How to enhance investments in a depressed property market.
For many investors facing uncertain times, there is a clear dilemma rearing its head. If you build in flexibility and improved environmental performance to your schemes, or insist on that in the projects you back, enhanced investment returns will more than likely come your way. But are those elements affordable in a depressed property market?
The dilemma arises because everyone knows that environmental design is expensive, yes? Green equals greenbacks, right? Wrong, says UK architect Rab Bennetts, famous for schemes such as the Mint Hotel and New Street Square in London.
In the eyes of many investors and contractors, says Bennetts, a sustainable building is perceived as an expensive one, long before the potential benefits of reduced operating costs, enhanced marketability and increased energy efficiency and life expectancy are properly considered. In practice, he goes on, innovative building shapes and forms do not necessarily add substantially to construction costs and, notwithstanding aspirations to zero carbon development, the differential cost of delivering sustainable design as opposed to conventional structures is marginal.
“Yes, improved thermal or solar performance might require an increased spend on cladding”, he says, “but if this design decision means less capital is required for expensive building services systems and operational savings are realised, then the initial outlay is much less of a dilemma.”
But it is not only cost that has caused misconceptions for sustainable construction. There are historical misunderstandings that green buildings do not deliver higher rents or sale prices, though this is changing, if not on price then definitely on the ‘marketability’ of green buildings. Tenants are starting to demand green principles, and providers are responding. Happily, ‘sustainability’ is no longer a buzzword, says Bennetts, evident in the schemes developed by heavyweight companies British Land and Land Securities, which see the issue as a marketing tool delivering competitive advantage.
The issue now also forms part of Corporate Social Responsibility, with developers responding to companies going beyond laws or planning guidance – but also because it makes business sense. This idea – that the tenant has changed considerably – hit home for Bennetts especially following the creation of New Street Square, his practice’s £200m scheme for Land Securities which was awarded the first BREEAM ‘Excellent’ building in the City of London.
“When the first tenant came to see New Street Square, the first question they asked concerned sustainability”, says Bennetts. “Why? Because there is a growing awareness that people want to work for green-conscious companies that take environmental impacts seriously. A green building can also increase comfort and productivity, reduce absenteeism and have a positive effect on staff wellbeing and retention.”
In stark contrast, Bennetts was recently asked to assess a corporate HQ which, in the face of spiralling energy costs and the embarrassment of a poor Display Energy Certificate in its lobby, is already “staring down the barrel of a major refurbishment less than 10 years on from its completion.”
Head of investment at BNP Paribas Real Estate Paul Griffiths believes that assessing return and cost of sustainability is still a difficult area, whether in a depressed market or not, and industry indexes on the matter take time to bed in. But no new building is going to ignore sustainability, and this is easier to attend to in cost terms on new-build than it is in refurbishments of existing stock. “To attract the best tenants, sustainability will become more and more key and will provide occupiers with a more cost-effective solution in the long term”, said Griffiths. “Where we are seeing some difference today is that investors who have a duty to stakeholders are openly saying they will only buy or fund sustainable buildings.”
An example is L+G, which has made just such a statement and to whom BNPPRE sold the Rolls Building in the City of London earlier this year. It was a good fit. The investment worked with its green objective, being BREEAM Excellent, was built with 80 per cent Grade A-rated materials and has operational efficiencies which include energy-saving lights and a cycle scheme. The fact that it is let on a long lease to public sector tenants who have their own agenda also means that they know they’ll continue operating with sustainability in mind.
“In the future we will see a changing attitude from investors as they seek to please stakeholders and attract occupiers who also have their own corporate agendas”, said Griffiths. “Then it will become more of a cost to not include sustainability in a building, rather than it provide an obvious return.”
On the flip side, however, consultancy Tuffin Ferraby Taylor warns that both landlords and owners are eager to avoid any negative impact on their property value as a result of substandard properties or, worse still, a property becoming sustainably obsolete.
Darren Berman, director of energy and sustainability at CBRE, agrees that it is more of a question of “can you afford not to do it.” It is not a black and white question, because there are some things which are ‘crazy’ not to do, others which will not necessarily give you the financial returns you would want, and others still which would be sensible for reputational reasons, if not financial ones. A group of technologies such as building management systems, controls, lighting solutions, voltage and boiler optimisation deliver real returns.
“The question for me is, if they provide attractive returns, why are they not being done? The reason is market failure – things like a lack of information and education, but primarily the ‘split incentive’ between the landlord and the tenant, with savings perceived to be benefiting the latter at the expense of the former. A couple of landlords are applying a model where there is a shared saving, but that is a key opportunity that too many investors are missing,” says Berman.
In 2018, legislation is coming to the EU on this – properties will not be allowed to be rented out unless they meet specific energy ratings, expected to be an EPC rating of E. So the long-term outlook on these matters is crucial. “This just shows that in the future it will have an impact on value quite significantly on the decisions that you make on your portfolio today,”, says Berman. “Let’s say on a pension fund. It will affect that pension fund in 2019 or 2018 or perhaps 2015 or 2016 if the market starts to price this in properly. The answer is: you can’t afford not to do it if you’re a medium-term investor.
If you’re interested in investment, MIPIM 2012 has a special programme of conferences and events just for you, including the innovative new format, RE-Invest. If construction and property management is more your thing, find out about the new Building Innovation programme and pavilion at MIPIM 2012.
Image: Rictor Norton and David Allen