A strong economy can also be environmentally sustainable

This article first appeared in Mitre 10 Trade Quarterly – Autumn 2017.

There was an increased push for greater environmental sustainability during the economy’s boom times last decade – until the Global Financial Crisis hit in 2008, that is.  Now the New Zealand economy is back in a strong position and we expect to see an increasing amount of investment in environmentally sustainable buildings over the next few years.

The reality is that specifying and constructing new buildings to a higher environmental standard usually means a bigger upfront cost for developers, and thus a greater income stream is needed from the investment to justify the initial outlay.  That greater income stream could come from being able to charge higher rents or, in the case of an owner-occupier, reducing their ongoing operating costs through reduced energy or water bills, for example.  

Given the inherent uncertainty that surrounds future income streams compared to known upfront costs, investors will generally place less weight on the possible future income.  Favouring more near-term and tangible results creates a higher hurdle for “green” investment to take place.

Current economic conditions are conducive to sustainability making a comeback.  Improved business profitability provides more room financially for firms to pursue broader social and environmental objectives.  And low interest rates mean that it’s effectively cheaper for firms to take on risks, making projects with an uncertain future return more likely to progress.  It’s unsurprising to see building developments such as 20 Customhouse Quay in Wellington, Mercury’s new headquarters in Newmarket, and the Park Hyatt Hotel in Auckland going ahead with a strong emphasis on their environmental features.

The overall rate of non-residential building has grown about 40% since mid-2012 and is currently about 11% above its previous record high in 2005/06.  With the sheer amount of non-residential construction currently taking place and the renewed focus on sustainability, the overall stock of non-residential buildings looks set to become considerably more environmentally friendly over the next few years.

Sustainability is not just limited to non-residential construction.  In the residential space, improving energy efficiency has been an important aspect of government regulation, such as the higher insulation standards for new homes that came into force from 2008.  These requirements have been followed up by similar ceiling and underfloor insulation standards for rental properties from 2019.  The pay-offs from these higher standards range from the easily quantifiable (lower electricity bills) to the more difficult to measure (better health outcomes for the occupants).

Technological advances are also instrumental in achieving more environmentally sustainable outcomes.  The proliferation of heat pumps has been a factor contributing to a 1.8% reduction in New Zealand’s electricity consumption since December 2010 which, as Graph 1 shows, is a stark contrast from the 2.2%pa growth in electricity usage over the previous 36 years.  The recent lack of growth in electricity usage is even more astounding given population growth is at a 40-year high.

Dramatic drops in the price of solar panels have also made microgeneration a much more viable option than in the past.  With battery technology likely to get significantly cheaper in the near future, homes that are almost self-sufficient in terms of their energy needs could easily become the norm within the next decade.

Smart homes can also mean more environmentally-friendly houses, such as sensor lights reducing energy usage or automatic blinds letting or keeping in heat as appropriate.  The cost of this sort of technology is likely to keep coming down over time, resulting in a greater take-up in new homes as well as more retrofits into existing buildings – both residential and non-residential.

Graph 1

To conclude, strong economic growth can often be associated with negative environmental outcomes – the side-effects of intensive dairy farming on water quality, or the seeming lack of regard for environmental issues alongside China’s rapid economic development over the last couple of decades.  But technological progress and higher incomes ultimately give people greater choice about the way they live and do business, including an increased ability to mitigate the environmental effects of their actions or live in a more sustainable fashion.  Given the strong economic outlook for the next few years, along with rapidly improving ecotechnology, there is likely to be a strong push for more environmentally sustainable construction during 2017-2019.

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