The time is right for the interests of investors, developers, and occupiers in the UK to yield positive sustainability outcomes, writes Julie Hirigoyen
Traditionally, investors, developers and occupiers have had relatively divergent interests in sustainability. However, recent policy and market developments in the EU might provide the context for a closer relationship based on closer alignment of their environmental and financial interests.
Institutional investors and pension funds have longer-term investment horizons, so one would assume they were sensitive to long-term sustainability risks such as energy security or flood risk. However, the priorities of both occupiers and developers tend to be far more immediate - focusing on compliance with tightening building regulations, energy prices, and green certification schemes for marketing or brand-enhancing purposes. Until recently, this was manifested through each of these groups' commitment to quite different objectives, and rarely delivering mutually reinforcing or beneficial results.
However, as government policy increasingly focuses on energy and carbon performance standards, it is likely that key interests in the industry will converge. In the UK, this convergence centres on a mix of instruments, including taxation policy (in the form of the new iteration of the CRC Energy Efficiency Scheme), fiscal incentives such as the Climate Change Levy or Feed-in Tariffs, and the roll-out of mandatory and voluntary energy labels (in the form of Energy Performance Certificates and Display Energy Certificates).
As the landscape of liabilities for energy purchasing and management changes, so do the traditional time-scales of investors' and pension funds' commercial and sustainability interests. So we are witnessing a renewed focus among pension funds, property companies and corporate occupiers to address their energy profile, and reduce their carbon intensity, forcing them to find new ways of partnering to achieve common goals.
In 2011, real estate market fundamentals are challenging the status quo. With a shortage of grade-A office supply, the investment community is having to find ways of meeting growing demand by repositioning older assets. This involves the consideration of capital investment programmes, which in themselves represent significant opportunities to improve the sustainability profile of the assets. And given that 98% of the commercial property stock is existing buildings, investors are quick to recognise that the focus of their energy and carbon reduction programmes should be on retro-fitting and refurbishment rather than on new development.
Corporates are also embracing new ways of working. Technology and flexibility are at the top of the knowledge-worker agenda, resulting in shrinking work spaces through efficient workplace planning. These corporates are themselves committed to sustainability as illustrated by growing numbers issuing voluntary sustainability reports and disclosing their performance under schemes such as the Carbon Disclosure Project. Furthermore, the 2010 results of Jones Lang LaSalle's global survey of corporate real estate executives (conducted in collaboration with Corenet) reveal that over 90% of occupiers consider sustainability criteria in their location decisions, and almost half would pay up to a 10% premium for sustainable space.
On the face of it, interests of owners and occupiers of real estate are converging around both market and sustainability trends. But with capital in short supply, investors must convince their lenders of the strong returns for sustainable investments.
Chairing a session at the World Economic Forum in Davos in January, Jones Lang LaSalle's global CEO, Colin Dyer, sought to address the issue at the heart of the challenge - namely the split financial incentives for owners and occupiers to invest in capital upgrades aimed at improving energy efficiency. After all, why should investors fund improvements that reduce the costs for their tenants? Or why should tenants fund upgrades to building plant or fabric when the long-term results of this will be to enhance the capital value of the site?
The answer to unlocking this dual interest might yet lie in the effect government policy instruments has on investors and pension funds, as both will incur higher energy and carbon tax costs for inefficient buildings.
To help coalesce the owner and occupier agendas around the low energy/carbon retrofitting agenda, a number of potentially transformative financial models are emerging. These include the performance contracting typically used by energy services companies, which have an important role to play in unlocking energy savings, particularly for owner-occupied buildings.
Beyond these, policy-led initiatives, such as the Green Deal in the UK (a key part of the Energy Bill currently going through Parliament) are likely to enable significant progress to be made as and when they are officially introduced. The Green Deal is expected to enable owners and occupiers to avoid upfront costs while the repayment of improvement measures is made, in whole or in part, over an extended period of time from the savings generated by reduced energy bills.
In reality, in many cases, it is the availability of accurate energy data according to complex relationship structures that will enable such policy instruments to function in the commercial real estate world. And if the experience of the CRC Energy Efficiency Scheme in the UK is anything to go by, those data points have not traditionally been at the top of every real estate investor's or managing agent's priority list.
But, once again, there is an opportunity here to take advantage of substantial improvements in metering technologies and building management systems to revolutionise the way in which we monitor, allocate and report on energy use and carbon emissions in buildings. Once the industry is in a position to apportion energy costs correctly, carbon taxes and capital improvement budgets, this can be complemented by a supportive leasing structure and policy context. At this point, the correct carrots and sticks will be in place for investors, developers and occupiers to engage in a far more fruitful and transparent sustainability debate.
So we believe the future is bright for sustainable real estate in the UK, and more broadly in the EU. Interests of the different parties are converging around key policy drivers and industry trends. It will not be too long before pension fund managers of real estate assets engage in creative collaboration with their retail and office occupiers to meet jointly set carbon reduction targets for their mutual benefit.
Julie Hirigoyen, head of energy & sustainability services EMEA, Jones Lang LaSalle