In 2012, property developer Heron International reported its new office building opposite London Victoria station was 80 per cent full, only two years after it opened in the middle of an economic crisis.
Known as The Peak, the nine-storey building boasts a whole suite of green features. These include louvres that act as solar shading and a façade designed to balance the requirements of natural day lighting and solar gain control, solar PV and solar thermal and a heat pump for air conditioning.
Flagship new green buildings such as these attract widespread attention. This also includes the Shard (constructed to consume 30 per cent less energy than similar buildings), The Pinacle, formerly Bishopsgate Tower, (generating electricity through 2,000 square metres of photovoltaic cells), and Broadgate Tower, (through a heat recovery system and efficient cooling plant).
All the above buildings have drawn tenants attracted to these trendy, innovative features. The rents may often be offered at a premium. It might be expected that the same would be true of retrofitted commercial buildings. But the opposite is often the case for most of the market for existing, older building stock. Poorer performing buildings may be reduced in price, but more energy-efficient buildings do not always command a green reward.
That, at least, is a common perception and is certainly the view of Daniel Grandage, an expert at energy consultancy WSP.
“It was originally expected that a premium would be attached to green property. Instead, you still get the usual market value for a normal building. But if it is a particularly poorly-performing building in terms of energy efficiency, you can get a brown discount. More energy efficient properties don’t get above the market value, but it does protect their value,” he says. Location and building function nearly always take first place in terms of tenant priorities.
But recent international research from several sources has indicated that a reverse trend may be emerging. That is the conclusion of Richard Francis, principal at The Monomoy Company, a consultancy specialising in sustainability and the built environment.
A broader view
Francis challenges the common perception, arguing that evidence of green premiums is masked due to a lack of market data. Making a broad comparison across a wide range of studies considering building rents and energy efficiency, he found that recognition of good energy performance was indeed a factor that determined building rental and sale prices. Francis collated studies from all over the world, including the Netherlands, Germany, the US, Switzerland and the UK, investigating existing buildings both in the residential and commercial sectors and for both sales prices and rental rates.
These are rated on the basis of ‘greener’ labels, such as higher Energy Performance Certificate (EPC) ratings, Energy Star or Leadership in Energy & Environmental Design (LEED) labels. Both UK studies were based on BREEAM ratings.
One of them, commissioned by the Royal Institute of Chartered Surveyors (RICS) [1], found BREEAM-certified properties command a 28 per cent premium over non-certified properties, controlling for basic building characteristics. According to Francis’ research, all the studies demonstrated green premiums of 3-30 per cent.
FM QUICK FACTS
28%
The extra value of BREEAM-certified buildings (RICS)
2018
Year in which ‘F’ and ‘G’ – rated buildings become outlawed in the UK
“No matter where you are looking or on what [energy label] basis, the impact is always positive and there is always a premium,” he states. The magnitude of the premium, he suggests, may be challenged. “But the direction is hard to dispute.”
An influential study of the US market [2] found, for instance, that for around 10,000 subject and control buildings, those with a green rating command rental rates roughly three percent higher per square foot than otherwise identical buildings — controlling for the quality and the specific location of office buildings. Premiums in effective rents were higher — more than 7 per cent — while selling prices of green buildings were higher by about 16 per cent.
Francis’ own primary research shows it is possible to separate the energy performance due to building age from tenant usage. This may demonstrate the impact of landlord investment (or lack thereof) on tenant operating costs and therefore incentivise green premiums. Assessing a building constructed in 2000, he estimated its energy consumption within 3 per cent of the actual costs incurred by the client.
Matching these energy usage habits with a similar building constructed in 2006 (and therefore according to stricter standards), the consultancy showed the client could be spending £2.96 less per square foot. Francis suggests this type of calculation can be used in rent reviews relating to older buildings needing greater energy efficiency investments. Eventually, it could act as an incentive to refurbish.
Cerfification nation
At the moment, the market is still reliant largely on Energy Performance Certificates (EPC), generally considered a blunt instrument. This is because they are based on different standardised elements rather than individual actual operating performance.
Nonetheless, many consultants believe they are having an impact. “The EPC of a building is now quite a key driver, and it’s the only driver at the moment that a tenant has available to understand. Landlord clients are now turning to us and asking us whether achieving a certain rating is important as part of a refurbishment,” comments Sophie Hutchinson, head of sustainability at Morgan Lovell, an office design and retrofit consultancy.
With lower-rated (F and G) buildings outlawed by 2018 according to the 2011 Energy Act, the brown discount will become more visible.
Obsolescence could threaten some buildings: “The year 2018 is beginning to focus people’s minds because there could be a number of buildings where it is not possible to drive efficiencies through — they might have to be demolished,” says Bill Wright, head of energy solutions at the Electrical Contractors’ Association (ECA).
The introduction of Display Energy Certificates (DECs) to sectors beyond public buildings, a change mooted for the future, could also drive regulatory-led innovation towards greener premiums. “DECs are of far greater use, giving a better view of the use of the building. Many groups would welcome it if the government extended their use to commercial buildings provided the benchmarks they are using are correct,” says Bill Wright.
But more powerful change could be driven by client demand rather than the regulatory stick. Richard Francis indicates that inadequate data explains why this is not already happening.
Wheeling and dealing
Francis perceives an undercurrent of savvy negotiating relating to energy performance, which is affecting some final deals. “The smart observer in this market has been asking for two years about energy performance by price; it tells the tenants whether they are dealing with a sustainable building. So people are bypassing regulations because the source data [such as utility bills”> is more reliable,” he says.
If energy awareness continues to spread, he suggests, energy efficiency data will send out signals to potential tenants looking to cut a bargain. They can use energy costs as a lever for rental negotiations, even if this is not their biggest running cost. In turn, this could have an impact on energy performance and eventually, perhaps, the EPC framework. But awareness should be founded on good data, which the EPCs have so far failed to provide.
“Better benchmarks are needed in the UK… we do not know how much energy buildings are using per square metre nor what counts as ‘good’ or ‘bad’,” states Francis. Better benchmarking would probably lead to greater performance competition too. Improved disclosure in the US, he suggests, may account for a more evident trend of greener premiums across the Atlantic. Lack of transparency continues to be a common complaint in the UK market.
Beyond that, energy efficiency can be an indicator of quality and innovation, which often commands a premium in a positive economic climate. Simon Rubinsohn, chief economist at RICS paints a positive picture of the future in terms of the links between sustainability and UK property market economics. Sustainability, he points out, is a type of innovation. “When the economy is buoyant and returns are high there is more willingness to consider innovation,” he says.
At the moment, however, the climate is cautious. “Looking at data over the last four or five years, there is no doubt that demand for space has been diminishing. They key point is the attractiveness of paying for retrofits upfront. Tenant demand is weak, there’s not much of an incentive for flashy new developments and retrofits — it’s hard to make a sell for high value capital outlay right now,” he says.
But, as Rubinsohn explains, there are signs the market is changing: “If we see a more solid recovery, I would probably expect budgets to be identified for increasing sustainability and to see more widespread innovation coming back,” he says.
In the mean time, FMs have an internal role to play in encouraging further energy savings. For instance, they can set targets for designers and builders to cut energy use by a certain percentage, and in some cases they are involved with procurement. “I think facilities managers do have a good perception of how the building operates and where the energy use is. They have a good idea of where changes can be made. They are in an excellent position in terms of knowledge and responsibility — far better than designers themselves, because they live with the problems every day,” states Bill Wright.
