New financing needed to accelerate circular built environment

January 16, 2019

Report presents new tools for valuation and financing circular buildings.

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The ‘Building Value’ report launched today demonstrates the radical potential in the built environment to accelerate the circular economy. The industry should re-think how to calculate value in buildings and how to finance them.  

This report identifies key reforms to current methods of valuation and financing to stimulate circular construction. An alternative pathway is mapped from a case study of the Fridtjof Nansenhof social housing project in Amsterdam, due for redevelopment in 2020.

The report is a collaboration between Circle Economy, Sustainable Finance Lab, ING, Allen & Overy, Eigen Haard, The Royal Netherlands Institute of Chartered Accountants (NBA),  Alfa Accountants and Advisors, Madaster, Arcadis, Arup, and DOOR architecten, co-funded by Nederland Circulair! The participants formed a Community of Practice (CoP), to develop relevant, transferable tools to guide circular construction.

Rethinking Construction: one building, six layers

The report argues that each building should be conceived as six individual layers, each with their own lifespan. Applying circular principles, strategies can be developed to maintain the value of each layer.  

The EPM hierarchy

Value can be maintained within each of the six layers by prioritizing reuse in this order: elements, products, materials (EPM). New business models, such as Product-as-a-Service, enable effective reuse of EPMs.

Market for reusable elements

Prioritizing reuse will require a developed market for building elements. Technology has enabled actors within the built environment to increasingly collect, store and exchange data. Reliable governance of EPM data is essential to respect privacy, security and transparency.

The business case

Accurate valuation of individual layers and EPMs is key. The Community of Practice conducted a scenario building exercise to compare the long term (financial) performance of circular features for two building layers. The business case is shown to be highly dependent on assumptions for factors including depreciation, discount rates,  lifespan and market development.

Valuing circular construction

Distinguishing between building layers, when realizing the value on the balance sheet, is necessary to explicitly show the value of layers and EPMs as part of the overall value. The traditional emphasis on location value as part of the total value has eclipsed the importance of building layers and EPMs. These factors should be reported separately on the balance sheet to guide investment decisions.

“Separating location and building elements on the balance sheet should result in a different way of valuing and financing buildings when the developing market for repurposed building elements is more established.”

Jan van der Doelen, Sector Banker Building & Construction, Real Estate at IN

Bringing future value into present financing

Financiers play a crucial role in identifying and mitigating risks in the transition to a circular economy. Circular business models capture value over a longer time horizon, reflected in higher future values. Investment decisions should assess this future value: The business case of a circular construction project is based on the ambition to reduce our demand for natural resources. If a small extra investment results in increased flexibility of the building in the long-term, then it is a smart investment. This long-term investment vision could be further incentivised if financiers make circular construction an investment criterium.” says Dries Wijte, Manager Back Office Finance at Eigen Haard.  

Next steps

On the 16th of January the Community of Practise hosted an event, inviting industry professionals to further the conversation and challenge the report findings with the market. Several of the CoP partners have already committed to continue to build on the knowledge and support the implementation of a circular built environment.

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