World Built Environment Forum

Construction is one of the largest sectors of today's global economy, representing 13% of GDP and employing 7% of the world's working age population. It also consumes half of the world's resources extracted every year and is responsible for nearly 40% of annual global greenhouse gas emissions.

Yet, current approaches to sustainability are too often viewed as counter to good business sense. So, we might ask, what alternative approaches exist that can help the real estate sector address its footprint while also delivering against business objectives?

The ideas behind the circular economy offer real estate investors and developers an opportunity to boost the investment value of assets while also mitigating environmental policy and commodity price risks. Arup and the Ellen MacArthur Foundation have been working with RICS, architecture and innovation studio 3XN/GXN and others to set out the practical steps the real estate community can take to realise this opportunity.

A circular economy, which seeks to decouple economic growth from resource consumption, is a paradigm shift from wasteful practices and employs three main principles:

Applying circular economy principles to the built environment can support a growing sector that is resilient to volatile prices of raw materials, maintains essential natural ecosystem services, and creates urban areas that are more liveable, productive and convenient.

It does this by changing business models to realise value from materials in new ways, for example using smart building technology to use floor space more productively - one estimate by the Ellen MacArthur Foundation suggests a switch to flexible, adaptable smart buildings could add €350-400M to the Danish economy by 2035.

Catch up - Energy efficient renovation

Why isn't it happening already?

"The €1.8tn opportunity revealed by the Ellen MacArthur Foundation reaffirms the economic rationale of moving towards a circular economy. Realising and capturing the benefits of this systemic transition requires a cross-industry, cross-performance, and multidisciplinary approach." —Ellen MacArthur Foundation, 2016

Decoupling economic growth from finite resource consumption should be an attractive proposition to an industry responsible for the largest material flows in the global economy, which begs the question - why is the built environment not already implementing circular principles?

To find out, Arup, EMF and 3XN / GXN undertook 105 interviews across five European cities including Aarhus, Amsterdam, London, Berlin and Milan. Interviewees were chosen to cover the whole value chain and included client and investor perspectives. The project team also analysed 116 case studies that employ elements of circular economy to understand the current trends and gaps of circular economy application in the wider built environment as well as real estate. By combining their analysis of the interviews with insights from the case studies, Arup identified key barriers, opportunities and enablers facing clients and investors seeking value from the transition to a circular built environment.

Knowledge

Almost all of Arup's stakeholders recognised the potential benefits of a circular economy, but few were able to describe the first steps they might take. We therefore see a clear need for greater dissemination of knowledge about circular economy in the industry, and to signpost the steps along the road from a linear to a circular built environment.

Collaboration

Arup's analysis of existing initiatives showed that the application of existing circular products and approaches is limited, in part thanks to the fragmented nature of the built environment. By changing investment models we can align the incentives to create attractive commercial propositions using circular principles.

Finance

Finance was three times more likely to be seen as a barrier than an opportunity or enabler to circular real estate projects. The misalignment between business planning cycles and built environment asset life-cycles is seen as a particular challenge.

Leadership

The use of regulatory incentives and both public and private policy was regularly cited as a key enabler of a transition to a more circular built environment. Policy makers, however, said they would be more able to support circular economy initiatives if sufficient data gathered from commercial scale projects were readily available to highlight benefits and demonstrate viability to the wider audience.

So who needs to lead?

In their interviews, many individuals or organisations told Arup they were willing to act, but that they needed others to lead the way. Arup concluded that some built environment stakeholders are better placed than others to act first, namely:

  • Policymakers – particularly public-sector policymakers at all levels of government
  • Investors – private investors, institutional investors, public-sector investment, banks and other lenders
  • Construction clients – commercial and residential developers, infrastructure and building owner operators

All three stakeholder groups noted the need for public private partnerships to develop commercial, scalable projects. Together, they can generate the evidence base needed to inform policies that unlock further value.

Circular economy as a business strategy

For investors and construction clients to really see value from this thinking, they need to use circular economy thinking as a business strategy, rather than just a sustainability exercise. It is a tool for achieving the overarching goal of business growth, but one that is decoupled from resource use and – crucially – is able to contribute to the financial performance of real estate investment portfolios.

Real estate is experiencing profound shifts in occupant expectations, technology use and investor requirements that are producing new ways of creating value in the sector. This has given rise to new models such as co-working, build-to-rent and responsible business, among others. Responding to these changes with a circular mindset not only keeps a business relevant but also supports its license to operate in the face of changing social and political expectations. Businesses that fail to embrace these trends risk being left behind.

Phase two of Principles to Practices, the joint research project by Arup and the Ellen MacArthur Foundation, is supported by RICS, and seeks to illustrate how and why to implement circular principles in real estate business models. Initial findings were presented in New York at RICS' World Built Environment Forum, 13-14 May 2019.

For more information, please contact Carol Lemmens, Global Advisory Services Leader, carol.lemmens@arup.com.