The green buildings sector represents a $24.7 trillion investment opportunity by 2030 across all emerging market cities with a population of more than half a million people. Most of this investment potential—$17.8 trillion—lies in East Asia Pacific and South Asia, where more than half of the world’s urban population will live in 2030. The investment opportunity in residential construction, estimated at $15.7 trillion, represents 60 percent of the market.
There is a strong business case for growing the green buildings market. Emerging evidence indicates that green buildings, or buildings that use energy and water more efficiently, are a higher-value, lower-risk asset than standard structures. While building green could range from savings of 0.5 percent to 12 percent in additional costs, green buildings can decrease operational costs by up to 37 percent, achieve higher sale premiums of up to 31 percent and faster sale times, have up to 23 percent higher occupancy rates, and have higher rental income of up to 8 percent.
Investing in green buildings allows market players to manage potential risks that stem from the global transition to low-carbon economies. Globally, the buildings sector consumes more than half of all electricity for heating, cooling and lighting and accounts for 28 percent of energy-related greenhouse-gas emissions.
It will require an estimated 50 percent more energy by 2050 than today. Resource-inefficient buildings run the risk of losing economic value or becoming stranded assets due to increasingly stringent regulations, pressure from financial regulators to manage and disclose climate risks, changing consumer preferences, and shareholder demands. Non-compliant buildings could become subject to legal action and fines, making them more expensive to operate and insure, and harder to lease or sell.
The floor area of the global buildings sector is expected to double by 2060. Most of this construction will occur in emerging markets, particularly in middle-income countries experiencing high population growth, rapid urbanization, and income growth. New construction offers a significant opportunity to integrate energy efficiency into building design from the outset, helping to maximize the financial benefits that come from energy savings and avoid the need for costly retrofits later.
Green buildings construction at the scale required can spur low- carbon economic growth and create skilled jobs in emerging markets for decades to come, while improving energy security, air quality, and people’s wellbeing.
The current size of investments in green buildings, however, is only a fraction of the investment opportunity. Global investments in green buildings accounted for $423 billion of the $5 trillion spent on building construction and renovation in 2017. There are a number of constraints that hamper the development of a robust pipeline of green properties and widespread adoption of green construction. These constraints include the perception of high construction costs, a lack of alignment of incentives and benefits among market players, and a mismatch between relatively short hold periods of real estate assets in portfolios and the long lifespans of buildings and when they might be affected by climate change and stricter regulations.
Emerging markets, despite having ambitious targets for green buildings, struggle to put in place effective measures to mandate and incentivize large-scale adoption of green construction practices. This is partly due to low technical capacity to build, operate, and maintain green buildings, lack of knowledge, and weak enforcement regimes, as well as challenges in developing and implementing consistent standards and requirements for green construction across a highly local and decentralized industry.
These countries must also address an urgent need to meet a considerable shortfall in affordable housing—a challenge in itself without the added considerations of building green. Furthermore, low-income countries and fragile and conflict-affected states face additional challenges given weaker institutions and capacity, and underdeveloped financial systems, including the mortgage market.
Despite the challenges, realizing the full investment potential of green buildings is within reach, with established financing models and proven, easy-to-implement technologies that are readily available and continue to decrease in cost with their greater adoption. Investors, developers, owners, and governments will have to work together to meet demand for buildings in a way that is economically beneficial and aligned with global climate goals.