By Joel Quintal
2 November 2010 – The UK closely watches sustainability initiatives around the globe and is not shy about throwing its hat into the ring to try out something new. In the first instalment of a two-part series, Jones Lang LaSalle’s Australian head of sustainability, Joel Quintal looks at current sustainability trends in the UK. After six years working in the UK property sector with real estate investment manager PRUPIM, Mr Quintal is now Sydney based, leading Jones Lang LaSalle’s approach to sustainability management across Australia. In the second instalment, he will focus on Australia.
Part One: United Kingdom – What’s going on
Energy Performance Certificates
The launch of Energy Performance Certificates marks the beginning of the UK Government turning its sustainability focus towards the property sector. In 2007, the UK Government enacted legislation requiring energy performance certificates to be incorporated into property transactions [not as part of advertising collateral, as in Australia].
This particularly onerous piece of legislation comes from the European Commission’s Energy Performance of Buildings Directive that places a requirement on EC member states to enhance their building regulations and to introduce energy certification schemes for buildings.
The energy performance certificates include two distinct certificates (i) the Energy Performance Certificate and (ii) the Display Energy Certificate.
The EPC takes the physical structure of a building to deliver a theoretical or potential energy performance rating whereas the DEC takes the actual energy consumption to produce an operational energy performance rating. In many ways the DEC is similar to the Australian NABERS (National Australian Built Environment Rating System) rating.
Currently, DECs are not mandatory in the commercial property sector. However, they are required for buildings greater than 1000 square metres occupied by the public sector that are accessed by the general public and some privately owned buildings such as public swimming pools/leisure centres, theatres, and museums. Perhaps unusually this does not currently include shopping centres, universities, or hospitals.
For buildings captured by this requirement, DECs are required to be displayed within a building and in public view, that is, lobby areas, which brings some transparency to the way in which buildings are managed.
The UK requirement for producing an EPC is triggered when a building is leased, sold, or built. There are a few exceptions to the EPC but those that are include places of worship, sites for demolition, and commercial buildings less than 50 sq m.
The EPC rates the building on a scale of A to G (A being the highest) and visually resembles the energy performance rating system of electrical whitegoods in the UK. The EPC is accompanied by a recommendation report which, to date, has received much criticism as it is a generic document produced by modelling software and takes little consideration of the specifics of the building so recommendations range from the impractical, such as constructing large wind turbines on inner city buildings, to the unfeasible, such as installing banks of photovoltaic panels on low value assets.
Unfortunately, EPCs in the UK are often treated as another transaction document with little direct value in improving the state of the existing building stock.
Carbon Reduction Commitment Energy Efficiency Scheme
The Energy Performance Certificates provide the basis for transparency in the market, while the 2010 Carbon Reduction Commitment Energy Efficiency Scheme is what has hit the UK property sector with force by placing a price on carbon emissions. Organisations were required to participate in the scheme where their annual energy consumption during 2008 was greater than 6000 MW and they have at least one electricity meter settled on the half hourly market. That’s where the simplicity ends.
In order to capture as many organisations as possible, the government linked participation to the highest parent company of an organisation and all entities of that organisation were drawn in as a participant as soon as one entity qualified. Unit Trusts and shared ownership required a whole raft of participatory rules that were released after the CRC commenced and are still subject to interpretation.
The CRC works on the principle of organisations being required to purchase carbon allowances equivalent to the amount of CO2 emitted as a result of their energy consumption. During the First Phase (2010-2012) the allowances will be available in response to market demand through controlled trading periods, however, in the subsequent phases there will be a cap on the amount of allowances available for purchase. In this way, the UK Government aims to achieve carbon reductions as the number of allowances available for purchase is reduced on an annual basis.
In an apparent U-Turn on the original plan to operate the scheme as cost neutral by recycling the allowance payments to incentivise participants, rewarding good performers and penalising poor performers, the UK Government has announced that the circa £1billion will be absorbed by the public coffers.
While this is now looking like an energy tax, I don’t necessarily disagree with this change – on the contrary, for landlords looking to pass the cost on to occupiers it halves the complexity of transferring costs between owners and occupiers, however, for those participants that took early steps to maximise their performance early on in the scheme they will certainly be disappointed by the apparent lack of return on investment now that money from the scheme will not be recycled back.
All in all this is a pioneering scheme that will set the benchmark for other national carbon reduction programs and should be watched closely for areas that could (and should not) be replicated in Australia.
Renewable Energy Feed in Tariffs
Another area in which the UK government has taken action is renewable energy. Following the release of the Low Carbon Transition Plan in 2009, landlords and owner-occupiers sat up and took stock of the potential for their roof space and vacant land to generate an alternative income stream through producing renewable energy.
The UK feed in tarrifs, or FiTs were previously disregarded in asset planning when compared to the more generous tariffs seen in parts of continental Europe. However, the revised tariffs provide land and building owners with a real opportunity to make additional revenue from their existing assets.
The FiT’s essentially pay generators of renewable energy for each KW of energy produced. The generating organisation would then have the option to consume the energy on site, sell the energy back to the grid, or a combination of the two by consuming on site and selling the excess. Suddenly, renewable energy projects were working with a return on investment that was appealing to managers of large assets (such as shopping centres and industrial sheds) and Chief Financial Officers – sustainability initiatives had a clear financial return.
Who would have thought that the UK sunshine (or lack there of) would provide a potential income source? Imagine the possibilities in Australia…(Victoria is understood to have been examining a potential for commercial scale feed in tarrifs.)
Better Buildings Partnership
The UK regulation is supported by a number of organisations that promote sustainability in the property sector. One of the most productive in my opinion is the Better Buildings Partnership (BBP). Since its inception in 2007, this collaboration of the UK’s leading landlords, the London Development Agency, and the Mayor of London’s Office has produced a number of practical toolkits and promotes excellence throughout the UK property sector.
The BBP has produced and made publicly available the Green Lease Guide, Sustainability Benchmarking, and Low Carbon Retrofit toolkits; with the Managing Agents Toolkit and Green Building Management Toolkit soon to be published.
Where to next for the UK?
The UK has made solid attempt
s to kick-start a carbon market through the CRC which certainly raised the profile of carbon management throughout organisations as they were faced with a new and significant annual expenditure. What remains to be seen is how industry will react to paying for carbon emissions during recovery from the global financial crisis and how successful this scheme will be in reducing the UK’s overall carbon footprint.
The introduction of EPCs into the transaction process was a clever way to bring sustainability out of the tree-hugging forest but in a profession focused on compressing yields and covenant strengths the government really needs to go back to basics and address the knowledge gap amongst the surveying [or valuation] profession on these issues so that the true benefit of sustainability can be realised as building owners focus on improving the existing building stock.
There is a clear differentiation between the sustainability leaders and those that don’t take responsible property investment seriously. In such a fast moving and topical issue I do worry that the latter of these two groups will miss out on opportunities for enhanced returns and be faced with portfolios that are on the slippery slope to early obsolescence because they can’t meet the demands of the discerning investor and the conscientious occupier.
In the next column I will take a look at what’s going on in Australia and where Jones Lang LaSalle considers the opportunities are in responsible property investment.