In 2020, the Ellen MacArthur Foundation and Arup – one of the world’s leading design and engineering firms – published a study concerning the circular economy in the real estate sector. They have shown that by adopting business models based on the circular economy, real estate companies can benefit. In fact, they can achieve significant financial returns, reduce the footprint of their resources, and implement the decarbonization project.
For their research, they used data from several real estate projects in five European cities; Aarhus, Amsterdam, Berlin, London, and Milan. Based on the data collected, they developed five circular economy real estate business models, testing their financial performance for distinct buildings. The application of the concepts of the Circular Economy to the real estate market is based on the idea of buying services instead of products, and adopting new business models. They involve the use of more adaptable and deconstructible buildings. In this way, investors can enjoy more productive, less damaging and higher value-added assets, as well as new income streams.
Business models at a glance
According to the report, there is a considerable amount of unused space in buildings. This is, for example, an average of 40-60 % for offices and 72 % for higher education buildings in the UK. That is why the first business model, Flexible Spaces, addresses exactly this problem, identifying co-working spaces as the solution. The study based on several rented offices in Milan, and has calculated an additional revenue potential of 18% over the net cost of the current 12-year lease.
As a second point, the study focuses on the importance of creating buildings able to withstand changing market situations and social expectations. Therefore, adopting a business model based on Adaptable Assets means considering the construction of multi-purpose buildings. In this way, it is possible to stop the demolition process, usually applied before the end of a building’s technical life. The report takes residential development in Denmark as a case study. The application of these concepts confirms the 3% increase in the internal rate of return over 50 years.
Another topic raised in the report concerns the building solutions adopted for temporary use sites. As mentioned, besides a limited architectural structure, they may have poor operational performance. For this reason, the Relocatable Buildings model was tested in Amsterdam, finding an internal rate of return of up to 26% over 11 years (not considering land costs).
The Residual Value business model provides for the depreciation of construction materials, whose annual loss in value is approximately 2.1tn. Its implementation on a retail fitout in Berlin has demonstrated a reduction in the cost of ownership over the entire life cycle of more than 5% over 10 years. Through this model, owners create negotiable forward contracts for the quantity of building materials during deconstruction. During the construction phase, customers are allowed to sell these contracts. They can exchange them while the building is usable. In this way, it changes its value in response to local real estate markets and global commodity markets. During the deconstruction phase, the re-use of the materials becomes available. At this point, it will be possible to proceed with the transfer of ownership and cash settlement.
Finally, the study developed a business model based on the idea of purchasing services instead of products. This model, Performance Procurement in the report, allows conserving about 20-40 % of energy in buildings. For instance, the implementation of this concept on a build-to-rent development in London has shown a 3 % improvement in the internal rate of return in 30 years.
Business models, decarbonization and collaboration
Moreover, it is crucial to consider that the construction sector is one of the most expensive, polluting, and carbon-intensive industries. For instance, according to the report by the World Green Building Council, 39% of global energy-related carbon emissions are attributed to buildings. Also, every year 1500 billion bricks are produced for our buildings, and most of them are created with polluting kilns. The latter are responsible for 20% of global black carbon emissions. In such a scenario, an approach like the one described in the report would contribute to the decarbonization process.
Lastly, the study highlights the importance of collaboration between government institutions, business, public and private sectors. This is the only way to achieve a circular economy in every sector.