The hunt for a bold property development

Two things need to happen if residential property developers are to persuade the public that sustainability is on the business agenda. And it starts with understanding sustainability is an asset not an expense.

In my previous article I noted how property developers in Australia increasingly sought to exhibit their ‘green’ credentials and to report on a wide variety of initiatives in annual reports on ‘sustainability’ (Building a greenwashing perception, April 23). Some are persuasive, many others less so. They represent a necessary but not sufficient step in understanding the business imperative of sustainable development.

In my view, two bold things need to happen if residential property developers are to persuade the public that the sustainability agenda is the natural home of business.

The first is for responsible developers to recognise themselves as ‘shared value’ companies. In the words of Michael Porter and Mark Kramer, in their article in Harvard Business Review in Jan-Feb 2011, business needs to recognise that it creates both economic and societal value in its operations. Societal impact comes not from ‘giving back’ to community by undertaking additional worthy activities, but from the intrinsic nature of the business itself.

Think of residential property developers and the role they play in society. Providing citizens with affordable housing is one of the most important contributions that can be made to community well-being. Competitive markets have been very successful in providing the incentive for developers to meet this need.

Of course we know that markets can fail. Development benefits are generally privatised but the costs (in terms of environmental waste and degradation) are often externalised. It’s difficult to accurately measure the cost of resource depletion and as a consequence, the use of natural capital is often undervalued in calculating the net present value of a property development.  Sometimes the link between cause and effect is obscure, at least in the short-term. Not surprisingly, one can find instances of imperfect optimisation amongst developers.

All the more reason, then, for the business case for sustainability to be persuasively articulated. Residential property developers need to recognise that they create shared value from the business itself. By integrating their sustainability activities into their investment strategy they can accentuate the positive societal impacts and, at the same time increase their long-term economic return. Sustainability, in short, is a business asset not a cost.

Residential property developers create shared value. Housing estates are not just a group of properties but communities. Residential development is not simply a financial transaction based on subdivisions. It’s about creating places where people want to live. Social value (the provision of local schools, childcare and health, retirement and shopping facilities) and environmental value (planning for open space, parkland, water recycling and low energy houses) are not ‘add-ons’ to the bottom line. They represent the lifestyle which is being purchased. Societal benefits contribute to financial return.

Sustainability needs to be premised upon the basis that it creates additional financial returns. Smaller houses are more affordable. Community developments add value to real estate. Long-term energy savings have a perceived value to purchasers. In short, a residential property developer that views itself as creating shared value will integrate sustainability into its core building strategy as a source of competitive advantage. Sustainability, in this sense, is about organising the business so that it can build the most positive mix of societal and economic returns. It’s about commercial considerations not, simply, corporate responsibility.

The second thing that needs to happen is that businesses need to develop a more integrated reporting framework, in which the returns on various forms of capital are presented in a holistic manner. Metrics become important. The challenge, for residential property companies (as other businesses), is to be able to measure the societal and environmental returns on sustainable development with the same persuasiveness that they can calculate financial returns.

Sustainability can be good business practice for residential property developers.  In seeking, entirely appropriately, to present themselves as good corporate citizens, they should not seek to ‘balance’ environmental against economic imperatives. Rather, they need to espouse that they create shared value.

As I emphasised in an earlier blog on Stockland, the most innovative and strategic companies will, in developing their sustainability strategy, seek over the long-term to maximise both the societal and financial returns in the interests of business.

Peter Shergold is the Macquarie Group Foundation Professor at the Centre for Social Impact.