Roundtable Sarah Jackman asks members of the BBP’s working groups what progress has been made on green leasing and property ratings
The panel
Keith Bugden, programme director, BBP
Matthew Tippett, director of sustainability, Jones Lang LaSalle
Paul Edwards, head of sustainability, Hammerson
Miles Keeping, partner and head of responsible property investment, Deloitte
Becky Clissmann, solicitor (non-practising) and editor, PLC Environment
What is everyone’s perception of the market’s response to green leases?
KB: Green leases are becoming more common: all BBP members now have green clauses in their standard form lease. Two years ago, it was clear that we needed to change attitudes to this being perceived as a benefit rather than a burden. We are not there yet. There has been a thawing of attitudes, but pockets of resistance still exist.
MK: The pockets of resistance tend to exist where smaller landlords are involved. When presented with a green lease or memorandum of understanding (MoU), it is often the first time that the lawyer involved has come across it, which immediately creates scepticism.
What more can be done to emphasise the benefits of green leasing?
MK: First, getting away from calling it a green lease, which instantly establishes preconceived ideas about what it will involve, such as draconian obligations being placed on either party. Secondly, demonstrating how easy it is to collect data and share information on a building and that a green lease clause might establish an initiative to facilitate that.
PE: Whether you call it a green lease is less relevant. It is a question of whether you include clauses – many of which are simple – to measure a building’s efficiency. CRC has driven people to measure energy use and has helped to bring parties together.
BC: A recurring issue is that landlords struggle to get retail tenants to sign green leases. It is not the clauses themselves – they are reasonable and unbiased – but there is a problem with branding. Retail has its own set of policies and employees often don’t want to step outside the strict parameters placed around the design and operation of their stores. One retailer, for example, objected to recycling bins being placed in its store on the basis that they weren’t properly branded. This probably conflicted with an environmental policy and an objective to recycle, but in retail, branding often has the trump card.
MK: There is a disconnection between a retailer’s environmental policy and the person making the property decision. It is a real problem for larger organisations and there needs to be more joined-up thinking. The advisory community has a case to answer here.
BC: Agents can also cause problems. My experience is that having two agents inbetween the main parties necessitates greater buy-in and can make the process more difficult. It would be easier to talk to the landlord directly. There need to be more agents who commit to understanding green issues. This isn’t a nice-to-have any more. This is best practice and should be standard practice.
Much of the government’s focus is on ratings, notably EPCs and DECs. How have these aided a reduction in energy consumption?
MT: There has been a focus on EPCs by government and an insufficient focus on DECs. EPCs – and other design or asset-related ratings – do have their place, but it is possible for an E-rated building to use less energy per floor area than a C- or B-rated building, as the recent JLL & BBP paper A Tale of Two Buildings highlights. If the government wants to meet its UK targets, overlooking operational energy consumption for private commercial buildings is a major omission.
KB: The positive to EPCs is that they are making people think about energy consumption, which previously they weren’t. In terms of actually reducing energy use, however, they are currently having no effect whatsoever.
PE: It is ironic that the government is using DECs to drive change in its own sector, but won’t use them in the private sector.
MT: It is odd that it is the industry leaders that are trying to lead government on making DECs for commercial properties mandatory. However, the DEC methodology needs to be made appropriate for commercial property. The existing DEC is not robust or sophisticated enough to cope with multilet landlord and tenant relationships in private buildings.
PE: EPCs are good for design and DECs are good for measuring actual performance of a building. Ideally the two systems would be aligned, but you cannot currently compare the two, which is a problem. You have a requirement to do an EPC, but no requirement to do a DEC. So, when an empty retail unit is being assessed, the EPC is completed with theoretical information based on what the assessor believes a retailer will fit its store out with. What use is that? EPCs currently don’t drive energy efficiency. What they do is confuse the industry because they are poor quality; they are not robust, the advice given is poor; and because they don’t align with DECs, they have no purpose.
BC: There should be a single EPC covering both aspects: the design of the building and how it performs. It would force the owner to work with the occupier.
KB: The BRC has stated that it is not in favour of the introduction of DECs, in part because it represents a wide range of retailers, some of whom are, by the nature of their business, energy intensive, for example, using fridges, freezers, lots of lighting etc. Those retailers will, if DECs are introduced, look bad compared to some of their rivals who have tin sheds and use very little energy. For the public, there is no caveat in respect of business type.
PE: The current system is also complicated and expensive. Some retailers are cautious because they have hundreds of stores to roll this out across and the per-store cost can be high. The problem too is that government is trying to change the whole industry with one move. The likes of M&S, Kingfisher Group and H&M are doing this because they recognise that their energy bills are huge. For example, on a £1m utility bill, you either need to save 7% energy consumption per year just to stand still or you need to increase sales by £800,000 per year. In this market, the 7% is the more attainable.
MK: One problem is that when EPCs first came in, they were seen as part of the transaction process. The EPC supplier market was populated late and very quickly resulted in an over-supply of providers. The price for the provision of those services fell and consequently the quality was awful. Deloitte has recently undertaken some work for a BBP member assessing the validity of existing EPCs at some of its premises. The case study highlighted that around 40% of the EPC ratings were badly wrong, some were a bit wrong and some were right. When wrong, they generally contained lots of default information. In those instances you were more likely to get a G than an A or B. In one case, a building was rated an E, we did it properly and it was revised to a B.
KB: Generally, owners at that time wouldn’t have been bothered by that rating. It was a piece of paper to go with the deeds to the property and to tick the relevant box.
The BBP is working on a landlord energy rating for private sector buildings. How will this feed through into an improved DEC process?
KB: The work will ultimately produce a robust measurement system that will identify and measure actual energy performance. The BBP will concentrate on the areas the landlord is responsible for. It is often difficult to get data from tenants, making it important to produce a standard evaluation methodology that is robust and appropriate for commercial buildings. The BBP hopes that it will be adopted by government and used to produce a market-transformational landlord DEC.
MT: Landlords’ services are missing from the current equation. Under an existing DEC, it is possible to measure an entire building or a single tenancy/unit. Measuring the services/shared services provided by the landlord isn’t currently doable.
KB: Occupiers will be able to compare buildings that they are interested in taking space in and how efficiently they are being operated.
MT: This is the idea behind these performance certificates: transparency between different parties. It will drive landlords and their managers, as much as the relationship between landlords and tenants. It gives the opportunity for those who are making improvements to be rewarded.
The Energy Act 2011 will set a minimum EPC rating of E for commercial property to be rented out. How are landlords gearing up to try to raise certification in advance of its implementation?
MT: A real mix. We have been helping landlords undertake portfolio risk assessments. Landlords need to assess whether they: hold off entirely; do an assessment from desktop information; or combine an assessment with doing something helpful: ie an EPC-plus, where you obtain the rating and, with a service provider, act on it.
MK: It is larger landlords who have this on the radar. One thing we say is do not “knee-jerk” into doing anything because there are so many unknowns. Will the government hold its nerve is the first question and it is impossible to answer. Government is behaving in different directions in this area and unfortunately that vacillation of political leadership gives landlords and occupiers the opportunity to do nothing and adopt the “wait-and-see” approach.
MT: CRC – love it or hate it – did get people measuring data. It made people realise that they need to know what actual energy consumption is.
MK: The problem facing government is that commercial property is complicated. As far as minimum energy performance is concerned, some of the really complicated issues are what happens at rent review and lease end. For example, what do you regard and disregard when it comes to assessing a new level of rent? Do you disregard tenant improvements, which, in a retail unit might be responsible for an improvement in energy performance?
BC: This is a vexed area. In the original drafting of green clauses and MoU, cost was deliberately left out because it was recognised that it would be a disincentive to people signing. If one could reach an industry standard on costs, it would go some way to incentivising people. A means of then sharing the savings is the Holy Grail.
MK: It is complicated and we should not criticise government for not implementing legislation immediately. The industry needs to work with government to develop a landlord DEC, enable it to see the benefits of that, and help it to develop that DEC as the foundation of policy, rather than EPCs.
PE: Our market is driven by “value.” If you can create a system that creates value then change will happen. It will drive itself because the government will be in a position where it will only move into certain rated buildings, people like ourselves won’t want a portfolio with G and F buildings because investors won’t want them, investors will want a building with a minimum of D and tenants such as Deutsche Bank or HSBC will not move into a G-rated building because of reputational cost.
And finally: cost. People will know that a G-rated building is going to cost more to use than an A-rated building. Initiatives such as CRC are almost irrelevant. It has made things over complicated. Get rid of CRCs, bring in DECs, make them aligned with EPCs and the market will move.
Download JLL & BBP’s report A Tale of Two Buildings >>
