UK commercial sector faces new ruling

COMMERCIAL buildings will soon be unlettable if they do not meet strict levels of sustainability.

WHILE 85% of property investors around the UK have committed themselves to “assessing” the energy efficiency of their own portfolios within the coming year, only one in five respondents plan to actively dispose of inefficient properties, with the same proportion planning to retrofit them.

The new study, entitled Green to Gold – Sustainable Investment Attitudes presents its findings only five years before the EPC minimum energy performance standards kick in. In accordance with The Energy Act 2011, by April 2018, it will be illegal to let residential or commercial properties that do not meet a minimum energy performance standard.

The Government has announced its intention to use an EPC rating of E as the minimum standard. This could have very significant implications for landlords and property investors alike with currently a fifth of commercial properties below this standard.

GVA’s Green to Gold survey is the longest running research into commercial property investor’s views on sustainability.

This latest survey indicates an increased emphasis on the importance of sustainability in property, despite the significant economic challenges that remain. However it will still do little to convince industry critics that the current trajectory of improving property stock will meet Government deadlines.

The survey shows a trend between 2007 and 2012 of investors placing increasing importance on sustainability factors within their acquisition and disposal decision making.

Alastair Mant, head of sustainability at GVA comments: “Bearing in mind the challenges that investors continue to face, it’s encouraging to see that the vast majority consider sustainability to be an increasingly important issue and the announcement of minimum energy performance standards has certainly helped the focus. However, many in the industry appear to be unsure of how to assess and value the risks, costs and benefits associated with sustainability and this must change if the appropriate investment decisions are to be made. Time is of the essence as mandatory reporting, minimum performance standards and rising operating costs are all starting to impact investors and occupiers. Factoring sustainability into investment decisions is vital if assets are to perform now and into the future”.

The report also stated that only a third of survey respondents believe the current poor market conditions have caused a lessening of importance towards sustainability issues by investors.

Although many investors are now assessing their properties, 55% of respondents do not assign monetary values for sustainability within their investment appraisals and the vast majority (80%) stated valuers did not adequately reflect sustainability issues in their reports.

When measuring the importance of sustainability issues to occupiers, 69% of respondents believed sustainability issues were of “some importance”. However, only 10% state the issues were “very important” which has decreased from 20% in 2010.

Simon Beanland, senior director of investment at GVA, Newcastle comments: “The difference we’ve seen since our previous survey two years ago is that investors and landlords have demonstrated a level of action is being taken.

“More investors have realised that these legislative changes to meet energy efficiency targets will have a major bearing on the future capital value of their stock.

“Despite that, we estimate over 55,000 commercial units around the UK still remain below the required standards and if not updated will become unlettable in 2018. Therefore a huge exercise remains in ensuring this does not happen.

“Within a sustainability assessment the results were similar to previous years with high energy efficiency and a sustainability “badge” such as BREEAM or EPC being considered most frequently with public transport/accessibility not far behind.

Asked how sustainability was likely to affect property performance, respondents observed it would have the greatest affect on obsolescence. Tenant retention was placed second, while other factors such as rental growth, yield levels, rent levels and voids received lower recognition.

Similar to 2010, investors felt city centre offices and office parks would feel the greatest impact from sustainability issues.

:: Simon Beanland is director of national markets, investment at GVA in Newcastle

'Sustainability is key'

THERE is little doubt sustainability continues to be at the leading edge of property development with tools available to encourage climate change mitigation and resource efficiency.

Twenty years after the Rio Summit on climate change, the face of the world has changed. Economic, demographic and environmental challenges have shifted. The world’s population has increased by 26% between 1992 and 2012, and the earth is likely to host nine billion human beings by 2050 (UN Report, 2011). Furthermore, since 2008 more than half of the world’s population lives in cities, hence the need for property professionals to design, build and manage properties in a sustainable way.

The UK has a target to reduce CO² emissions by 80% by 2050 based on 1990 levels. To achieve this target the Government has created a framework, The Climate Change Act 2008, to encourage private and public sector bodies to reduce carbon emissions and consume energy from renewable sources.

At the moment the building sector is responsible for more than a third of global resource consumption annually, including 12% of all fresh water use and produces 40% of solid waste (UNEP Report, 2012). Therefore, property developers should increase efforts to ensure natural resources are processed and used in a more sustainable way to manage a growing population.

Sustainability assessment tools like BREEAM (the most widely used measure of sustainability for new developments in the UK) provide accurate and sensible information on the sustainability performance of properties. It was updated over a year ago by adding an “Outstanding” category and changing scoring parameters making it harder to achieve each category.

During the BREEAM assessment process, a building is measured at design stage and through the construction process and it ensures participants contribute to the final score of the building.

Designers have to think about materials from the “Green guide to specification” or points are lost and provisions such as cycle racks can improve a score. Although not empirically proven, the value of “green” buildings is higher than less sustainable ones.

:: Ian Tew is building consultancy partner at Knight Frank in Newcastle

New rules on energy certificates

THE commercial property industry in Newcastle must now act in accordance with the new Energy Performance Certificate (EPC) rules brought into force by the Government earlier this month.

Changes to requirements for the display of certificates in commercial buildings over 500 square metres, visited by the public, where an EPC has been issued, are important. This is especially as they place new requirements on the occupiers of commercial buildings.

EPCs must be clearly displayed in a large number of commercial buildings visited by the public, including retail and leisure premises.

It is the tenant, not the landlord’s, responsibility to ensure this happens for their occupied space. Landlords may face similar obligations for common areas under their control, businesses can ultimately be fined for non-compliance.

There are more changes planned, as of 2018, it may be illegal to lease a building with an EPC below a minimum standard – expected to be an ‘E’.

Regulation is going to become tighter with time. According to Jones Lang LaSalle, property investors are aware of these pressures and will pay increasing attention to the overall sustainability profile of any building.

Newly built stock should remain insulated from these changes. For a swathe of older ‘core’ stock, the location and demand profile will justify the required investment. In other locations, where demand is vulnerable, the problems are more difficult to solve, given the wider structural changes outlined above. It will be difficult to raise finance for capital expenditure on assets for which future growth is uncertain. Conversion to residential or other uses is possible, but in the right location. Those alternative uses will be subject to sustainability criteria. We advise all commercial property owners and occupiers to review their portfolios and consider the risks and opportunities for assets.

It is essential to know the current EPC rating of your building. You can then consider options to improve the energy rating. Landlords could dispose of poorly rated stock in favour of higher energy efficiency buildings. Properties kept for long-term strategic reasons may have to be upgraded to ensure their lettability in 2018. Jones Lang LaSalle can offer EPC upgrading services and advice to commercial property owners and occupiers’.

Jones Lang LaSalle predicts the changes have potential to impact on property owners and occupiers:

Obsolescence will accelerate in poorer quality buildings, increasing the need for refurbishment.

Occupiers will be unable to assign or sublet space.

Capital values could fall on poor rated buildings as we near 2018.

Owners or occupiers will need to spend capital improving poor EPC ratings in advance of 2018.

It will be uneconomical to upgrade the asset, leaving the owner with an illiquid/high risk asset.

:: Martin Smith is associate director at Jones Lang La Salle’s Newcastle office


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