Over het rendement van duurzaam bouwen (2011)

On the profitability of investing in sustainable buildings: a Noord-Brabant case study

Discussion-paper to be presented on behalf of the province of Noord-Brabant at the 4th SILCS-meeting on 5-6th of May 2011 in Portsmouth England

(concept-report on finance)

Martin Bakker

Province of Noord-Brabant, mbakker@brabant.nl

Jochem Jantzen

TME, jochem.jantzen@i-tme.nl

Chris Posma

Syneff Consult, synefsin@wxs.nl

Rudy van Stratum

Stratum Strategie, rudy@stratumstrategie.nl

This paper studies four case-studies within the province of Noord-Brabant to demonstrate that investing in sustainable buildings can be more profitable than investing in (non-optimized) mainstream buildings. This is demonstrated by using standard financial cash-flow driven techniques and by using conservative assumptions with respect to (for example) the increase in energy prices. To minimize the hurdles of existing liquidity-constraints of potential builders and to overcome focus on short-term profits from financial institutions, the authors suggest to create a public-private revolving fund for sustainable investments, while stopping giving subsidies for investments that are profitable already on their own terms.

Key words: sustainability; profitability; case-study; Noord-Brabant; build environment; financial arrangements

History: draft01 rvs 19-4-2011

1. Introduction

This report1 is written in the context of the POWER programme under the European Territorial Cooperation Program INTERREG IVC within its sub-project Strategies for Innovative Low Carbon Settlements (SILCS). In the justification for the project it is stated that:

Societal Development is constrained by geographical boundaries. On a global scale and within a few decades, urban environments will increase in scale to support another 1.5 billion people. The central question is: how can we design buildings and urban environments so that carbon emissions through the whole product life cycle are reduced and the environment and its ecological systems are sustained whilst providing for an increased urban capacity.

The aim of SILCS is to prove the effectiveness of low carbon building initiatives within the framework of sustainable development. Within the program there are stated separate research-questions for participation, financing, organization and technologies. The province of Noord-Brabant has taken the responsibility to dive deeper into the financing part of sustainable building. The key question here is:

What kind of approaches can successfully enable change and have maximum impact on the way financial analyses are made and decisions taken, resulting in decisions not only based on initial investments costs and short-term profits but on total live-cycle costs and benefits?

In the next section we set out our research-strategy to tackle the questions. In section 3 we will give a general description of the four cases that served as illustration of the approach. In section 4 we show the outcomes of the calculations of the four cases2. In section 5 we discuss the possibility of financial arrangements. Section 6 is about the possibility of up-scaling our results for an economic region like a province. Section 7 concludes the report.

2. Research strategy

From our own experience from within the building process, we normally succeed in convincing the stakeholders that there is a problem when we keep building our buildings the traditional way. The arguments seem to be pretty clear especially since Al Gore’s ‘An inconvenient truth’. The problems to be addressed mainly deal with absolute scarcities on a global scale: scarcity of available geographical living space, scarcity of oil and natural gas, scarcity of all kind of building materials. But it is also scarcity of hitherto “free and abundant” goods like clean fresh air, water and biodiversity. In the end it’s all about our future well-being and the well-being of our descendants. There is a common understanding that not changing our habits means that we will have to pay the price someday in the future. But there are financial barriers that should be taken, as often the initial investments to achieve a certain level of sustainability are higher than the “regular” needed investments, and the financial returns are often unclear, not exactly known at the start of a project. This leads to a higher level of uncertainty making it difficult to attract additional financial means in the initial stage of a building project (given the higher financial risks). And besides that, we are just recovering from a severe financial crisis, leading to tight budgets and a focus on the short-term profitability.

To study these questions, we decided to go back to basics. We pose the question: is investing in sustainable building practices really more expensive and in what way? To answer this question, we made a stepwise analyses of the (additional or change in) investments and operational benefits in four cases from the on-going building and designing practice from Noord-Brabant (see next section). The main steps are:

  • inventory of sustainable interventions, compared to the base-case3;
  • inventory of (changes in) investments and future (operational) cash-flows of the sustainable interventions, linked to: energy, water, health, productivity, maintenance, etc.;
  • quantification of financial returns of the various interventions;
  • inventory of stakeholders and their financial returns.

This research approach does not only allow quantifying the costs and benefits of sustainable construction, but also fits in the regular framework for the analysis of investment projects (“Payback time”, “Return on Investment”, “Net present Value”, “Cash Flow analysis”). Additionally, there is a focus on the lifecycle costs and benefits of a project rather than just looking at budgets and initial investment costs. This also forces different (financial) stakeholders to actively participate to achieve the optimal result. We don’t look at the building as an isolated entity for the investor, but look at the building from the perspective of all its (future) users/stakeholders. So all the cash-flows associated with the use of the building over time are considered. This includes the repair, upgrading, maintenance, use of energy etcetera.

Initially we look at hard “cash-flows” for the building and its users/stakeholders over a 30-years life span4. But there is more: Sustainability also involves health, well-being, productivity, etc. Part of these “social returns” is hard to monetise (for example: feeling better because we live in a greener environment), but part of these social returns is about hard cash too. For example: the “Fresh School” leads to increased learning performance as does a “green environment”. This may in the longer term lead to higher incomes and thus higher tax returns. These are hard returns that can be statistically validated. But again: we don’t take these effects into account because they’re not normally associated with the direct use of the building and thus are difficult to integrate in the financing strategy. Paradoxically our side-calculations about these issues show that the discounted value of these benefits can be a manifold of all direct benefits taken together.

3. The 4 cases of province Noord-Brabant: general description

The four cases focus on new buildings (so a question for future research would be how the results will change for retrofit building). The cases are all existing designs ‘in progress’ which means they can reasonably assumed to be built within one to five years.

The four cases represent the main types of buildings found in urban areas:

  • Case 1 concerns a public building which is the symbiosis or partnership of a city hall and a secondary school;
  • Case 2 is about a new-style public-private sporting facilities complex;
  • Case 3 concerns a primary school;
  • Case 4 deals with the ‘Brabant house’, an innovative housing concept for starting families.

Case 1 concerns a multipurpose public building. It combines a secondary school and a city hall. The footprint is around 7.000 square meters and the total floor space around 27.000 square meters. The building will be used by 1.000 employees (school and town hall together) and over 1.000 students. There are shared spaces like the restaurant, a hall for big meetings and parking lots. This lowers investment costs for both parties but the benefits go beyond that. The initial budget allocated to this building is around 40 mln Euro. Benefits of sustainable interventions are associated with: optimal/combined use of spaces (saving investment and operational (maintenance/energy) costs), more durable material, less installations (by making use of natural processes), lower energy use, water retention, higher productivity and less costs of illness, etc.

Case 2 concerns a multipurpose sporting facilities building. The footprint of the building is around 5.000 square meters. The total floor space around 6.000 square meters. The building caters for a total of only 10 employees. At this moment there are several sporting facilities including several soccer- and tennis-fields spread out over the area. Every sports club has its own accommodation for changing cloths, storage of materials, galleries for visitors and in some cases clubhouses for social meeting. This sporting area needs some serious maintenance and revitalizing. The local authorities aim to create a new-style sporting area that radiates symbiosis and partnership while giving the low-profile neighbourhood new chances for growth and liveability. Our case concentrates on the main shared building not reckoning with the playing fields and some minor (existing) buildings at the venue. The building must be designed flexible so that it can accommodate live concerts or demonstrations for a bigger audience in the future. The budget allocated to this building is around 6 mln Euro. Benefits of sustainable interventions are associated with: optimal/combined use of spaces, durable building materials, less installations, lower energy use, water retention.

Case 3 concerns a primary “Fresh” school. The Fresh School design has a footprint of around 2.200 square meters and a floor space of slightly more than 3.000 square meters. The school must cater for 500 pupils and 25 teachers. The budget allocated for the school is dictated by government guidelines and adds up to around 3.6 mln Euro. In most cases the building is owned by the local authorities (who decide on the available budget) while the school board rents the building and pays for the energy bills. The practice of most existing schools is that the buildings have no good insulation with unnecessarily high energy-costs. In the regular design the internal climate of a school lacks of sufficient fresh-air (the air containing too much CO2 and fine dust particles). Benefits associated with the sustainable interventions are: optimal use of space (i.e. a “green roof” that can be used as playground), lower costs of operation (energy, maintenance) and lower costs of illness (teachers). As mentioned, the better learning performance (one of the main objectives of the “Fresh School”) has not been included in the results, although the anticipated benefits thereof may be considerable.

Case 4 is about the “Brabant house”. It concerns an innovative concept of dwellings for the starters on the housing market. The Brabant house wants to show that the concept of sustainability is not only for the more luxury segment in the housing market. Sustainability in housing can only get serious when it caters for larger numbers (multiplier effect) and foresees in a practical everyday need for larger amounts of people. The design caters for 4 types of housing in two or three layers, all with a footprint of around 50 square meter for the unit alone, ranging from 80 to 150 square meters including the garden area. The floor space for the 4 types ranges from 100 to 150 square meters. The idea is that these 4 types of units can be assembled into clusters of 8 units, totalling up to 10-12 clusters, giving a total of 80-100 sustainable Brabant houses. The concept is modular and free in the sense that every municipality in Brabant can assemble their own subset of houses including the outside looks and finish and green public spaces around it (the latter is not part of the design itself). The all-in price for the units (including land price and VAT) is in the range of € 180.000 – € 235.000. The units are designed from an integral perspective, not only looking at maximum energy-savings but also looking at the use of environmental friendly building materials, use of green roofs and walls for carbon-absorption but most importantly: they have to be friendly, comfortable and healthy to live in. Benefits associated with the sustainable interventions are: optimal use of space (low temperature heating requires less space, a green roof can replace part of the garden) and lower costs of operation (energy, water, maintenance).

4. The 4 cases of province Noord-Brabant: calculations on the profits of sustainable investments

In all four cases5 a detailed analysis was made of the original design (and investment cost-estimates) and the operational aspects with financial effects (energy, water, maintenance, health, performance). Next, for each design detailed calculations were made of all kinds of possible sustainable interventions. This revealed a bigger pattern in the approach to optimise existing (non-optimized) designs. It appears that optimising for sustainability can be done in three logical steps:

  • Step 1: Go for optimal space, synergy and symbiosis:
    • use less space by make smaller and more compact buildings (as far as functionality allows);
    • create higher utilisation rates of available spaces;
    • share and multi-usage of spaces;
  • Step 2: Aim at optimal performance of the space:
    • orientate the building optimal with respect to available natural resources as light, sun, air and water;
    • design for minimal use of energy and optimal air quality;
    • use minimal machinery and installations (less space, less energy, less maintenance);
    • use simple solutions, eschew complexity;
    • use longer lasting materials (lowering maintenance and extending lifecycles);
    • use smart solutions that fulfil more than one need (for example: roof-gardens);
  • Step 3: Increases future flexibility and bring down future costs that reasonably can be foreseen already during construction. If the initial budget does not allow for it, create a financial arrangement that enable these additional investments.
    • Design and build for the possibility of extra cellar space and foundation if reasonably can be foreseen that there will be need for a parking space in the future;
    • Design flexible or modular so that the insides of the buildings can easily be transformed for other future uses;
    • Design for some extra space margins for future needs that can not be foreseen now.

For the four cases we have summarised the (aggregated) financial effects for all interventions made in the optimisation process, according to steps 1 to 3.

Table 1 shows the effects of step 1 (optimal space and synergy) for the initial investment and for the annual cash-flow.

Budget allocated in € Optimal space saving


% of budget

Annual cash-flow effect
Case 1: town hall+school

40 mln

– € 4 mln


+ € 200k

Case 2: sports centre

6 mln

– € 0.3 mln


+ € 50k

Case 3: primary school

4 mln

– € 0.13 mln


+ € 15k

Case 4: housing (100)

19 mln

– € 0.19 mln


+ € 11k

Table 1: Optimal space and synergy of STEP 1

What we see is that for case 1 the original budget of the non-optimized design can be squeezed by around 4 million Euro, which is in terms of the original investment a reduction of 10%. This squeeze can be attributed for 60% to higher utilization rates of space and for 40% by a reduction in space by levelling up the amount of shared spaces. These reductions in the original budget allow on top of that an increase in the yearly cashflow of around 200k Euro (less space means mainly less interest payments and less costs of energy). For case 2 we have along the same lines of reasoning a budget cut of 0.3 million Euro or 5% in terms of the original budget. It is clear that not all spaces in a sports centre can be shared as easily as in a town hall/school. The reduction in the budget generates extra annual cash-flows of 50k Euro. Case 3 shows that the budget of a primary school hardly can’t be squeezed anymore, only by 3%. This generates a annual extra cash-flow of 15k Euro. Finally, case 4 leaves hardly any room for squeezing space (due to standards and wellbeing). We assumed 1% saving due to less installations.

The next step is the optimisation of the performance parameters of the designs. The aggregated outcomes for this step are shown in table 2.

Budget allocated in € Optimal performance extra investment in €

% of budget

Annual cash-flow effect
Case 1: town hall+school

40 mln

6 mln


+ € 600k

Case 2: sports centre

6 mln

2.5 mln


+ € 200k

Case 3: primary school

4 mln

1.8 mln


+ € 130k

Case 4: housing

19 mln

1.9 mln


+ € 95k

Table 2: Optimal performance of STEP 2

For case 1, additional investments in sustainability of 6 million Euro can be made. These extra investments consist mainly in adapting the building for better ventilation (2.4 million Euro), extra investments for energy-savings like solar-panels (1.7 million Euro) and extra investments in longer lasting and sustainable building materials (1 million Euro). These combined investments generate positive yearly cash-flows of 600k Euro. About 45% of the total is due to reduced replacement costs for illness of employees, about 25% for energy-savings and about 15% in a reduction of maintenance costs.

It is recommended in case 2 to invest an extra amount of 2.5 million Euro. This time extra investments in energy-saving technologies account for 60%, 30% for a green roof costs and 10% for ventilation measures. This extra investment in sustainability generates a positive annual cash-flow of 200k Euro, consisting for the largest part of energy-savings (up to 75%).

The “Fresh school” of case 3 is advised to invest an additional 1.8 million Euro not surprisingly consisting for the largest part in higher investments for a better and healthier circulation of fresh air and for having more daylight in classrooms (other investments are among other things again in solar-panels and a green roof). These substantial higher investments with respect to the original budget (+45%) generates a yearly positive cash-flow of 132k Euro. The return on investment for the primary school case is relatively modest because the extra amount of fresh air mainly contributes to a better well-being of the scholars, of which the economic effects are not included in our calculations6.

For the 100 “Brabant houses” the additional investment to optimise the design is € 2 million. The annual positive cash-flow is estimated at € 95k, mainly (80%) energy, for the rest water, materials and maintenance. For housing the return on investment is low: 6%. This is due to the not accounting of health effects, effects on wellbeing and comfort.

For the sake of brevity we do not go into the details of step 3 of making the building more flexible for alternate future usage. Instead we show the calculated Returns on Investment (ROI) of the combined steps 1+2 and the ROI of the combined steps 1+2+3 for all cases in table 3.

Extra net investment steps 1+2 Annual cash-flow effect steps 1+2

ROI steps 1+2

ROI steps 1+2+3
Case 1: town hall+school

2 mln

– € 800k



Case 2: sportscentre

2.2 mln

– € 250k



Case 3: primary school

1.6 mln

– € 150k



Case 4: housing

1.7 mln

– € 100k



Table 3: Total effects of integral approach

The main conclusion is that the calculated return on investment seems to be robust over all steps and for all cases except (partially). The ROI ranges from 6% to an extremely high 40%. Of course the outcomes will differ for other cases depending on the amount of sophistication already there in the existing design and depending on a number of other characteristics of the building.

To conclude this section we want to do another clustering of the main drivers behind the ROI’s. It is not always possible to draw a clear line between the investment itself and the kind of effects it generates. We decide to concentrate on the effects and came up with three main categories. Profit-increasing effects can be physical-capital-related (these effects have to do with the structure of the building itself and with the materials used), can be energy-savings-related (meaning lower costs of energy) or can be human-capital-related (mainly less replacement costs of employees and/or lower premiums for insurance for illness). The decomposition of the ROI of steps 1+2 taken together are summarized in table 4.

Decomposition into:

Case 1

Town hall


ROI = 40%

Case 2

Sports centre

ROI = 11%

Case 3


ROI = 9%

Case 4


ROI = 6%

Buildings and materials

Physical capital





Energy savings






Better human performance

Human capital





Other factors






Table 4: Decomposition of ROI into factors

Table 4 can be read like this: the rate of return of case 1 can be explained for 34% by physical capital effects, for 24% by energy savings effects, for 34% by human capital related effects and for 8% by various other factors. Which conclusions can be drawn from the decomposition in table 3?

  • Big buildings with lots of empty spaces and low utilization rates have a high energy-savings component (as in the sports-centre of case 2).
  • Building in which are a lot of people a lot of the time have a high human capital savings component (places for working and learning as in cases 1 and 3).

  • Building with a lot of potential for space-sharing and multi-usage have a high buildings- and materials savings component (mainly the symbiosis-case 1);
  • For housing energy plays a major role, but other harder to monetise factors like well being and comfort should also be considered.

This should give some guidelines where to start the optimisation process for new cases.

5. Financial arrangements

So where does that lead us? We have seen that the return on sustainable investments in buildings can be quite high. So the main objection why the sector doesn’t build sustainable on a larger scale has been tackled. Problem solved, case closed. Not! We spoke about our calculations and about the extra opportunities to make a profit with a number of decision-makers. And a new financial objection turned up a number of times during the conversations. Even if we want to invest in sustainable buildings, so we were told, we have to have the cash available or must be able to lend the money. In other words: the hurdle for investing in sustainable buildings could be a liquidity-constraint.

So on we go, tackling the next hurdle. Can a financial arrangement between parties be made to solve the liquidity-constraint? It is our opinion that when returns on investment are that high a financial arrangement (swapping cash-flows between parties over time) can be set up that makes the extra investments feasible. We illustrate this by giving a simple numerical example. Let’s take case 1 where the initial budget is 40 million Euro. This budget is catered for so should not give a problem. Now suppose that our calculations suggest investment in an extra sustainability package of 5 million Euro that generates a yearly extra cash-flow of 500k Euro (the ROI then is 10% which is lower than in our actual calculations). Suppose the bank for whatever reason is not willing to lend this amount of money. Our suggestion to the authorities would be to stop giving subsidies for investments that are profitable in their own right. Instead we suggest to use these subsidies to form a revolving investment fund where parties can lend the (additional needed) money for sustainable building. We think that banks can be persuaded to be partner in these revolving funds. The fund charges a moderate rate of interest if certain conditions are met, let’s assume the rate of interest to be charged is 4%. This seems to be a win-win situation: the authorities get 4% return instead of giving it away for free, the sustainable investor gets his money and pays the rent (which in our example is 200k Euro a year) and cashes in a net extra cash-flow of 300k Euro a year. But what about the payback of the total amount of debt? This can be solved easily too. Standard accounting practice often says that the building lasts for only 40 years, which implies 40 years of depreciation and a net worth of zero for the building after year 40. Now ownership can easily be swapped after 40 years of use. The sustainable investor is the owner of the building during the first 40 years but agrees from the start upon giving the ownership to the revolving fund after that period. Giving it away for free accounts for redemption of the original loan of 5 million Euro. Now the fund is the owner of a building that can be sold for cash or rented to the existing or new users. Of course a lot of details have to be worked out, the only thing we are saying is that it cán be worked out.

So again: problem solved? Guess what? In our conversations new objections came up. We can make a list of all kind of objections and we can come up with all kinds of possible solutions. This is beyond the scope of this paper however. We think it is for future research to look further into the psyche of the building chain and discover why finance for sustainability is so hard to find.

6. Thoughts about up-scaling

We have studied four cases. Is it possible to upscale these cases to form conclusions at the level of a region? We take the region Noord-Brabant as an example7.

Noord-Brabant has 2.45 million inhabitants, which live in 1 million houses. One in 5 inhabitants follow education in more than 1000 buildings. More than 800,000 people work in the service sector, with about 100,000 economic units registered. Each year up to 1% of the existing stock of buildings is new-built or (partly) replaced: around 10.000 houses, 150 buildings for non commercial services and 750 buildings for industry and commercial services (part office buildings). The total estimated annual turn-over in Noord-Brabant of the construction sector is € 4.5 billion for housing (new and renovation) and € 2.6 billion for public buildings, service building, offices, industries. We assume that about 50% of the market value concerns new buildings. For the relevant type of (new) buildings turn-over can be estimated at about € 2 billion for housing and € 500 mln for public buildings and offices in the service sector. If all new building projects in Noord-Brabant would be designed towards sustainability (Step 1 + 2), the additional investments could be 10% for housing and 20% for offices. So the additional needed finance would be € 200 million + € 100 million per year = € 300 million per year8. The return on investments would be initially € 12 mln per year for housing (6% ROI) and € 10 million for larger buildings (10% ROI).

The pace in which the built-up environment of Noord-Brabant would be transformed towards sustainability if only attention is given to new houses and buildings is not by far fast enough to achieve the ambitious targets for energy and climate in the longer turn. If for example in 40 years time the majority (90%) of the built-up area needs to be “sustainable”, the pace of action would need to be at least 3 times higher than for new buildings and mainly directed towards existing buildings and houses. It would at least require an additional € 500 million (or more) per year in investments9, but would also lead to 3 or 4 times larger savings/revenues (up to € 100 mln per year).

7. Conclusions

  1. Most if not all of existing designs for buildings can be re-designed from the perspective of sustainability and integration and show a reduction of initial costs (outlays) in the order of between 1% up to 10% of the original budget.
  2. The main part of initial cost reductions as meant in conclusion 1 can be attributed to:
    1. Physical orientation of the building with respect to optimal day-light, air circulation, energy-consumption and noise;
    2. Smarter use of installations and ICT;
    3. A plain reduction of square and cubic meters by multiple and symbiotic use of space;
  3. Still taking the redesigning a step further along the road of sustainability means most of the time an increase in the total initial costs in the order of 10-20% but up to 40% of the original budget. These cost increases can mainly be attributed to:
    1. A more flexible building with respect to other possible future uses.

    2. The use of longer lasting and/or more sustainable materials.

    3. The use of other energy- and water-concepts (green roofs, solar-collectors etc).

  4. The extra initial outlay of conclusion 3 can most of the time be proven to be profitable in the longer run (30 years time horizon). The main drivers for the often high positive return on investment are:
    1. Energy-savings.

    2. Less maintenance and/or adjustment costs. Less depreciation and/or higher life-span of the building.
    3. Higher productivity and less absenteeism of employees.
  5. Sometimes there are financial restrictions with respect to the initial budget and extra investments are not an option. In most of these cases a financial arrangement (swapping cash-flows between parties over time) can be set up that makes the extra investments feasible.
  6. An idea is to skip subsidies for sustainable building and instead create a revolving fund, that takes up the loans in case the market/budget does not allow.

1 This report is a rewritten , adapted and extended version of the original Dutch paper ‘Slim financieren in Noord-Brabant is goud waard’, Provincie Noord-Brabant, September 2010.

2 The details of the calculations and underlying assumptions are available upon request.

3 The “base case” assumes a regular design, taking on board legal requirements (“Nationaal Pakket Duurzaam Bouwen”: “National package sustainable construction”)

4 although it can be expected that energy and other environmental values become more expensive in the future (above inflation) this effect has not been taken into account (as the energy market has proven to be difficult to predict). If the relative prices of energy and other environmental goods increase, the financial benefits of the approach taken will be (much) higher.

5 For the “Brabant woning” case 4, for comparison reference housing was studied.

6 Under modest assumptions about the effect on higher future earnings due to the better school environment (5% of pupils reach a 1 step higher education level, leading to a € 5000 (nominal) increase in annual salary), it is estimated that annually a benefit of € 50k may be foreseen.

7 For part of the calculations use was made using data from CBS Statline (2011).

8 Each year, inhabitants and enterprises in Noord-Brabant contribute for over € 500 million in energy taxes.

9 The investments in renovations (retrofit of existing buildings) may be considerably higher than in new buildings. But also the improvements (and thus savings) due to renovations will be larger than in new buildings (as the “Package sustainable construction” is used as reference).

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