China International Business

Media: China International Business
Author: Geoffrey Lewis

When people talk about the massive urban development happening across China, “green” is unlikely to be one of the words at the forefront of their conversations.

In the building frenzy that has enveloped China, environmental concerns seem, at first glance, to have been forgotten. Yet, if this was once the case, developers are no longer overlooking the importance of building green in China.

Studies have shown that green buildings will be critical to sustainable development. According to UNEP (United Nations Environment Program), buildings already account for 25% of total energy use across the country, and a similar share of carbon emissions. This is expected to rise to 35% of total energy use by 2020 if green building strategies are not widely implemented.

As of now, a small but growing number of buildings in China have been working to prove their green and energy-efficiency credentials by pursuing Leadership in Energy and Environmental Design (LEED) certification – an internationally recognized rating system developed in the US to evaluate the Good Energies, a renewable energy investment firm, found that LEED buildings in the US on average use 33% less energy than standard buildings.

Fourteen building in China have so far been awarded LEED certification, with any others currently under construction hoping for approval. According to the USGBC (US Green Building Council), a further 103 buildings across the country have registered their intent to seek LEED certification.

While these numbers are small compared with the overall number of buildings being constructed, and they will do little to lessen the environmental strain on their own, they are indicative of a growing demand for environmentally friendly office space in China led not by local firms, but foreign multinationals.

LEED-ING THE WAY

For a long time, it has been suggested that multinationals operating in China have felt little need to go beyond the minimum compliance requirements when it comes to environmental regulations. Now, more and more buildings in China are being built according to sustainable design and construction principles, and it is, by and large, foreign multinational corporations that are the ones driving this forward.

Of the 14 currently certified buildings, eight were built by foreign multinational corporations, and two of the others are occupied primarily by foreign companies. LEED buildings generally take the form of owner-occupied, single-tenant buildings and corporate headquarters, which gives those responsible all the long-term benefits of the green features.

Plantronics, a California-based maker of electronic audio equipment whose headsets were used to carry the historic message “That’s one small step from man, one giant leap for mankind” back from the moon in 1969, was the first multinational to seek LEED certification in China, for its factory and office in Suzhou, back in 2006. Since then, Nokia has followed suit with its LEED Gold campus in Beijing, and GM, Coca Cola and Exxon Mobil are among others who have registered with the USGBC to construct their own LEED-rated green buildings in China.

GREEN SELLING-POINT

Property developers – both local and international – seeking multinational tenants have begun to recognize this growing trend, and are increasingly building rentable LEED-certified building. Tishman Speyer, a US-based real estate developer, is currently constructing three LEED projects in China, all of which conform to a company-wide policy and adopted in 2007 to achieve certification of all new buildings so as to entice foreign tenants.

Foreign multinationals take up most of the recently completed Gold-rated Prosper Center in downtown Beijing – buildings are rated Certified, Silver, Gold, or Platinum, depending on how environmentally friendly they are. And Carrefour, the French retail giant, is the anchor tenant of the Silver-rate LeSang Shopping Mall in Harbin. Both developments were constructed by Chinese companies but aimed at largely foreign tenants.

Parkview Green, a new mixed-used tower in downtown Beijing which hopes to become China’s first Platinum-rated green building, exemplifies this phenomenon. Leo Hwang, director of the Parkview Group, a Hong Kong-based developer, says the building’s green credentials were critical to attracting top international tenants. “The green aspects of the building were very much driven by the fact that to differentiate ourselves from the rest of the completion, we had to give our tenants a reason to want to come to us before our competitors,” he explained.

IMAGE-BUILDING

“Most (large) international companies are implementing green building-standards, including LEED, on their projects all over the world, “ said Rob Watson, the “father of LEED” and now CEO of EcoTech International, a green building consulting firm with a growing number of projects in Chin, including Parkview Green. “These companies realize that their real-estate portfolio affects them on several levels: their corporate image, their ability to attract and retain good employees, and the reduction of operating cost and environmental liability.”

Corporate social responsibility (CSR) policies that increasingly require firms to occupy green real-estate globally are also having a large effect. Nokia, for example, built its new green campus in part to comply with CSR. And, after the success of the Gold-rated Nokia China campus, the company has adopted a global policy of building to LEED Gold standards. CB Richard Ellis, the world’s largest commercial real estate service company, also takes environmental factors into account when making location decisions, occupying LEED space where available. Prosper Center, currently6 the only rentable “green” office space in Beijing, was therefore chosen for its offices.

Foreign multinationals are generally willing to pay a premium for certified green space, and developers are aware of the higher rental charges they can charge for these properties, even taking into account the added construction expenses.

“Rents for LEED-certified buildings are often at the highest end of the market,” said Julien Zhang, managing director at Jones Lang LaSalle (JLL) in Beijing. Indeed, Prosper Center is one of the most expensive properties in downtown Beijing, and these inflated prices are likely to stay that way for all new green office buildings in the short-term, at least until supply starts to rival demand.

Foreign multinationals are beginning to recognize the many additional benefits of LEED-rated estate, on top of the obvious reduction in energy costs. LEED buildings can be used as effective recruiting, retention and productivity tools. Nokia, for example, successfully used the green aspects of its new campus as a key selling point to employees wary of working out in the suburbs of Beijing.

“Many multinationals want to present themselves to potential clients and employees as environmentally friendly firms, and occupying green office space in one way to show this,” Zhang added.

In China, where “green-washing”- lying about your company’s green credentials – can often go unchecked and contractors sometimes skimp on quality, the strict and internationally recognized third-party verification that LEED provides is indispensable.

As Parkview’s Hwang noted: “It shows our tenants that we really believe in walking the walk rather than just talking the talk, which is very important in this day and age where there is a lot of green-washing.”

LOCAL FIRMS LAGGING

At present, however, demand for green office space is largely restricted to foreign multinationals operating in China. This is largely a question of economics – most Chinese firms still can’t afford rent in Class-A buildings, which averages around RMB 200/sqm/month (USD29) in Beijing and RMB250/sqm/month (USD37) in Shanghai, and LEED space in China falls exclusively into this category. “Multinationals occupying space in this segment of the market far outnumber domestic firms because of affordability,” said Jones Lang LaSalle’s Zhang.

Complying with the stringent LEED rating standards requires high-end design and construction expertise, which costs more, although not as much as some developers assume: -Tishman Speyer estimates that meeting LEED requirements adds around 3-5% to the cost of building in China.

But even those Chinese companies which can afford to rent Class-A properties are on the whole not choosing green-certified buildings. “Due to generally lower environmental awareness in China, local firms don’t have the same kind of pressure to prove their environmental credentials,” Zhang said.

However, he adds that it is not necessarily the case that Chinese firms are not concerned about environmental or energy-saving measures. Petro China’s recently built Beijing headquarters is a case in point: the constructors worked hard on maximizing energy efficiency to reduce energy costs, but saw no need to get the building certified as “green.”

THE FUTURE’S GREEN

This may be starting to change, with growing environmental awareness and government regulations causing more Chinese companies to start thinking about occupying green space.“ actually, over the past few years, the Chinese government has done a lot to more this green building idea forward,” says Yingchu Qian, a manager at EMSI, a green building consultancy.

The Ministry of Construction has recently released its own “evaluation Standard for Green Building,” which, while yet to have significantly affected the marketplace, is a sign of the increasing governmental interest in green building standards.

According to EcoTech’s Watson, the new Chinese green stand “is more geared to the Chinese market and should appeal to a broader base of developers than LEED.” He also believes that “as the cost to certify comes down, the reach of China’s green standard and LEED will expand.”

In the long-run, this may attract more local firms to base themselves in green-certified buildings. But, for the time being, demand for LEED and environmentally friendly office space is being driven by foreign multinationals.

That firms operating in developing countries – often perceived to be trying to evade the stricter environmental laws of the developed world in order to squeeze out more profit – are leading this drive is testament to the growing role of foreign businesses in China.

By demanding green space, multinationals have actually begun to transform China’s real-estate market, making it greener. This is an unexpected but welcome role for them to play in China.

Geoffrey Lewis is a Beijing-based Fulbright Fellows studying green building trends in China.