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Three Signs Real Estate Must Move to a More Sustainable Model

1. Governments are putting sustainability into law and regulations continue to tighten.


The response of the international community to Donald Trump’s decision to withdraw from the 2015 Paris agreement demonstrates that we (most of the rest of the world) have long since reached our ‘tobacco’ moment and acknowledged that climate change is real and we must respond with changes in our current models and behaviour. Examples of this include India’s and China’s current outperformance of the Paris goals, California’s and China’s agreement to continue working on climate change, and the UK Minimum Energy Efficiency Standards (MEES).

Commercial Real Estate can account for up to 50% of C02 emissions globally, and 88% of potable water consumption in the US. An industry that has such significant impacts on C02 emissions and energy consumption will continue to get scrutinized more and more as governments implement further environmental legislation.

[clickToTweet tweet=”Commercial Real Estate can account for up to 50% of C02 emissions globally” quote=”Commercial Real Estate can account for up to 50% of C02 emissions globally. An industry that has such significant impacts will continue to get scrutinised as governments implement further environmental legislation.”]

An example of this is the UK’s Minimum Energy Efficiency Standard (MEES) which comes into effect in 2018, whereby properties with an F or G rating are unable to be let. Amazingly one third of landlords surveyed by Property Week earlier this year were unaware of these new requirements.

Our EDGE team can develop a strategy for you to ensure you are prepared for MEES and de-risk your property portfolio.

Businesses have also responded in ways that exceeded my expectations (call me a pessimist) such as Apple’s commitment to the Paris agreement and ‘green bond’ environmental push, US auto industry’s commitment to Paris, and an impressive range of real estate investors have reaffirmed their commitments to match or exceed the Paris agreement’s goals. The NHS and several UK companies will no longer occupy properties with an EPC rating of a C or less, further emphasising the focus businesses and government are putting on their environmental responsibilities.

Further evidence of the increasing importance of sustainability within Real Estate can be seen through the exceptional growth of real estate sustainability benchmarks over the last decade such as GRESB, BREEAM, LEED and WELL.

Take away: Governments are committing to a sustainable future and are tightening regulations on energy efficiency and sustainability. A paradigm shift has happened where leading businesses are moving to ‘conscious capitalism’ where their contribution to society is considered and profitability is no longer the only goal, regardless of the consequences. The evidence to demonstrate that consumers will shirk environmentally friendly properties may be anecdotal for now, but I believe that soon we will have enough evidence to establish this as a growing trend within the real estate industry.

Real Estate investors and asset managers must recognise these shifts and make changes in the management of their portfolios. Those who stand still in sustainability will be moving backwards, and will see the value or their properties decrease and their economic/environmental risks increase.

EVORA can advise you on the best strategy to future proof your portfolio and minimise risks. Use our SIERA software to get in-depth insights into the environmental performance of your properties.

 

2. Space as a Service is the new way of working


The millennial generation has come of age and has joined the work force, and it isn’t working like the generations before it. This is the generation of Uber, Airbnb, and BorrowMyDoggy, and it will be sharing office space as well.

There is research that estimates that around half the UK workforce can work remotely, and around 40% of the UK workforce will soon be freelancers. Leases of 20-25 years are now the exception instead of the norm, with tenants putting a greater emphasis on flexibility. This has coincided with a boom in flexible office providers who are taking advantage of technologies which enable this new way of working. That this workstyle has caught on is demonstrated by the fact that WeWork was the largest new occupier of space in the USA in 2016, and British Land has also ventured into the flexible workspace section with its new Storey co-working offering in London.

Research by Knight Frank and the Instant Group shows that this market has grown by 16% in 2015-2016 and 18% in 2016/2017 in the UK. This combined with WeWork’s estimated valuation of $16bn demonstrates that Space as a Service is an evolution within real estate opposed to a fad.

The increased demand for flexibility from tenants represents a challenge for landlords as short-let properties generally underperform against long term lets. As explained in a recent Property Week article:

“While rental values have grown faster on shorter-let properties in the central London office market, where the demand for flexibility has increased significantly, shorter-let assets had delivered a cumulative return of 91% over the past nine years compared with 113% for longer-let properties.”

Take away: The ‘Uberisation’ of space means traditional landlords must move with the times and technology. There is a shift where they need to move from their existing model to becoming service providers of space. As an all-inclusive provider (rents, rates & services) the landlord will no longer be constrained by the ‘landlord-tenant dilemma’ of improvements and any energy efficiencies will help the profitability of their properties. Their self-interest will drive them to make their properties as energy efficient as possible.

Our EVORA EDGE technical engineering team can help ensure you improve the energy efficiency of your properties and maximise the lifetime returns of your assets.

 

3. The rise of Science Based and Carbon Neutral Targets


Real estate developers and companies with large property portfolios are committing to Science Based Targets (SBT) and recognising that sustainability is no longer just a Marketing and PR exercise, and that their environmental impact must be measured.

For those that don’t know, a SBT is a carbon emission target that is defined as ‘science-based’ because it is in alignment with the 2oC target set by the 2016 Paris Agreement. It involves companies assigning themselves a target in line with their proportional contribution to global emissions. This requires short and long-term planning when considering expansion plans in the context of carbon reduction commitments.

A range of business have made commitments from manufacturing, energy, industrial, telecommunications, to retail. Examples include Coco-Cola, Eneco, Sony, and Wal-Mart. In the UK real estate sector, companies setting themselves SBTs include Land Securities and British Land. So far it’s a small number, but I am convinced that this number significantly increase over the next 12-24 months.

[clickToTweet tweet=”Companies are committing to #SBTs and recognising their environmental impact must be measured” quote=”Real estate developers and companies with large property portfolios are committing to Science Based Targets (SBT) and recognising that their environmental impact must be measured.”]

Take away: Real estate does not live in a bubble. Leading blue-chip companies are setting themselves SBTs and most of them will have significant property portfolios. As mentioned earlier, if commercial real estate is estimated to account for up to 50% of global carbon emissions you can be assured that these companies are looking at the performance of their property portfolio and how they can improve the performance. For landlords that want to continue to have competitive properties that attract blue chip business (which often draw in more businesses) then they need to consider the environmental performance of their assets.

Contact EVORA to see how we can help you set Science Based Targets for your property portfolio and become an industry leader in sustainability


These are just three signs that real estate must move to a more sustainable model, to discuss this more in-depth, contact a member of the team.


 

Budget 2016: Changes to the UK Government Energy Efficiency Strategy

Significant changes to the Government’s energy efficiency strategy were announced in today’s budget (16 March 2016).  Key points are summarised below:

  • The Carbon Reduction Commitment (CRC) energy efficiency scheme will be scrapped at the end of the 2018-19 compliance year (the end of Phase 2). Obligated businesses will be required to surrender allowances for the final time in October 2019.
  • Lost revenue will be recovered through an increase in the Climate Change Levy (CCL).  This will come into effect from 1 April 2019.  This is designed to cover the cost of CRC abolition (although 2019 appears to be a bumper year for the Government – with increased CCL rates and a final CRC payment).
  • CCL rates and CRC allowance prices will increase in line with RPI annually until 2018-19.
  • The CCL discount for sectors with Climate Change Agreements will be increased to cover increases in CCL main rates.
  • The Government will retain existing eligibility criteria for Climate Change Agreement schemes until at least 2023.
  • The main rates of CCL for different fuel types will be rebalanced to reflect recent data on the fuel mix used in electricity generation. In the longer term, the Government intends to rebalance rates to deliver greater energy efficiency savings and reach a 1:1 ratio of gas and electricity rates by 2025.
  • Finally, the Government will consult later in 2016 on creation of a simplified energy and carbon reporting framework planned for introduction by April 2019.

Please contact Paul Sutcliffe at EVORA for more information (psutcliffe@evoraglobal.com)

70% of organisations on the road to ESOS compliance

Latest figures from the Environment Agency show 6000 organisations have ESOS compliance.

In the two days before 29 January deadline, the agency received a further 1,015 notifications of compliance. This last-minute action reflected earlier fears of a slow start to compliance by organisations covered by the scheme.

More information via The Environmentalist

Changes to Display Energy Certificates

The Government is proposing a shake up to the current Display Energy Certificates to reduce the cost burden on the public sector with the likely outcome that schools, town halls and swimming pools will be exempt from the requirements to have a DEC. We have responded to the Department for Communities and Local Government (DCLG), who have produced the consultation document, expressing our negativity and concern to the proposals. The reality is that far greater financial savings can be achieved if DECs are acted upon to generate energy efficiency savings in these buildings compared to the relatively modest administrative savings of abolishing the DECs.

Our response is provided below.

To whom it may concern.

EVORA is a niche energy and sustainability consultancy working in the real estate field. We are involved in energy performance assessment of public and private sector occupied buildings. One of our core service offerings is to support clients with compliance requirements and this can involve obtaining DEC assessments (although we do not complete the assessments in house). I am the Operations Director of EVORA. My responses to consultation questions are provided below.

Question 1 – How could the existing enforcement regime be improved?

A clearer definition of ‘public authority’ and ‘frequently visited buildings’ are important and good steps (point 32). However, I think there is a risk, based on your planned definitions that schools will be excluded going forwards. I think it is vitally important that educational establishments are covered by DEC regulations. As a parent, I am regularly reminded of the energy inefficient operation of school buildings, on my infrequent (based on consultation paper definitions) school visits.

Questions 2 and 3 – How can enforcement be improved?

I do not think enforcement is effective and I am not aware of any enforcement action being taken. LWMAs may not be the most appropriate enforcement authority. However, I do not believe that passing this responsibility on to local authorities is the answer (point 43). In my opinion, this will create a ‘self-policing’ conflict of interest and open the scheme to criticism – as LAs will be the primary occupiers of public buildings. Furthermore, I do not believe that passing enforcement responsibility on to neighbouring local authorities will work.

I understand why this is being considered, as local authorities have a significant interest in the proper application for Energy Performance of Buildings. However, it may be worth considering the Environment Agency as an option. The EA is already responsible for CRC and ESOS schemes and transferring responsibility for policing of DEC (and EPC schemes) will allow for more joined-up thinking. It will also enable enforcement funding to be ring –fenced and will improve access to enforcement data. I also suggest that publication of non-compliance is considered.

Question 4 – Should the existing system of Display Energy Certificates and recommendation reports remain unaltered?

I believe that the DEC scheme, whilst it has failings, is well recognised and can be further developed to form an essential element of the UK Government’s approach to tackling inefficient buildings and more generally, climate change. Scrapping, or even diluting the scheme, will be a major step backwards for UK energy policy.

Question 5 – Should the exemptions from the requirements of the Directive be applied to qualifying buildings for Display Energy Certificates?

I do not believe that exemptions should be introduced. The consultation document (point 57) assumes that 1% of buildings may be exempted, creating savings of £83,520k annually. However, I believe that correct application of the DEC scheme, across the buildings at risk of being exempted, will identify energy saving opportunities well in excess of this figure. The benefits of applying the scheme correctly, will exceed the exemption benefits.

Question 6 – Should those buildings that have and display their Energy Performance Certificate be exempt from the requirements to have a Display Energy Certificate?

No – Display Energy Certificates and Energy Performance Certificates display different information. This approach would lead to confusion.

Question 7 – Should an energy certificate be required when 500m2 is occupied by public authorities and frequently visited by the public?

A clearer definition of ‘public authority’ and ‘frequently visited buildings’ are important and good steps (point 32). However, I believe that exclusion of schools will be a mistake. As referenced above, I think it is vitally important that educational establishments are covered by DEC regulations.

Question 8 & 9– Should the validity period of all Display Energy Certificates and their accompanying recommendation reports be five/10 years?

No – lengthening inspection cycles would lessen the effectiveness of the scheme.

Question 10 – Should the Display Energy Certificate regime be altered in the way outlined above?

Question 11 – Should the mandatory Display Energy Certificate regime be abolished?

The DEC scheme should continue as is, with focus on improved enforcement. Changes to simplify, or even abolishment, will be a major step backwards.

Question 12 – If Display Energy Certificates were no longer a statutory requirement, would you still obtain one (for example in order to monitor the energy efficiency of any non-dwelling)? Question 13 – Which proposal (or combination) is your preferred outcome?

I think DEC completion would fall significantly (and be exceeded by private sector voluntary take up) if it were no longer a statutory requirement. I therefore believe it is vital that the scheme is maintained and that enforcement practices are strengthened.

Kind Regards,

Paul Sutcliffe
Operations Director
EVORA

Heat Network Update 2015

The Heat Network (Metering and Billing) Regulations 2014 – an update

EVORA can now provide a further update on the above regulations. The National Measurement Office has issued a Scope and Guidance Document covering the regulations.

A heat supplier obligated under the regulations is defined as a person (or organisation) who supplies and charges for the supply of heating, cooling or hot water to a final customer, through either communal heating or a district heating network.

Whoever is supplying the end user with heat is classed as a heat supplier. This includes the supply of heat as part of a package – i.e. through a service contract. The contract does not need to explicitly mention the supply of heat. Shared offices and shopping centres are identified as examples within the guidance document.

Air Conditioned Areas

The regulations define the use of hot water, steam or chilled water. Therefore, air conditioned systems relying on local compressors or purely ducted air are not in scope. However, the provision of chilled water to multiple heat exchangers within a system, supplying more than one customer, is recognised by the regulations as being in scope.

Requirements

In summary, the guidance confirms that multi-let properties are in scope. As such, heat suppliers must notify the National Measurement Office of the existence of heat networks (i.e. multi-let offices and shopping centres where heating and/or chilled water is provided to more than one tenant in a building). Notification must be completed by 30 April 2015.

EVORA can provide templates that need to be completed. The completed template should then be emailed to heatnotifications@nmo.gov.uk.

Consideration must then be given to installation of heat and hot water meters (or heat cost allocators) to final customers. Cost benefit analysis and subsequent installation must be completed by 31 December 2016.

Please do not hesitate to contact EVORA for more information.

EVORA is a niche sustainability consultancy specialising in commercial real estate. For further information on environmental regulation or any other sustainability issue please contact

Paul Sutcliffe

psutcliffe@evoraglobal.com

07557529104

Chris Bennett

cbennett@evoraglobal.com
07810631599

Environmental Legal Updates

Please find an update on environmental legal updates on F Gas rules and The Heat Network (Metering and Billing) Regulations 2014, which may impact on the operation of your buildings.

Changes to F Gas rules

Introduced in the UK on 1st January 2015, EU Regulation 517/2014 has replaced previous regulations dealing with maintenance and inspection of fluorinated gases (F-gases). Previously, inspection requirements were based on the charge, in Kilogrammes, of the refrigerant in the system. As a result of the new legislation, requirements are now based on the global warming potential (GWP) measured as the Carbon Dioxide weight equivalent of the F-Gas.

Table 1 below outlines the new maintenance frequency requirements

System Charge Leak Test Frequency
<5 tonnes CO2 Equivalent Leak tests not required
5 to <50 tonnes CO2 equivalent Annually (Once every two years if leak detection system fitted)
50 to < 500 tonnes CO2 equivalent 6-Monthly (Once a year if leak detection system fitted)
>500 tonnes CO2 equivalent Quarterly (Twice a year if leak detection system is fitted)

As a result, two different systems containing the same amount of F-Gas may now require different maintenance frequencies.

The new regulations also introduce a requirement to fit a leak detection system if your equipment contains F gas equivalent to more than 500 tonnes of CO2.

Why have the changes been implemented?

F-Gases have a high GWP, if they are released to the atmosphere they can cause significant emissions. Introducing a system which takes the type of F-Gas into account provides a risk-based approach to maintenance. Systems with F-Gases which can cause higher emissions are therefore inline to be tested more frequently. This will reduce the potential likelihood of a release occurring.

What do you need to do?

Checks need to be made on the type and amount of F-Gas held in your air conditioning systems to determine if the regulations impact upon maintenance regimes. Once the type and amount of F-Gas is confirmed it needs to be converted into CO2 equivalent tonnes.

Annexes within the regulations provide conversion factors to calculate GWP using the type and weight of refrigerant in the system.

Please don’t hesitate to call EVORA if you have any questions.

The Heat Network (Metering and Billing) Regulations 2014

The above regulations came into force in December 2014 and introduced notification, metering and billing requirements for operators of District Heat Networks and Communal Heating.

Multi-let buildings where heating and cooling is provided to tenants may be classed as communal heat networks. Steps will need to be taken to meet regulation requirements, if this is the case, andif the landlord is deemed to be a heating supplier (a person who supplies and charges for the supply of heating, cooling or hot water to a final customer).

EVORA has written to the National Measurement Office (the Government Department responsible for the legislation) to seek clarification on interpretation of the requirements in relation to operation of multi-let properties. We will provide an update when received, however, in the meantime, we recommend that Landlords take steps to prepare for the legislation. It is expected that landlords will need to consider heating supply set-ups in multi let buildings on a case-by-case basis to consider whether the legislation is applicable.

Key requirements and associated deadlines are set out below.

Step 1: Notification

Heat Suppliers must notify the national measurement office of the existence of heat networks by 30 April 2015. This is a data collection and information provision exercise. Information to be provided includes location and size of the network and the number of customers supplied. Notification should be updated every four years.

Step 2: Analysis and, where feasible, Installation

Consideration must then be given to the installation of heat and hot water meters, to final customers (TRV radiator controls and heat cost allocators must also be considered). Cost benefit analysis and subsequent installation (where feasible) must then be completed by 31 December 2016. Feasibility analysis should be reviewed every four years.

There are also requirements to ensure that adequate metering is installed on new builds going forwards.