Green building, building green

■ Mandatory building energy codes, green-certified buildings and higher IBS adoption are key to decarbonising Malaysia’s buildings & construction space.
■ Developers may prefer green commercial/industrial buildings given higher marketability and selling price premium vs. green residential buildings.
■ SP Setia and Sime Darby Property are poised to benefit from the growing demand for green certified buildings given their experience within the space.

Green buildings gaining traction globally due to climate change

As the buildings and construction sector are responsible for over one third of the world’s energy consumption and the total direct and indirect energy-related carbon emissions in 2020, the sector needs to be almost net-zero carbon by 2050 to meet the Paris agreement goals, according to 2021 Global Status Report for Buildings and Construction. This can be achieved by improving energy efficiency and reducing emissions through mandatory building energy codes and green retrofitting. We note green buildings are gaining traction across the globe as evidence shows that this is one of the most effective measures for
tackling climate change.

Going green is not an option any longer

We believe stakeholders within the Malaysia buildings and construction industry will gradually embrace green buildings given the increasing focus on sustainability from real estate investors and more stringent building energy codes from policy makers to address climate change. We expect the domestic buildings and construction sector will likely evolve to achieve net-zero carbon buildings via: (i) implementation of mandatory building energy codes, (ii) targets for more buildings to be green-certified, (iii) promote industrialised building systems (IBS) adoption and automation, and (iv) increase usage of eco-friendly
green building materials.

Green buildings come with a price tag

Based on our findings, the construction cost premium for green buildings range at 0-14% vs. conventional buildings. Empirical studies published by Knight Frank and MDPI (see page 10-11 for details) show that green commercial buildings are able to command a higher selling premium vs. conventional buildings. The higher green construction cost premium vs. lower presale green premium for such residential buildings could dent developers’ margins. As per a Life Science Journal’s article (see page 10), a majority of Malaysian home buyers are only willing to pay up to 3% premium for green homes, vs. a 0-6% green construction cost premium for a Green Building Index (GBI) certified residential building. We believe property players will prioritise green-fitted commercial/industrial buildings given the higher marketability and selling price premium as real-estate operators and office occupiers need to address environmental, social and governance (ESG) issues. However, green-fitted residential buildings may not command a selling price premium as home buyers are more sensitive to pricing, in our view.

Developers with green buildings experience are better positioned

We expect property players with i) experience in designing and obtaining green certification for their buildings/projects, and ii) high adoption of IBS and in-house IBS manufacturing facilities, to benefit from the rising demand for green-rated buildings/projects. We like SP Setia within this space as it has experience obtaining green certification for buildings and in-house IBS manufacturing facilities, which is unique among developers. We also like Sime Darby Property which has set clear goals and action plans under its 2030 Sustainability Goals to cover green building development aspects. We retain sector Neutral given affordability issues, potential interest rate hikes, and higher property overhang, which is balanced by KL Property Index’s undemanding valuation, in our view. A key potential sector upside risk is stronger-than-expected new sales, while a key downside risk is a weaker macro outlook.