Taking early steps to decarbonize can boost the value of a residential building by 30 per cent after 10 years, according to a report from a consortium of analysts for Fonds FTQ.

Commissioned by the Quebec investment organization and its partners, the Générations 1,5 ̊ C project modelled the financial performance of a multiresidential building in the Fonds FTQ portfolio. It explored how incorporating sustainable features such as heat pumps, low-carbon concrete and using renewable natural gas as a backup system would impact the valuation against likely risks.

The report's conclusion is a substantial increase in financial performance. A building constructed in 2018 at a cost of $60 million that had $6 million in investment to reduce its carbon output would see its initial cash flow hindered, but a 30 per cent increase in a decade compared to the reference building.

“Most of the financial companies, when they are looking for green buildings, they see higher costs, a small impact on revenue, so the grid of analysts inside of the company (say) greener buildings are good building(s) but they don’t bring value in the financial model. So the study’s objective is to bring this value inside of a financial model to add the impact of risk,” Philippe Hudon, president and CEO of Akonovia, one of the firms that contributed to the report, told Sustainable Biz Canada.

Protecting against risks

Three levels of analysis were conducted for the report. Project manager Akonovia, a Montreal-based consultant, performed the energy modelling. Quebec City-based Vertima Inc. handled the carbon life-cycle analysis and Montreal accounting firm BJC calculated the financial risk.

This was the first time Quebec-based experts from these fields collaborated on a such a project, Hudon said.

The modelling is based on an existing asset in Fonds FTQ’s portfolio: a Montreal mixed-used project of 320 rental units with a commercial space on the ground floor. The building was chosen because more residential properties of this type are expected to be built across Canada, he explained.

The adjusted cash flow of the reference building, which was built to code and had not previously undergone substantial decarbonization measures, was estimated to decline by 15 per cent after seven years and 80 per cent after 10 years. Risk factors such as escalating carbon taxes, rising energy costs and rental income affected by changes to building codes would likely drag down the valuation.

A surprise for the authors of the report was that the risks emerged sooner than expected. As a result, the owner of a newer building with electrical baseboards and high energy consumption would struggle to re-invest, impacting the profitability and revenue of the building over the long-term.

By comparison, an upfront investment of six per cent of the building’s value to reduce operational and embodied carbon would cut initial cash flow by 15 per cent, but free the property from the need to make green retrofits in seven years. The cash flow would rise by 45 percentage points in 10 years because it minimized the risks.

“If we invest at the beginning we need to invest more money, more equity in the building. But what we discovered is at the end, the asset is protected against each risk,” Hudon said.

How building investors may need to change risk calculation

The report's findings align with the opinion of Annie Houle, Ivanhoé Cambridge’s head of Canada, who told Sustainable Biz Canada taking steps to reduce the carbon from a building mitigates risk and keeps ahead of upcoming environmental regulations.

While the modelling takes place in Quebec for a mixed-use project, the broad takeaway should apply for the rest of Canada - and other property types - Hudon explained. The values would likely be different, but the concept is similar.

“The risk and the financial impact will be different but the conclusion will be the same, that you need to have this risk on your evaluation.”

For example, Alberta does not have as much renewable energy capacity in its electric grid compared to Quebec, altering the risk impact.

The conclusion of the study shows building financiers may need to change how they evaluate a project, Hudon suggested, by rethinking what future risks will be and integrating those factors into their risk calculations.