Property Sustainability: The Investment Imperative

Friday, 29 May 2009 13:34

Investment in the construction sector must increasingly take environmental considerations into account

by Dr Angus McIntosh, Partner & Head of Research, King Sturge LLP

The “energy - climate era” has arrived. This is the term coined by Thomas Friedman in his recent book “Hot, Flat and Crowded”. It has become the agenda for President Barack Obama and is also driving the European Union’s next directive relating to the energy performance of buildings.

In this directive it states: “Buildings are at the core of the European Union’s prosperity. They are important to achieve the EU’s energy saving targets to combat climate change whilst contributing to energy security.”

The EU also states: “More energy efficient buildings provide better living conditions and save money for all citizens … the best moment for energy improvement is when buildings are constructed or renovated … member states have to ensure a good quality of the certificates and inspection …”

From 2009 onwards all buildings bought, sold and let within the European Union are expected to have an Energy Performance Certificate. Simply stated, this measures the construction of the building against the performance characteristics of different elements of construction material, including the mechanical and electrical plant equipment, thermal insulation of the windows and walls. The type of space and water heating units available is also measured.

In addition, all public buildings in the UK (and also in some other parts of the EU) are expected to have Display Energy Certificates. DECs, based on evidence from the last year, measures how much energy a particular building has consumed.
By producing a coloured bar code of efficiency (or inefficiency) and displaying the same by the entrance of the building, the building occupier is made aware of how efficient or otherwise he might be in its use of the building.

As the latest King Sturge report “European Property Sustainability Matters – benchmark tools and legal requirements” states, across the world there is now a plethora of different types of benchmarks and certificates. In the UK BREEAM (Building Research Establishment Environment Assessment Methods) has recently been upgraded to bring it more in line with Energy Performance Certificates. The UK has also introduced the Code for Sustainable Homes whereby new development is rated from a scale of 1 through to 6. Code 6 is meant to be zero carbon.

Environmental assessment

In Hong Kong the BEAM building environment assessment method is used. In Japan they have CASBEE and in Germany DGNB-Seal. Australia is arguably further ahead than Europe and has a Green Star certification process, whilst France has an indication benchmark called HQE. Italy likewise has a protocol ITACA and in America, LEED (Leadership in Energy and Environmental Design) has taken route and has become an important part of the construction industry.

Not only is there total confusion, especially if you are international investor, as to what all these different certificates and benchmarks mean, there is also a growing awareness that they may be, to some extent, bureaucratic nonsense.

The key question is; will they save energy and the planet? It is doubtful whether having an Energy Performance Certificate Grade C or better means much more than the building is well constructed. How the building is used is not measured!

Furthermore, if the building has been constructed and in use for more than a century (which is the case for many buildings across Europe), and it has an F or G rating, the question arises “so what”? Is the introduction of Energy Performance Certificates simple costly well meaning bureaucracy?

We all know that there are three major energy stages to the life cycle of any building; the construction (obtaining and designing a building efficiently); the use in terms of energy/waste and transport to and from that building; and the demolition (involved recycling and disposing of toxic waste material).

All the current benchmarks almost totally ignore this three-stage life-cycle carbon footprint assessment.

Furthermore, the UK Government recently commissioned a study to calculate the additional cost of obtaining Code 6 if a building was built to the new Code for Sustainable Homes. It is suggested that up to 40% additional costs or more would be needed to meet this onerous carbon efficient standard. Therein lies the dilemma; at a time when property and land values have collapsed in value, can the industry afford to pay yet more costs to save carbon dioxide?

Across the European Union there have been a variety of attempts to introduce carbon efficient buildings. For instance, countries such as Denmark and Germany have had mandatory benchmarks in place for more than five years. Other countries such as Greece and Slovenia have only begun to introduce certification this current calendar year. Many Scandinavian countries such as Sweden introduced stringent energy targets back in the 1980s.

One the challenges for the “sustainable agenda”, is to have a clear picture as to what we mean by “sustainable”. The traditional route is to think of three concepts; Environmental, Social and Economic Sustainability. To make all three happen, Governance is paramount. In others words, if there is no legal and political infrastructure in place, which not only sets a target but manages those targets over many decades, little will be achieved.

One of the dilemmas in a democratic system of Government is that of political change. Many well meaning Ministers of State in all EU countries come and go year-by-year (and sometimes month-by-month). In the UK, an analysis of the last 30 years reveals that, there have been more than 16 Secretaries of State responsible for Town Planning and Energy matters. In other words, no Minister has been round more than a year or two before another well meaning individual has taken over. The inconsistency of the political structure is at variance with the concept of long term sustainability.

The outlook for the investment market suggests that, whilst there are a number of problems associated with this agenda (as set out above), it will not go away.

Increasingly occupiers and investors will have to take on board legal and other changes and think about “future proofing” their investment holdings. An empty building with a poor Energy Performance Certificate may be even less lettable, especially in this difficult market. However a well let building, with a good Energy Performance Certificate, may have far higher capital value.

But as former President Ronald Regan famously said; “you ain’t see nothing yet”. As President Barack Obama stated in his Inaugural Address on January 20 2009, “Each day brings further evidence that the ways we use energy strengthen our adversaries and threatens our planet…… We will harness the sun and the winds and the soil to fuel our cars and run our factories…”

The European Union is currently putting in place its next Energy Performance Directive. The concept is that all buildings from 2010 onwards will require a certificate when renovated. The objective is to cut green house gases by 20% by 2020. The Commission aims to set down, “a comparative methodology for calculating cost optimum levels of minimum energy performance.”

All members should then bring forward plans by 2011 with reviews every three years thereafter to make sure they are being implemented appropriately.

In addition, the European Union is likely to introduce a Water Directive. This will set down minimum standards for each building against which to judge water usage and re-usage in terms of achieving sustainability. The use or miss use of grey waste water is as important as using up fresh water.

Preparing for this future agenda will mean meeting both targets; reducing the use of energy (much of which, as President Obama states, comes from less politically stable parts of the world than Europe) and reducing the impact on the climate.

A more sustainable future is envisaged, despite some of the rather bureaucratic benchmarks and legal requirements currently being implemented. Retro-fitting older buildings, to meet these ever increasing targets, will become paramount.