Watery Times for Lend Lease

Positioning themselves as a leader in sustainability, Lend Lease is on target to build Australia’s first carbon neutral commercial building, but are they truly prepared for the changes to come?

Lend Lease is a commercial property developer, builders and owner with assets in Australia, Europe, Asia and the Americas. They build office buildings, mixed use buildings, malls and even US Military bases. The company’s major projects and strategic growth areas span major urban commercial centers across 30 countries, and weighted towards coastal regions.

Positioning themselves as a leader in sustainability, Lend Lease is on target to build Australia’s first carbon neutral project [1], but are they truly prepared for the changes to come?

Rising with the Tide: Regulatory and Physical Risks

As the building sector contributes up to 30% of global annual greenhouse emissions and consumes up to 40% of all energy[2], the inevitable carbon regulations of any sort will be costly. In Europe, Asia and Australia we already see requirements around emissions reporting, renewable energy targets, and established trading schemes that will place additional financial burdens on management. Potential carbon taxes could significantly increase both the cost of construction using carbon-intensive materials (concrete, aluminum and steel) as well as the ongoing energy costs of operating their properties and add administrative costs to monitor all energy usage.

Rising sea levels presents a real threat to their key assets in coastal cities. An MSCI report found that properties in the US’ eastern seaboard, eastern Asian cities and Australian cities – Lend Lease’s core territories – are all at major risk[3].  Rising sea level and worsening coastal storms already threaten existing and between $66-106B of coastal property will be below sea level by 2050 in the US alone[4]. Scaling up to account for Lend Lease’s global footprint, these physical risks are very real and will be very expensive.

 

Near Term Solutions

As a reactive measure, Land Lease’s development diligence process accounts for the risks of regions prone to flooding and storms.

Construction accounts for 10-20% of the emissions of a building project, so Lend Lease is also factoring in the potential price increases of its core construction materials, considering less carbon-intensive materials, such as timber, and also attempting to shift to more local sourcing to reduce supply chain risks.

The source of over 80% of emissions from a building comes from the actual energy use.  Toward that end, Lend Lease can do some mix of using a cleaner energy sources or using less energy. Aside from signing power purchase agreements, unavailable in many urban areas, selecting for a cleaner energy mix is generally not within their control so consumption reduction is key. As shown by their sustainability certifications, such as LEED, Lend Lease’s buildings use a mix of energy efficiency measures, such as monitoring and controls.  Additionally, Lend Lease have hired “environmental managers”, invested in energy audit and data collection mechanisms which result in KPMG-audited reports[5]. All wood is from credibly certified forests and LL has pledged to restore degraded environments.

Onwards

For commercial developers such as Land Lease, both more stringent carbon regulations as well as more destructive storms and rising sea levels are certain. Lend Lease has already undertaken significant internal measures to reduce energy use and incorporated rigorous forecasting of the increased costs and risks and greater diligence in site selection.

Yet Land Lease has yet to address the existential threat that rising sea levels pose to their predominantly coastal portfolio. Potential immediate steps to mitigate the impact of submersion include adding wetlands as intermediary buffers, and sea walls. Both of these approaches require partnership with and investment from cities.

In addition to the incremental improvements to efficiency in each property, Lend Lease may also need to reconsider their building materials to be more regionally appropriate. For example, glass buildings in hot and humid regions such as Southeast Asia or Oceania, are inherently less efficient.

 

Sources

[1] Lend Lease, Annual Report, 2016

http://www.lendlease.com/us/investor-center/2016-online-annual-report/report/

 

[2] UNEP Sustainable Buildings and Climate Initiative, Buildings and Climate Change: Summary for Decision makers, 2009

http://www.unep.org/sbci/pdfs/SBCI-BCCSummary.pdf

 

[3] MSCI, ESG Issue Report: Climate Risk Executive Summary, December 2014

https://www.msci.com/documents/10199/238916/Executive_Summary_Storms_and_Rising_Seas-Mapping_Climate_Risk_of_Property_and_Power_Assets.pdf/d8e3c1e1-b0a3-413f-b9e4-a9d36fba4bc2

 

[4] Bloomberg Philanthropies, Risky Business: The Economic Risks of Climate Change in the US, 2016

http://riskybusiness.org/report/national/

 

[5] Lend Lease, Carbon Disclosure Project, 2010

http://www.lendlease.com/-/media/llcom/investor-relations/sustainability/submissions/2010-carbon-disclosure-project.ashx

 

 

(683 words)

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5 thoughts on “Watery Times for Lend Lease

  1. This blog is concise, easy to understand, and highlights the key issues that Lend Lease is facing. Barangaroo South is one of Lend Lease’s major projects in Australia. This report highlights some more climate change issues and additional adaptations that Lend Lease has to make to deal with the threat of climate change:

    https://www.barangaroosouth.com.au/about/~/media/Developments/AU/BR/Images/About/SustainabilityClimate%20Change%20Adaptation%20%20Community%20Resilience.pdf

    One additional issue that Lend Lease must deal with is the reduction in potable water availability owing to the decrease in the rainfall. One way the company plans to deal with this is to develop a water treatment system that enables the usage of recycled water for a vast majority of non-potable uses.

  2. I find the building and construction industry an interesting one especially from the perspective of climate change given the sizable impact it has in terms of resource usage and emissions. This post gives a great overview of some the fundamental challenges that real estate developers in terms of energy-efficient operations and resource-efficient construction. However, the issue of rising sea levels (the “existential threat”) is also touched on – something I haven’t spent much time thinking about. Given the premium that is often placed on coastal properties, I wonder how developers are factoring the rising sea level into their diligence. When will this threat be reflected in prices? As a developer (or even a consumer), how should you think about the purchase and ownership of coastal properties that are at risk of submersion?

    When discussing solutions, the post mentions the necessary investments and partnerships that will be needed with local government. I think that this is fertile ground for some novel public-private partnerships in real estate development as the incentives for “greener” buildings are aligned for both parties.

  3. Great article. I echo the comment above. I have never thought of the impact rising sea levels could have on real estate developers or companies such as Land Lease. Apart from the immediate measures mentioned here I wonder whether there are more solutions with permanent fixes and how much of that is in a company like lend lease’s control. How can they position themselves to have more of a say in climate change discussions that positively impact them. Should land and real estate developers get a seat at the table when discussing sustainability?

  4. I find the real estate industry reaction to climate change to be fascinating. I am interested to know how developers such as Lend Lease plan to protect their coastal portfolios. It seems like it is a good idea for them to take on preventative measures such as seawalls. Additionally, it is a good idea for them to reduce their carbon footprint. But as sea levels rise I wonder if there is anyway to actually save a coastal city, or if there will be a massive trend toward inland building. The real estate industries’ reaction to the larger climate change debate is going to be an interesting one to see play out, as developers are at a crisis point. Should they build in the coastal areas that people love in order to maximize profit, or should they build in less attractive areas in order to invest in building sustainable cities. Lend Lease and many other developers will face this very problem and I am interested to see how they plan to navigate it further into the future.

  5. Your concerns are valid — Lend Lease seems to have found ways to mitigate its contributions to climate change but its efforts to adapt to climate change seem inadequate. And I would think that Lend Lease would be worried about this, being a commercial property developer in a country whose major cities are mostly coastal. I would go a step further and say that cities need to do more than to work with Lend Lease, they need to regulate developers with coastal portfolios more heavily. I speculate that Lend Lease is less willing to change its operations and more willing to defer that risk to the insurers; but if developing in certain coastal areas were made more difficult, then Lend Lease would have no choice but to adjust its operations.

    Wow, I was surprised to learn that 80% of the emissions comes from a building’s use of energy and not its construction. What’s also surprising is the diversity of tactics involved in seeking LEED certification. Using greener raw materials and improving processes to achieve energy efficiency seem foreseeable, but hiring “environmental managers” and obtaining better data capabilities seem quite different compared to the types of things Lend Lease usually does. Even though it appears that seeking LEED certification would be more impactful than finding ways to reduce emissions associated with building construction, is that still true after adjusting for the operational changes requires to get them done?

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