Towards a feasible business case for circular real estate development

Abstract

The global imperative to embrace a circular economy, underscored by concerns over climate change, resource depletion, and urbanization, has spotlighted the need for sustainable practices and waste reduction, within the built environment. This master's thesis within the context of the circular economy delves into the challenges faced by the real estate sector, a substantial contributor to resource consumption and waste. The knowledge gap revolves around the financial feasibility of circular real estate development, especially for private equity real estate (PERE) investors. Despite acknowledging the environmental benefits of circular real estate, its construction methods often entail higher costs, creating a significant hurdle for real estate investors. In this context, there is limited financial justification for investing in circular real estate developments, particularly when focusing solely on financial outcomes. This study zeroes in on the logistics real estate sector in the Dutch market, exploring under what conditions there is a feasible business case for real estate investors to make a positive investment decision on circular real estate development. To address this problem, the research employs an action research methodology, combining theoretical insights with practical application. Two cycles of plan-act-observe-reflect guide the exploration, beginning with a focus group discussion with PERE investor practitioners. Subsequently, a case study of a circular logistics development opportunity is presented to an investment fund, allowing for a comparison of the business case against traditional development.

The research identifies nine interconnected conditions influencing the investment decision: cost, returns, timeline, market development, sustainability, strategic portfolio management, investor appetite, regulation, and tenant considerations. Importantly, certain conditions, such as cost, returns, investor appetite, market development, and strategic portfolio management, are highlighted as particularly critical in circular real estate, potentially exerting more influence than in traditional developments. The findings conclude the delicate balance between cost and returns, aligning investor expectations with long-term potential, strategically integrating circular projects into investment portfolios, and staying attuned to market dynamics as the most important conditions for circular logistics development.

This research contributes to closing the knowledge gap in the literature, providing valuable insights for real estate investors navigating the complexities of circular development. The identified conditions demonstrate transferability across diverse real estate sectors, validating their universal significance. Future research avenues include exploring different fund categories, extending the study across diverse real estate sectors, and investigating the complexities within investment funds related to sustainability. Additionally, examining ancillary benefits and refining cost increase estimates for circular construction can enhance financial feasibility insights. For practical implementation, establishing a dedicated sustainable impact fund and introducing regulations mandating material reuse are recommended. These insights aim to advance the discourse on sustainable real estate practices.