Mark McLoughlin, Siemens Industries and Markets, Siemens Financial Services, looks at financing smart buildings
COVID-19 has caused a crisis for building owners and landlords – both in the public and private sectors. Patterns of work and public service are clearly changing as a result of the crisis and its aftermath. With this, the way in which we use public and commercial indoor spaces has been profoundly altered, shining a light on the need to optimise the hygiene, safety and energy efficiency of buildings. There is much emerging evidence of major corporations considering making flexible working the norm for their workforces, a trend that was already under way, but has now been accelerated by the positive realities of remote working revealed by the pandemic crisis. Making buildings smart allows this flexibility – whether from the perspective of hot-desking, agile changes of use, security and safety, or enhanced ability to morph to volatile circumstances.
Indeed, there is a “perfect storm” of factors which are coming together to simultaneously drive change and make buildings smart. Firstly, the economic pressures resulting from the pandemic are focusing minds on ways of achieving building management cost efficiencies (especially through energy efficiency). At the same time, COVID-19 has introduced new rules and ways of working to ensure hygiene, infection control and safety in buildings. Alongside these topical pressures are existing and emerging regulatory requirements that make fire and security upgrades mandatory. And various policies around the world are setting targets to reach higher environmental standards in buildings.
Smart buildings deploy automated and digitalized technology to enable more efficient, more effective building capabilities and management. The data generated by IoT sensors provide real-time information for quick reactions. Smart technology helps transform the building from a cost burden to an active contributing partner – a new team member – in running a business or a public sector organization and coping with the “new normal”.
This whole new perspective is making building owners and managers look afresh at the underlying operational cost base of their assets. The added value offered by smart buildings has already been widely acknowledged amongst expert commentators. According to the European Commission report on Macroeconomic and Other Benefits of Energy Efficiency, a smart, higher-performing building can conservatively add as much as 11.8% in lease value and can ultimately yield 5% to 35% higher sale values.
The future of office occupancy is under considerable scrutiny at the moment, with many corporations reassessing their real estate needs in the light of the pandemic experience. Smart buildings have been seen to offer important benefits in terms of looking after occupant and staff safety through digital, touchless and remote capabilities. Equally, operating costs are also under the spotlight and the opportunity to save on energy costs without having to deploy capital is increasingly attractive.
While there is wide consensus around the need to make buildings smart, all countries and sectors need a way of making that conversion financially sustainable. How can this be done?
The starting point is to use smart technology to reduce energy consumption in buildings. This produces hard financial savings that – through smart financing arrangements – can be harnessed to subsidize or even pay for overall smart buildings conversion. This can be done at an enterprise level, or in small incremental steps, each of which proves its return on investment.
For whole building and multi-building projects, budget-neutral schemes are available from specialist financiers to enable conversion. They are increasingly becoming known as "Building Efficiency as a Service" (BEaaS) arrangements. The integrated solutions provider introduces technology and systems to create smart buildings which deliver a clearly predictable level of energy savings. The reduction in energy costs is then harnessed to effectively fund the cost of conversion.
Throughout, the building’s owner has conserved their own funds for strategically important development activities – whether commercial growth or improved public services. In the post-pandemic period, where cash reserves have been used up and revenues are experiencing a downturn, the idea of self-financing smart building conversion becomes even more compelling than before the crisis.
The latest insight paper from Siemens Financial Services (SFS) establishes the urgency and value of smart buildings conversion, as well as the mandatory drivers that are focusing attention on converting existing buildings to greater energy efficiency.
At a time when building owners and managers are having to invest in measures to make their buildings safe and occupiable, and are also being restricted on the density of occupation, it is arguable that, only smart buildings will present a sufficiently attractive proposition to potential tenants and occupants. In a budget constrained environment, energy efficiency savings are increasingly seen as the ideal starting point for smart buildings transformation (either as a single investment or as a series of incremental projects), with smart financing techniques playing a major role in enabling those future savings to finance the cost of conversion.