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Guidance

Cities of the Future Series – Attracting Capital to Innovative Projects

Cities of the Future Series – Attracting Capital to Innovative Projects

The private and public sectors have a role to play attracting capital for the innovative urban renewal projects required to create the cities of the future.

I recently participated in a Green Building Council of Australia panel discussion on “Urban Renewal – Unlocking the Opportunities” that explored how development will evolve in cities across Australia. Other panellists included Councillor Andrea Reimer, who led the charge to make Vancouver a leader in the global green city landscape, and The Hon. Liliana D’Ambrosio MP, Victoria’s Minister for Energy, Environment and Climate Change.

One topic canvassed was how we attract capital to innovative urban renewal projects.

While there is currently strong demand for quality investment opportunities in real estate and infrastructure, competitively-priced mainstream capital is most attracted to projects with strong certainty of cash flows and returns.

Therefore capital will flow to projects where governments have facilitated developments that are well considered from a planning, community, delivery and commercial perspective.

Inflection point between innovation and risk

To be sustainable, the cities of the future must reflect the way we live and work in the 21st century and address issues like housing affordability, social inclusion and climate change.

Additionally, Australia’s cities of the future will develop around urban renewal projects adjacent to existing infrastructure and built environments. They must interface with the surrounding areas while creating liveable, sustainable, healthy and prosperous communities. This means innovating and developing new solutions that wrestle with environmental, commercial and social constraints.

But new approaches could imply greater risk, hence the importance of comprehensive project planning and implementation to increase certainty of outcomes.

A key input into planning, risk assessment and viability testing for such projects will be harnessing what we can learn from a range of data sources and the technologies that enable us to access and interpret this data. For example, how consumers or occupants interface with the built environment, mobility around a city and energy use patterns.

This means governments, business and communities must work more closely on the projects that we need to address the challenges of the future and ensure more sustainable outcomes overall, including attracting capital investment.

Green investing

Environmental considerations have been an important variable in real estate for decades. In fact, rating properties’ environmental credentials has become a business. Investors want climate-certified properties because consumers of space recognise the broader social focus on environmentally sustainable outcomes.

 Across all asset classes, there were more than 1,600 signatories, representing US$60 trillion assets under management, to the Principles of Responsible Investment as of April 2016.[1] Yet actual investment in green assets is modest. For example, the OECD estimates that only 1% of large pension funds’ direct investment in infrastructure is in green infrastructure.[2]

A contributing factor is the lack of suitably structured assets. Just US$694 billion of green bonds were outstanding last year, 0.77% of the approximately US$90 trillion global bond market.[3]

CommBank is playing its part to meet that demand. Last December we placed the world’s first climate bond for a university, raising $218 million for sustainable development projects across Monash University’s campus network. This month we priced our own climate bond, backed by more than $1 billion of Australian eligible renewable and low-carbon projects.

De-risking pioneering projects

Ironically, in the quest for certainty around an asset’s value and cash flow, investors that back traditional urban development risk investing in something that may not meet the requirements of the future. Regulators have noted that the transition to sustainable energy could potentially lead to significant repricing of carbon-intensive resources and activities.[4]

Leading-edge urban renewal projects therefore must have long-term sustainability to provide investors with stable cash flows and valuations. Governments can contribute by bringing projects that are demonstrably thoughtfully planned, responsive to consumer and community needs and commercially viable.

Several projects underway tick all the boxes around thoughtful planning for our cities of the future. Fishermans Bend in Melbourne is Australia’s largest project targeting a Green Star – Communities rating[5] while the City of Sydney will ensure 7.5% of all new housing in Green Square is affordable.[6]

Most important is certainty around policy. Investors want assurance that innovative urban renewal projects will meet the standards for the operational licence requirements well into the future.

[1] https://www.unpri.org/about [2] http://unepinquiry.org/wp-content/uploads/2016/09/11_Progress_Report_on_Approaches_to_Mobilising_Institutional_Investment_for_Green_Infrastructure.pdf [3] https://www.climatebonds.net/files/files/CBI%20State%20of%20the%20Market%202016%20A4.pdf [4] http://www.apra.gov.au/Speeches/Pages/Australias-new-horizon.aspx [5]http://new.gbca.org.au/news/gbca-media-releases/sustainability-around-corner-fishermans-bend/ [6] http://www.cityofsydney.nsw.gov.au/vision/green-square/planning/affordable-housing