What do occupiers of buildings expect from investors in the green space?
Today I believe we are witnessing the initial stages of a fundamental change that will affect demand for commercial property. This change will have as fundamental an impact on the value of property as internet shopping has had, but this time on all categories of property. I am talking about sustainability. The impetus for change will come from the occupiers as they seek to balance ever more stringent legislative and stakeholder demands on their property holdings. The timescale is maybe five years, but at the end of this I believe there will be a two-tier market. This is not so much about values being higher for sustainable properties but, rather, unsustainable buildings having much lower values.
Why do I say this? The reality is that the value of a commercial building is largely defined by the occupier. Empty poor buildings are bad enough; empty environmentally poor buildings will be unlettable in the future. When I first set strategies for the companies in which I was the property director they largely revolved around three things; business strategy, location and density of use. You can now add to that sustainability. Every strategic decision has to factor in the environmental consequences. A part of any property strategy now needs to include an exit strategy for those buildings that are uneconomic to make sustainable.
A recent report by the British Council for Offices says that 60% of private sector buildings in London could become obsolete as the government steps up energy efficiency legislation. The report recognises that environmental legislation will tighten the noose around older buildings so that refurbishment becomes unviable, thereby increasing the rate of their depreciation and reducing their value.
So initially it is legislation, along with rising energy costs, that is likely to have the biggest impact on occupier behaviour.
In France, article 225 of the newly adopted Grenelle 2 environmental law will require companies of more than 500 employees and €1m turnover to report on their impacts on environmental, social and society issues and have this independently audited. Denmark already has something similar. How long before the rest of Europe follows?
In the UK, a review of the CRC Energy Efficiency Scheme, aimed at large public and private sector organisations, is underway. The government, which has already dropped the recycling element of the revenue, so effectively making this a tax, has stated that the performance league tables will stay. No company will wish to be at the bottom of this table. The EU wishes to set a new greenhouse gas emission reduction target of 30% by 2020 (from 1990 levels), making additional regulation and legislation inevitable.
Faced with this I expect occupiers to take the lead by demanding environmentally better buildings, and not just new stock but all buildings. It will be a matter of pride for many companies that they are seen to be green. Their shareholders will want it and don't underestimate their own people pressure. I am convinced the greenest companies will ultimately attract the best people. By definition they are the best educated and therefore the most knowledgeable and will not wish to be associated with environmentally unfriendly companies that are wasteful of the earth's resources. The financial pressures, too, will require more economic buildings and the reduction in running costs that a sound environmental policy can bring. Some costs cannot be altered easily or quickly, for example, depreciation and rents, so the focus will always fall on these running costs.
Much higher environmental standards for all buildings are going to be required if investors are to maintain their property asset values and occupiers are to meet ever more stringent legislative and stakeholder requirements. It is stating the obvious therefore that occupiers and investors should work together to achieve these higher environmental standards. The International Sustainability Alliance (ISA), a not-for-profit members organisation, recognises this and provides reporting at two levels.
First, environmental KPIs with which to assess the overall environmental (energy, water and waste) performance of an asset whether that asset is a shopping centre, an individual shop or a floor in a building; second, benchmarking to enable members to track performance against their peers. It is thus a forum where members, both occupiers and investors, can share intelligence on the environmental performance of properties in which they share a very important financial interest, and which will lead to the long-term environmental improvement of that asset, retaining its value better while recognising the environmental reality of the world in which we all live.
I appreciate there is little hard data at the moment to demonstrate the value of sustainability. But this will change. I expect ISA to commission much research over the next few years. But meantime I know which buildings I would want to be in as an occupier.
And until that evidence comes along I would rely on that old property fall-back... gut feeling. That way you stay ahead of the game.