Financial Innovation Makes Green Buildings Bankable

The White Square and White Gardens complex in the Belorussky district of Moscow
Vladimir Filonov / MT

Western funds and investors continue to drive energy and environmental efficiency measures in the Russian economy.

Carmaker AvtoVAZ saved up to 300 million rubles ($9.4 million) through energy efficiency measures last year and has become the model for a type of service contract new to Russia.

Contractors design, source, install and maintain equipment and get paid from the savings over several years.

Fenice, the Italian subsidiary of French energy giant EDF, cut the carmaker's bill for heating, compressed air and lighting. Now Fenice Rus has won the backing of the European Bank for Reconstruction and Development, with a multi-year loan to spread the service contract model throughout Russia.

While Fenice's projects may be too large for the residential market, General Director of Fenice Rus, Vincent de Rul, said, "We are interested in how our performance contracts could be adapted to the municipal market. The opportunities are there but we do not want to move too much from our roots, from our DNA, from our work with industrial companies."

The project demonstrates that innovation can be as much about the financing model as the technology. Industry, warehouses, logistics as well as retail and residential can boast examples of innovation, from financing to energy and environmental efficiency.

Private initiative

The Russian government estimates that the country's per capita consumption of energy is more than three times EU levels and twice that of the US. Although it has committed to reducing energy consumption by 40 percent by 2020, practical efforts are mostly private sector initiative.

Russia has energy efficiency regulations and environmental protection codes but these exist largely on paper, according to the Russian Green Building Council, which was founded in 2009 and is a member of the World Green Building Council.

The government is also trying to introduce standards for efficient buildings, which will be essential, according to Pavel Teremetsky, Senior Manager with the energy efficiency team at the European Bank for Reconstruction and Development. "International best practice is to have benchmarks for a given level of energy consumption per square meter as well as energy performance requirements for walls, windows and roofs, etc. But in Russia that is just coming into effect. Also there can be standards and labels for materials and appliances, which were introduced in the energy efficiency law. There is still a question of enforcement but we hope to see some early adoption of these standards."

One problem is the split incentive: Constructing a building to higher efficiency standards may save the tenant money in the long run or enable the landlord to charge a higher rent. But most Russian developers see only the extra cost up front while the benefits are postponed.

Worse, as the Green Building Council Russia explains on the first page of its web site: "Decades of state energy price supports and an abundance of natural resources and raw materials combined with non-uniform enforcement of building codes together with low public awareness have resulted in an overall built environment that is significantly less energy efficient, less competitive, less healthy and more environmentally damaging than in most industrialized economies."

Lack of awareness, or the need to raise awareness, is the phrase used by developers, consultants and bankers again and again.

Moscow's first office block certified to international standards, Ducat Place III, was completed in 2006 and met the British green standard, BREEAM, in 2010.

"Two years ago when we were certifying Ducat there were a handful of green projects. There are now close to 50 projects which are either in the certification process or are intended to be certified," said Aaron Smith, Managing Director of Hines Russia.

"It is taking off but not to the extent in the West. It is a matter of awareness and competitive forces. You can get your employees trained here in Moscow by the Russian Green Building Council in BREEAM, LEED or DGNB certification standards. There are consultants who will take you through the entire certification process, such as Mott MacDonald or Drees and Sommer, so if you are serious about it you can execute in Russia." (For more, see Inside View, P11.)

Willing bankers

The awareness issue extends to the financial industry. Energy and environmental efficiency has a cost. The European Bank for Reconstruction and Development financed two shopping malls in Siberia: in Russia's third-largest city Novosibirsk and in Surgut. The borrowers have to report annually on how they meet energy efficiency benchmarks.

"For the borrower, implementing such things as energy efficiency features can actually bring the cost of construction up but then the project starts saving money while operating," said Leila Urazbaeva, Senior Banker, Property and Tourism, at EBRD. "Plus if the project complies with European environmental and energy efficiency standards it is more attractive for future sale if the buyers are institutional buyers like western funds. Though for a Russian investor, I think this is not as important.

"EBRD has a strategy which is to promote energy efficiency in the countries of the former Soviet Union. That is why we require certain parameters to be met. We are not just an ordinary commercial bank: we have to fulfill our mandate when we finance something.  An ordinary commercial bank would not care about that."

If green measures slow the return on investment, who would bother? "A private company or a fund who is interested in longer tenors, who is interest in implementing energy efficiency standards. It should be a bigger project, starting from $40 million to $100 million," Urazbaeva responded. "It may be an international developer because of the corporate standards and the ability to use English law."

EBRD is better known for its work with municipalities and infrastructure however its property division can, under its mandate, lend to any type of commercial property of a private initiative, though it must be outside St Petersburg, Moscow or Moscow Region. Past projects include shopping malls, warehouses, hotels and, in just one case so far, residential.

Ecodolie builds low-rise, economy-class homes in regions including Kaluga, Obninsk and Orenburg Regions. The homes are intended for entry-level and middle income buyers.

"EBRD is much more demanding than other commercial banks but it has its pros and cons. It makes sense when the project is big and when it is an international developer who is concerned about these same standards. EBRD can afford to have longer tenors and greater maturity. Normally such big projects that have this energy efficiency element tend to have longer tenors and EBRD can provide longer loans," said Urazbaeva.

Ecodolie is building affordable, green homes on 570 hectares spread across various regions
Alec Luhn / FOR REQ

Green construction

Consultants can take on the task for a property owner of converting a building to green status but green construction is another matter.  An investor may set the specifications but contractors must implement green standards throughout the construction process. This includes recycling the majority of materials on site and completing documentation on behalf of the investor so that he can apply to environmental standards boards for certification.

The fact that Russian manufacturing is still developing means many materials required for construction must be imported, although the proportion is smaller than before.  When Hines built Ducat Place III it imported the majority of the materials from outside of Russia. Now it says that has fallen to about 35 percent. Most of this is mechanical equipment and some natural materials for finishing.

Buildings built as green from scratch are still uncommon in Russia. One prominent example is White Gardens on Belorusskaya Square, which is the second phase of White Square. It is being built to BREEAM"s "very good" standard (on the scale, good, very good, excellent).

Russia's first BREEAM certified project to be rated excellent is planned as Skolkovo Business Park, scheduled to open in the second quarter of 2015. One key feature will be the use of underground ice chambers to cool the buildings passively.  On a territory of 8.4 hectares it is claimed to be ecologically the best development in Moscow. It will include six office buildings, each of 14,300 square meters, being constructed around pools and woodland.

The project gains an advantage from its location, says Elena Malinovskaya, Associate, Office Group on Green Development for Cushman and Wakefield, which is a consultant to the project.  

"The business park has a greater chance of getting an excellent rating because of its green location. Certification also involves transport and how people get to their workplace. Skolkovo offers more opportunities for people to use bicycles."

Malinovskaya sees a small but growing demand for green certification. "The motivation is for selling or leasing in the future. A lot of investors and tenants are asking for this. Some developers build to green standards so that they are at the top of the market."

While a small number of Russian specialist companies are rising to the challenge, the impetus for energy and environmental efficiency still comes mostly from western funds and international investors.