Copyright David Lawson - Property Week 2004
Snorts of laughter from agents and blank looks from investors are the depressing sign that despite years of preaching, green issues have made little impact on the mainstream property industry. ‘There is no evidence that tenants demand greener, more energy-efficient buildings,’ says Mat Oakley, director of research at FPDSavills.
Perhaps because of this only half the UK’s developers would consider using energy efficiency benchmarks like BREEAM, according the firm’s study Office Futures? carried out for the British Council for Offices. ‘The only way anything is going to happen is by legislation – when people are told they must use light bulbs that last longer than six months,’ says Oakley.
The first shadows of this kind of regulation are beginning to creep across the industry. Within a couple of years every building larger than 1,000 sq metres will need to carry an energy label similar to those on washing machines and fridges, says Dave Farebrother, environmental services manager at Land Securities.
But will this EU directive have any more influence on tenants than on consumers, who still tend to opt for low prices rather than efficiency in the kitchen? ‘It could be a surprise to see how many buildings perform below accepted levels – and how little tenants know about the amount of energy they use,’ he says.
Running costs have not been a powerful influence in the past. Tenants concentrate on rent today rather than electricity bills next year. Property is also a relatively insignificant cost compared with staff. But the two areas are beginning to merge. Attracting and holding staff will become more of an issue as they become more choosy about where to work.
Hamburgers and potatoes are a clue to the future. McDonalds was for decades a money machine until fashion shifted to healthy eating. It took a while but the balance tipped last year and now counters are crowded with salads while yuppies have supplanted street kids in TV ads as the global giant struggles to recover. A decade ago organic was a term vaguely remembered from school chemistry lessons. Today, supermarket giant Sainsbury devotes whole aisles to chemical-free vegetables in response to growing customer demands.
Landlords will face similar pressure as staff look to eco-friendly workplaces. ‘It will become a question of branding,’ says Oakley. ‘Tenants want to present themselves to customers and staff as green. The property industry will have to meet that challenge.’
But when? Tenants may not ask for natural ventilation, yet they are already bowing to demand for organic fruit in canteens. When staff begin flexing their muscles about internal climate controls, requirements could change. This could happen within the next few years as more legislation comes in and fashions change. Occupiers also face pressure to include environmental issues in their accounts as part of a move towards more socially conscious corporate governance.
Developers should be thinking ahead in purely economic terms if property is a long-term investment, says Oakley. Some are already heavily committed. Land Securities, Britain’s biggest developer-investor, could have trundled along relying on sheer size to maintain its profitable production line. Yet the firm has become a leading green campaigner, dedicated to reducing CO2 emissions by 1% a year and opening buildings to energy audits by the Carbon Trust.
Smaller operators should take the hint, as secondary property could be particularly vulnerable to changes in fashion and tougher regulations. Retro-fitting a secondary, multi-tenanted property which commands lower rents could raise massive problems.
It doesn’t help that the cost of going green is rarely covered by higher rents. The cumulative impact of reforms such as tougher Part L2 building regulations and landfill tax add around 4% to construction costs or reduction in 5-10% of profit, according to Green Incentives, an investigation by Hoare Lea and Gardiner & Theobald.
The report, commissioned by the BCO, is a useful one-stop shop for the industry, drawing together all the incentives to go green. But it is also a ‘reality check’ for policymakers, according to chief executive Richard Kauntze, exposing weaknesses in the range of ‘sticks and carrots’. The climate change levy, for instance, is aimed at tenants, who have little power to influence designs. Owners and managers get no reward for energy efficiency.
Capital allowances for buying low energy equipment often do not cover the cost of extra administration, and trader-developers get no benefit because allowances rarely impact on property values. The overall package of development grants and incentives is also too complex. ‘The sheer time and effort required keeping up to date with the latest taxes, regulations and incentives only highlight the failure in government strategy,’ says the report.
This is a paradise for cowboys playing on fears of landlords and occupiers with no in-house expertise. But many will just ignore the whole issue anyway because building control officers concentrate on health and safety, relying on the integrity of design teams to handle green issues, says the BCO report.
Even where buildings are turned deeply green, it could be in vain. Anecdotal evidence reveals lack of interest or shortage of skills among many property managers to maintain complex environmental controls, particularly in smaller secondary property.
But anyone who ignores this trend could be in for a rude awakening. Wise investors will follow the lead of pioneers like Land Securities and take the pain of higher costs today rather than struggle to conform later. Regulations are getting tougher, leases shorter and tenants more choosy. Before long, inefficient property could end up as unhealthy as a diet of hamburgers.
Landlords and agents face up to two years in jail and unlimited fines unless they control a killer that most refuse to recognize.Asbestos was widely used for fireproofing and insulation until health risks emerged in the early Eighties. It still hides away in almost 4.5m buildings, says Keith Davidson, environmental partner at lawyers Cobbetts. Tough new controls came into force on May 21st yet more than half UK businesses – some 700,000 firms - have done little, if anything to meet the requirements, according to research for international property law firm Davies Arnold Cooper (DAC).
The last thing the Health & Safety Executive wants is to panic anyone into calling the first cowboy in the phone book – which is why early warnings have been published for the last 18 months. Asbestos becomes most lethal when disturbed, spraying out microscopic fibres that can lodge in lungs and kill decades in future. Complete compliance is not expected immediately - especially from organisations with extensive property portfolios. But qualified surveyors and contractors are bound to be overloaded as the message sinks in, leading to long waiting lists. Inspectors will also be stretched, but widespread spot checks are expected and they will expect to at least see plans in place for compliance.
The onus will be on landlords and occupiers to prove themselves innocent. ‘If your building was constructed before the mid-1980s, can you prove that there is no asbestos?’ asks Davidson. Almost 60% of businesses will not be able to answer as they have done no assessment, says DAC. Only 7% have recorded where asbestos is located, while a similar percentage have assumed it is the landlord’s job. Yet the main ‘duty holder’ is whoever is responsible for repair and maintenance, and conventional leases put that burden on tenants.
But landlords may still be under threat. ‘The dutyholder may be the landlord, tenant or a managing agent, depending on the circumstances,’ say guidance notes by the HSE ‘In some situations, responsibility could be shared.’
Common areas such as stairs and corridors usually fall under a landlord’s control, and are often where asbestos is concentrated in fire controls and insulation. While controls exclude domestic buildings, residential landlords are responsible for stairs and corridors in apartment blocks and conversions, so they may be drawn in. Remarkably, construction companies are among the most apathetic, with more than 70% failing to act, says DAC. Retailers are not much better, which could signal confusion in shopping centres, where responsibility is already blurred. ‘It is not always clear within leases where responsibility lies,’ says Ian Lester of specialist agent Hammond Phillips.
Some landlords may decide to cover themselves by surveying the entire building rather than just common parts, so it is worth tenants checking before forking out on their own survey. Additional work to maintain and police the controls will place a huge burden on property or facilities management departments, says James Garbutt of property consultant Donaldsons. ‘The legislation is also likely to have a widespread impact on local government with regards to civic buildings, where there will be an increased responsibility to ensure compliance,’ he says.
But they will have to buckle down or face the consequences. Directors and officers can be found equally liable for breaches committed with their ‘consent, connivance or neglect’ and failure to comply has been classed as a criminal offence punishable by up to two years imprisonment and an unlimited fine.
The cost of full compliance has been estimated as high as £80bn, although the HSE claims it will be under £5 billion. Garbutt says costs should be manageable, as the onus is on management and containment of asbestos rather than replacement. And detailed work relating to removal is subject to 150% tax relief. But DAC senior partner David McIntosh, fears problems for thousands of companies. ‘The risk to business and individual owners, directors and officers is not confined to the possibility of facing prosecution for what appears to be wide-spread disregard of these regulations, but extends to their abilities to carry on in business.’The Control of Asbestos at Work Regulations 2002 (CAWR) Source: Health & Safety Executive
These introduce an explicit duty to manage asbestos in non-domestic premises. The duty to manage requires those in control of premises to:
Who will be the dutyholder?All who have responsibility for maintenance and/or repair of non-domestic premises have duties. The extent of the legal duty is determined by the terms of any tenancy agreement or contract that applies, and in the absence of any such agreement, on the degree of control the party has over the premises. The dutyholder may be the landlord, tenant or a managing agent. In some situations, responsibility could be shared.
Ask most property people about ethics and they will assume you are talking about the county running east of London. Such a mistake is understandable to most outsiders, who can’t believe the word exists in any development textbook. It doesn’t, but ‘corporate social responsibility’ [CSR] is prominent in latest revisions.
This is the caring face of property. A concern for issues beyond the balance sheet, overlapping with that other buzzword, sustainability. It includes anything from caring for staff health to checking that construction materials are drawn from renewable resources. But who cares? Not the great mass of investors or developers who still concentrate on the bottom line. But like green issues, ethics are beginning to cast what will be a long shadow over the industry.
Tenants are already putting pressure on landlords. Akeler chief executive Trevor Silver is among the ‘greenest’ of developers. He pioneered solar powered energy on a northern business park a decade ago and insists on building cutting-edge environmental measures into developments ranging from Glasgow to the Thames Valley. But even he was surprised to receive queries from tenants requiring information such as Akeler’s attitude to ethnic recruitment.
The trend is being led by US firms under social pressure at home. Dotcommers back from the brink of disaster are particularly keen to be seen as ticking every box that could help revival, and CSR covers lots of boxes.
Meanwhile, politicians and planners have been handed a new weapon to beat hard-nosed investors who have largely ignored pleading about saving the world.. A new EU directive means social and environmental issues can be considered in public procurement projects from the end of next year, says Jennifer Ballantyne, partner in the real estate team at UK law firm McGrigors.
Forward-looking investors have already anticipated this double-whammy. The two biggest UK developers, Land Securities and British Land, are leading a working group trialling ‘ethical’ procurement. ‘The government is a major construction client and is starting to demand evidence that all timber is from sustainable sources,’ says Dave Farebrother, environmental head at Land Securities. ‘This will have a domino effect with other clients expecting the same assurance.’
CSR will no longer be seen as an indulgence by large companies like Land Securities and BP, which can afford to spend thousands producing hefty tomes outlining the way they are ameliorating the social and environmental impacts of their main activities. Grassroots tenants are adopting similar policies.
Big institutional investors such as Morley have set benchmarks for both property they fund and tenants they support as shareholders. Producers are developing ‘earth-friendly’ branding to win the approval of customers and attract skilled staff. The ever-conservative construction sector could be left isolated by this shift. There is not enough sustainable timber to go around, says Farebrother. The industry needs to get working on developing a new generation of products including recycled material.
In the meantime, developers and investors should make the best of what they have by drawing up procurement guidelines. Architect TP Bennett suggests best practice requirements should be included in tender documents and ethical issues should be a key consideration in selecting contractors.
Sourcing and selection of materials should involve a comprehensive identification and evaluation of risks. Measures for dealing with waste should also be part of the decision. In fact, what comes out of every project will be as important as what goes in, and again this is down to the EU moving the goalposts. Next month [JULY] a critical part of the Landfill Directive comes into force, preventing hazardous waste being mixed with normal landfill. This could seem a world away from the average investor or builder, yet it could send shockwaves through the whole industry.
More than 200 landfill sites will no longer be able to take the 5m tonnes of hazardous material produced annually, says consultant Environ. The waste management specialist says 20% of this comes from construction and demolition, so the ‘dig and dump’ techniques normally used will no longer be sustainable.
This will slow regeneration and disposal costs could rise between 200% and 400%, says environmental engineer White Young Green. The upside is that authorities will be more ready to accept onsite remediation That will reduce the cost of disposal and the amount of material normally brought in. ‘In some cases the savings could be quite significant,’ says WYG.
Environ believes it is only a matter of time before ‘dig and dump’ is priced out. But this has to be balanced against potentially higher risks, adds WYG. Tougher liability rules already in force mean every developer and potential landlord should at least check for hidden contamination because they could be liable for material left behind decades ago.
That has been made relatively easy with the launch of cheap online mapping services. But a trend to treat or bury waste onsite makes the task even more essential and demands more extensive use of environmental risk specialists. Their findings are crucial for assessing land value, as the price should reflect potential future claims and sky-high insurance costs.
Small developers used to a quick turnaround could face demands from the Environment Agency for monitoring which stretches decades into the future. How they pass on this cost will hit their bottom line, so ethics will at last become part of the development vocabulary.
When one of Europe’s top developers opts for solar power in a City office block it might seem green energy has moved from the idealistic fringes of eco-awareness into the world of hard-nosed investment. But too much excitement about this kind of technology is misplaced. Photo-voltaic cells have been well known since Akeler covered a whole wall of a building near Gateshead a decade ago. Hammerson says its decision to put 6,500 sq ft of photo-voltaic panels on the joint Spitalfields development with City Corporation shows a ‘new policy towards environmentally friendly buildings’.
But more than 40% of installation costs were covered by a grant and the energy will provide only external lighting and public areas. An idea of the real economics comes from estimates by the Energy Savings Trust that a typical domestic system would provide only half household needs and cost between £8,000 and £18,000 to save a maximum £100 a year. Even with a 50% grant, that’s a payback of between 40 and 90 years.
Sainsbury gained yards of media coverage for a supermarket on the Greenwich Peninsula, complete with natural ventilation, turf roof and wind turbines. Such icons can be misleading, however. They are beyond the average landlord or occupier and of little relevance to the mass of older buildings. Reality is far more mundane. Even Sainsbury is banking on management rather than revolutionary design. The store group has effectively outsourced energy saving through a ground-breaking deal with energy supplier RWE to cut CO2 emissions more than 10% by the end of next year.
It might seem perverse to expect a provider to find ways of reducing its own product but RWE’s fees depend on meeting strict benchmarks for energy saving. And in the first year it has slashed £3m from the overall £50m annual bill through measures such as modernisation of cooling plants. Sainsbury has not left everything to RWE. Getting staff to switch off lights, for instance, was kept in house because there was no way to judge whether inspections by contractors were making this happen – and generating performance fees. Instead, every store manager is given a savings target as part of their annual bonus.
Another green leader, IBM saved more than $2.5m between 2000-2002 on 65 sites across the UK by working with long-term partner Johnson Controls on energy management. This involved detailed site surveys showing energy demand which was fed into software developed by EnTech that analyses complex energy tariffs to get the lowest charges.
Smaller firms and landlords may lack the motivation of giants looking to promote an eco-friendly brand or the means to fund major savings. IBM says it has cost nothing to go green but Sainsbury has budgeted for £15m of capital spending. But smaller firms can buy in similar skills via a network of environmental services consultants. Many offer to cover their fees through bottom line savings but, it pays to be careful as the threat of increasingly tough energy-saving regulations is spawning a lot of cowboys.
The decision will be taken out occupiers’ hands in future, as guidance being drawn up by the government which will insist that energy supplies must be considered a factor in granting planning permission – much as traffic generation is today. Some developers have already begun preparing for such a change. Stanhope and Chelsfield are working on local energy sources for the massive Stratford City regeneration in east London. This could involve wind generators and power stations fired by wood and even gas from human waste.
On the other side of the capital a similar approach is built into plans for the £750m regeneration of Bracknell town centre by Legal & General and Schroders. TV Energy and the local council are seeking EU funding essential to drive the £12.5m project. ‘By 2009 a majority of the town centre’s energy needs could be met from locally produced, non-polluting green energy generation,’ says TV chief executive Keith Richards.
Consulting engineers Thameswey and Element Energy have recommended the largest combined heat and power system in the UK for Middlehaven, the 200-ac re mixed-use development in Middlesbrough by Tees Valley Regeneration. Natural gas, fuel cells and local renewable energy including wind farms and biomass would cut CO2 emissions in half compared with conventional energy.
Similar schemes are expected to proliferate as the government pushes for sustainable development on brownfield sites at the same time as seeking 10% of electricity from renewable resources by 2010. Areas like the Thames Gateway will grab the headlines but small-scale schemes will also come under pressure.
Housing is the great gap in green ambitions. Ministers hold up examples like the Lacuna development at Kings Hill, West Malling, Kent, where Environ Sunley and Clague Architects have fitted electric air cleaners to improve air quality and solar-powered exterior lighting. But most buyers refuse to pay extra for greener homes and the economics of solar panels indicate they have little incentive to convert older property, which means housebuilders could have huge problems.
Local authorities and housing associations are likely to continue playing the leading role, such as at Holles House, a Seventies council block in Lambeth, South London, where a renovation by Anne Thorn Architects halved energy demand.