The new year heralds new journeys for individuals and organisations as we seek to learn from experiences in 2017 and focus on opportunities that preserve and enhance ‘value’ in the myriad forms that it takes.
It is a tremendously exciting 2018 for EVORA and one that has started incredibly positively. We are looking to forward to working with existing and new clients as we implement best practice solutions that deliver value to their funds, assets and the environment.
Below I identify my predictions for 2018 across five topics. In addition, where risks are identified, I propose solutions, to mitigate and manage.
There are many more areas and topics that could be covered, and this reflects the rapid changes the industry is currently seeing. I’d love to hear your thoughts on my predictions plus any of your own. I will commit to reviewing these predictions at the end of 2018, to see how things panned out.
GRESB: an evolution
The GRESB survey is in its ninth year and participation shows no sign of waning, particularly in the Real Estate assessments.
GRESB does not suit all fund strategies and our research demonstrates that Core funds, particularly those with a high percentage of directly managed (multi-let) assets, do perform better than those with Opportunistic strategies and / or a high percentage of indirectly managed (single-let) assets. Perhaps this is no surprise. Consequently, GRESB is reviewing the method in which is benchmarks and scores data availability for indirectly managed (single let assets).
[clickToTweet tweet=”Early adopters tend to perform better, as investment managers develop (and align) ESG strategies with GRESB criteria” quote=”Early adopters of GRESB tend to perform better, as investment managers develop (and align) their ESG strategies with GRESB criteria, particularly through the use of structured frameworks such as an Environmental Management System.”]
Early adopters of GRESB (with years of experience) also tend to perform better, as investment managers develop (and align) their ESG strategies with GRESB criteria, particularly through the use of structured frameworks such as an Environmental Management System.
To counter the above two points, GRESB has launched a Pre-Assessment module. This survey is designed for:
- New investment products that are raising capital and / or undergoing initial investor due diligence;
- Real estate strategies with opportunistic, short-hold or development focus;
- Real estate vehicles beginning to incorporate ESG into their operations
I expect this ‘toe in the water’ approach will lead on to greater participation in the full survey, despite the fact that GRESB is now charging participants that complete the main and/or pre-assessment survey. This change will have limited impact for participants who are already members or those who pay for the benchmarking reports (which will be issued automatically as part of the service)
The final, encouraging point for 2018, is the increased engagement by GRESB with a wide range of stakeholders as they seek to shape survey components. This is an important facet to ensure that the survey remains relevant to market needs, whilst continuing to push ESG strategies to deliver meaningful performance improvement.
Prediction: Continued growth in the main Real Estate survey, with respondents in North America and Europe leading the field in terms of number of participants. As it is the first year of operation, I expect a small uptake in the Pre-Assessment, which will increase over time as investors and their managers gain awareness of this approach.
I expect the main GRESB survey to incorporate more Health & Wellbeing (H&WB) questions, possibly at the expense of the separate H&WB module. I expect ‘pilot indicators’ for the measurement of social value, H&WB impacts and potentially governance scorecards. Measurement of environmental impacts alone will not be sufficient as the sole indicator of performance for too much longer.
Debbie Hobbs, Head of Sustainability at Legal & General Real Assets will be speaking about measuring social value, alongside Sander Paul Van Tongeren, MD of GRESB, at our industry event on 7th February. Get in touch if you would like to attend.
Resolution: Continue to work proactively with both GRESB and our participant clients. Last year we supported over 55 submissions. We expect this to increase significantly in 2018.
Maintain and enhance our clients GRESB ratings through practical and value driven sustainability programmes, as appropriate to their investment strategy. In 2017, our client Hines achieved Sector Leader status and was rated the number 1 non-listed European fund.
Building certifications: more than just a tick-box exercise
Sustainability building certifications have been in operation for around 28 years following the launch of BREEAM in 1990. There are now numerous in-use and design/construction stage standards around the world. Schemes cover individual topics such as water and air quality, to comprehensive multi-themed sustainability / health and wellbeing standards.
Whilst the use of these standards for new developments is fairly common-place (particularly in the office sector within major cities), the application for existing (in-use) buildings is less so. However, market drivers such as GRESB, who reward participants for holding certification, together with (future) policy standards and incentives for efficient retrofits have, in our experience, increased the interest for in-use schemes such as BREEAM In-Use and Fitwel. It is important that the application of these schemes leads to performance improvement rather than just a tick box exercise.
[clickToTweet tweet=”It’s important that the application of schemes leads to performance improvement rather than just a tick box exercise.” quote=”It is important that the application of these schemes leads to performance improvement rather than just a tick box exercise.”]
Prediction: Increased application of certification for standing investments through schemes such as BREEAM In-Use and Fitwel for major refurbishments.
I also predict more, but not many, WELL certifications for new developments. It will be interesting to see if WELL issue a ‘lighter’ certification route that has wider commercial application that the full WELL standard.
Resolution: Grow the number of EVORA employees that are accredited professionals for sustainability building certification schemes.
Support completion of health and wellbeing certifications through the recognised standards (WELL, Fitwel, RESET) that EVORA has expertise in.
MEES: you might feel the pinch come April
I am sure it is well known to most (but probably not all) real estate professionals, that as of 1st April 2018 landlords will no longer able to lease (via new leases and lease renewals) commercial or domestic space in buildings with an EPC lower than an E rating. Unless that is, a five year time-limited exemption applies and is registered on an Exemptions Register.
Previous studies have indicated as much as 20% of the market could be impacted. From our experience, a high proportion of ‘sub-standard’ EPCs (those lower than an E) have improved their ratings when reassessed by a trusted and competent EPC assessor. Many EPCs issued in 2008-09 were completed quickly using default setting for efficiency ratings. Whilst this was acceptable and legally compliant at the time, the resulting EPC typically did not reflect the state of the energy system in place.
That said, there will be a number of F and G rated units that may leave landlords scratching their heads on what to do, when to do it and crucially, IF they have to do anything at all – noting the relative ease that exemptions could be achieved, albeit with some resource implications to administer.
Prediction: Organisations that were slow to respond may feel the bite come April. I expect the regulation to be largely self-policing, via appointed solicitors, as is the case for the availability of an EPCs for lettings (and sales). However, I also expect enforcement (by local authorities) to be weak based on the relative ease of gaining an exemption and the convoluted nature of MEES guidance.
Resolution: Continue to utilise SIERA’s EPC profiling capabilities to assist clients to quantify the risk of MEES against Estimated Rental Value (ERV), lease and EPC expiry dates. We shall look ahead to the hard backstop of 2023 for existing leases.
Blockchain: new ways of working
Beyond cryptocurrencies such as Bitcoin, blockchain has the potential to revolutionise the method in which individuals and organisations digitally transact with one another in a secure and verified environment.
Blockchain came into operation ten years ago. It’s use beyond cryptocurrency is becoming clear (in property and sustainability) through applications such as:
- Smart contracts – simplifying the retrieval of data through distributed ledgers
- Governance – transparency is key to blockchain and it could increase the range of publicly available documentation.
- Intelligent grids – facilitating the buying and selling of renewable energy generated by decentralized systems
- Data management – countless possibilities for swiftly transferring secure and validated data
One final comment on blockchain (particularly mining of crypto-coins) that needs to be made, is how immensely energy inefficient it is. The process of using individual PCs to mine coins has led to Bitcoin alone having the annual energy footprint equivalent to Hungary, at the time of writing, and this is increasing on a daily basis as more ‘nodes’ are added to the blockchain. Bitcoin transactions require several thousand times the energy of other means, such as Visa transactions (source).
[clickToTweet tweet=”Process of using individual PCs to mine coins led to Bitcoin having the annual energy footprint equivalent to Hungary” quote=”The process of using individual PCs to mine coins has led to Bitcoin alone having the annual energy footprint equivalent to Hungary”]
Prediction: An exciting year where I expect Proptech companies to introduce new ways of working (more efficiently) through utilising blockchain applications. It is something that our SIERA team is busily exploring.
Resolution: Continue to track the emerging blockchain market (I will do this on a personal level to ensure I can understand what my software colleagues are talking about!)
Policy Landscape: hopeful for clearer messaging
A continued lack of clarity on future policy measures is one prediction that can (unfortunately) be confidently made for 2018. Through BREXIT and the fragility of global politics, uncertainty on the future of medium term policy instruments shall, I think, remain.
Long term achievements have been ratified by global leaders (minus one), however, specific programmes for achieving this for the building sector will not become clear until 2020. The UK government is yet to confirm the replacement to the CRC or ESOS (carbon and energy assessment and reporting schemes) beyond 2019, although I do appreciate that consultations are ongoing.
Recent UK government publications such as the Industrial Strategy and 25 Year Environment Plan are welcomed. However, industry needs to understand how the government intends to act on these strategy papers, rather than see recognition that the points covered are important.
Prediction: 2018 is unlikely to herald the launch of forward-thinking and fit for purpose policies that will progress the sustainability agenda. However, I am hopeful of a clearer message on the future of carbon reporting and disclosure requirements for organisations towards the end of the year.
Resolution: Continue to voice our concerns and aspirations for clear and forward thinking policy through participation in government / industry consultations and working groups.
Join us on 7th February for an industry event that that looks at planning for Real Estate sustainability in 2018 and beyond.