ESG and ESD in Build to Rent

ESG & ESD. Sustainability and environmental responsibility is front of mind. Along with other core investment sectors, build to Rent has witnessed a significant shift towards incorporating Environmental, Social, and Governance (ESG) and Environmental, Social, and Diversity (ESD) principles into its operations.

ESD & ESG are more than lofty ambitions. They can draw financial benefits through the appropriate implementation. This has been witnessed in core office markets globally. Commercial occupancy and valuations of B-Class buildings are suffering due to poor quality and ESD fundamentals.

By incorporating these principles with their development and management practices, these communities are not only addressing the pressing issues of our time but also reaping numerous benefits for the investors, environment and residents.

Environmental Sustainability (ESD) in BTR.

The environmental impact of buildings accounts for nearly 40% of all greenhouse gas emissions (GHGs). Build to Rent communities play a vital role in curbing these effects by implementing sustainable & ESG driven practices. These include energy-efficient building design, installation of renewable energy systems, and adopting smart technologies for efficient resource management. These initiatives both reduce the carbon footprint of these communities and lead to long-term cost savings, lower utility bills for residents, and increased property values. Additionally, incorporating green spaces, promoting biodiversity, and encouraging waste management and recycling.

Typically BTR developments are targeting sustainability measures of 5 Star Green Star, 6-7 Star NatHers and 4.5 Star NABERS.

The Clean Energy Finance Corporation (CEFC) is supporting the BTR industry through various capital and debt initiatives. To unlock these products, the CEFC requires specific metrics to be achieved. These include 7.5 Star NatHers and Net Zero emissions in operations.

CEFC Head of Property, Michael Di Russo, said: “The build to rent sector is an emerging asset class in Australia with the potential for significant growth, as well as considerable scope to make a meaningful impact on the decarbonisation of the broader residential property sector. We’re pleased to help extend the benefits of Mirvac’s build to rent developments to increase the supply of energy efficient housing, with each new development project targeting a minimum average of 7.5 star NATHERS rating and net zero carbon emissions in operations. It is particularly exciting to be working with Mirvac on this ambitious build to rent strategy, which continues to drive enhanced sustainability outcomes for owners and tenants over the life of the asset.”

The Financial Benefits of Environmentally Sustainable Design in BTR.

Further research has been undertaken by EY USA on the benefits of sustainable design in office buildings. The report identified the following findings comparing two separate buildings. Firstly, one of Class A retrofitted with sustainable inclusions. Secondly one of Cclass B demonstrating the green benefits.

Base rent per sq foot increased by 2.5% – 5%.
1% – 2% lower vacancy.
Common area maintenance down 2.5% – 5%.
Capital reserves 2% – 4% lower.
Cap Rates 0.1% – 0.25% lower.
Market values up 10% – 21%.

Residential is trailing behind the commercial space in sustainable practices. However, the results show that the financial fundamentals can transfer across.

Other ESG targets include the following:

45% reductions in green house gas emissions.
100% renewable electricity.
Electric vehicle charging stations and recycled water (irrigation).

ESD by ARUP & Local Residential HVAC Analysis

The two businesses recently undertook an analysis of HVAC systems & demonstrating that split systems provide the following benefits over Centralised HVAC.

Use less than 1/3 of the lifetime carbon of Central HVAC
Leak-less harmful refrigerants
Are more energy and space efficient
And save our residents up to $25/week in gross rent versus if we were to utilise a centralised HVAC system.

Local is committed to never putting centralised HVAC systems in our apartment buildings, providing our future residents with the healthiest, most sustainable and energy-efficient solutions.

Source: Local Residential

Social Responsibility and Well-being (ESG)

ESG and ESD principles in build to rent communities also prioritize social responsibility and well-being. These principles focus on fostering inclusive, safe, and healthy living environments for residents. Developers and operators are incorporating various amenities and facilities that promote physical and mental well-being. These include fitness centres, community gardens, and wellness spaces. Furthermore, these communities often prioritize accessibility. This ensures that residents with disabilities or different needs can fully enjoy the amenities and services provided. By promoting social cohesion, organizing community events, and facilitating resident engagement, build-to-rent communities foster a sense of belonging and community spirit.

In addition to investor objectives, there is significant weight behind social outcomes from a government level. NHFIC (National Housing Finance Investment Corporation) is providing grants and loans. HAFF (Housing Australia Future Fund) is to provide $10bn of investment to address Australia’s shortage of affordable housing. There are also various state government programs including Brisbane’s BTR pilot project supporting developments (Mirvac, Fraser’s & Cedar Pacific) to provide additional affordable housing.

Governance and Stakeholder Engagement (ESG)

Effective governance practices and stakeholder engagement are critical for the long-term success of multifamily and build-to-rent communities. By implementing transparent and ethical decision-making processes, these communities build trust with residents, investors, and local communities. Ensuring clear communication channels and open dialogue helps address concerns and feedback promptly. Community-wide participation in decision-making processes, such as involving residents in sustainability initiatives, enhances engagement and empowers individuals to contribute to the betterment of their living spaces. Furthermore, governance practices that prioritize diversity, equity, and inclusion create opportunities for underrepresented groups, fostering social equality within these communities.

Picture of Liv (Mirvac) Anura, Brisbane. Highly sustainable ESG.

Conclusion

Embracing ESG and ESD principles in build to Rent (BTR) communities brings numerous benefits, ranging from environmental sustainability and cost savings to improved well-being and stronger stakeholder relationships. By prioritizing these principles, developers and operators demonstrate their commitment to creating thriving, inclusive, and environmentally conscious living spaces that contribute positively to the world around us not to mention the financial benefits that are generated.

Read further to learn more about The BTR Equation.