Copyright: David Lawson - first published Property Week April 2005
Who cares about saving the world? Not the average occupier. Any agent will tell you the last thing they consider is how much CO2 will float off to stimulate some future ice age. Location and rents are key issues – and maybe a shorter, more flexible lease now they have become more fashionable. At least, that is the standard response to rising clamour about making property more environmentally respectable. But occupiers are not be as short-sighted as they are painted. Over the next five years the vast majority are likely to include green issues in their accommodation strategy, according to research backed by the CBI, the UK’s largest business pressure group.
That means developers and investors must take these matters seriously. Some have already accepted the challenge. Big names like Land Securities and British Land have integrated energy-saving designs and servicing into new developments. Paul McNamara, head of research at Prudential Property Investment Managers, and David Hunter, MD of Arlington Property Investors, have come out of the closet as born-again Greenies. Those four names control vast swathes of UK property. The illustrious generals are setting standards that more mundane footsoldiers cannot ignore. And the evidence is they are taking notice, despite the cynicism of agents.
Some 85% of firms questioned by consultant GVA Grimley in its annual Property Trends survey for the CBI said green issues were now discussed at board level. That is a huge step forward, considering that surveyors and managers spent decades trying to get their voices heard – long before the environment became relevant. This is not some semi-religious conversion to tree-hugging raging through Britain’s boardrooms. It is the gradual acceptance that there will soon be no choice. The debate has moved swiftly on from conferences attended by academics, eco-activists and idealistic architects. London and Brussels have been quietly ganging up to frame laws that can no longer be ignored.
But talk is cheap. Saving the world costs money. And everyone from the smallest housebuilder to billion-pound commercial property fund mangers knows that occupiers back off as soon as they learn that greener property means higher rents. Again, this prejudice is being challenged. An overwhelming number of companies told GVA Grimley they would pay extra for environmentally sound premises. But this carried a sting in the tail. Any new standards must reduce running costs.
So has nothing changed? Green is good – as long as it does not cost anything. Saving the planet is the prerogative of super-heroes, not paper-shufflers and widget-makers. Yet it does reveal that occupiers are acknowledging the importance of running costs – another huge step forward. The expense of resources such as energy and water are rated the most important driver of greener property strategies. And as they soar, it may provide a back door through apathy to providing the sort of premises that environmental activists – and John Prescott - expect the property industry to magic out of thin air for the 21st century. Three factors have shifted occupiers views, according to the GVA Grimley/CBI poll: the cost of resources, potential UK legislation, and the forthcoming EU directive on the energy performance of buildings, stood out as important.
The climate change levy - a third of respondents gave this a ‘high’ rating and 42% a ‘medium’ rating. Only a quarter were untroubled.
The EU directive on energy performance of buildings - rated lower on the agenda, with only 20% of firms considering it highly significant. But another 45% confirmed a ‘medium’ rating, confirming that it could not be ignored. The rest seem likely to be blasted out of their apathy when labelling of buildings comes in.
The BRE will be disappointed that its Environmental Assessment Method appears to be unimportant to so many occupiers after a decade of hard work. Some 47% rated it poorly or not at all. Again, opinions may change as energy costs rise.
KEY DRIVERS
Three areas show space users may still be dragging their feet.
This shows occupiers may be as guilty as developers in failing to appreciate how opinions are changing. Management consultants McKinsey warn that customers are beginning to demand assurances from suppliers about their environmental policies.Similarly, staff are expected to make individual decisions on where to work based on personal perceptions about how green an employer may be. This influence has been muted by lack of choice but as more firms provide the option of greener polices, skilled staff will exercise their muscle, bringing the issue into boardrooms.
Investors are last on the list of expected drivers, yet they should be among the first. Big institutional bodies such as Morley and Hermes are already raising questions about green credentials. In the US, the Carbon Disclosure Project, a group representing institutional investors managing $10 trillion in assets, has sent questionnaires to 500 of the world's largest companies, says McKinsey. Again, this is no ideological conversion but reflects hard-nosed fears that rising energy costs and new laws restricting CO2 emissions will begin to eat into shareholder values. Pressure on occupiers will swiftly transfer to their landlords. Those failing to respond could find themselves isolated. McKinsey warns they should be preparing today – if only by tidying up matters such as fixing leaks and turning off lights. This will create a mindset which will make it much easier to adjust to more fundamental change occupiers will demand.
Energy Saving Self Help Tips
Gas and electricity prices are soaring. Water charges will follow as OFWAT approves increases to pay for wholesale replacement of leaky pipes and collapsing sewers. The long era when service charges were practically ignored in calculating property costs is over. Many landlords remain unmoved, locked in the traditional attitude of distain for running costs under traditional arms-length leases. This may change as energy labelling emerges and potential tenants come under pressure from investors and customers to cut costs and take greener space..
In the meantime, occupiers bear the burden, yet they are often bemused about how to tackle problems which have been such a low priority in the past. The first lesson is not to panic. Savings can be remarkably easy to achieve, according to the Carbon Trust, a central clearing house offering anything from free advice to cheap loans. For instance, turning off unused lights can cut energy by 15%. Dropping the heat is another easy win, particularly in little used areas. Just washing windows can cut bills and cleaning light fittings means fewer need to be turned on.
In other words, better management can ease the lack of better buildings. But you can’t save what you can’t measure. Many occupiers don’t even know how much power and water they use. That can be the fault of landlords, who perpetuate inefficiency by lumping together service charges and allocating to tenants according to floorspace or headcount, no matter how careful some are at turning off lights.Yet most occupiers are in charge of their own fate. The Carbon Trust offers advice and inspections to pinpoint potential savings while an army of outsourcing specialists has emerged which take the whole issue off the finance and property managers’ desks.
They are backed by new technology which can analyse exactly what resources are used and when. ‘Most firms get monthly statements but just don’t use the information,’ says Chris Lees MD of Calvis, which integrates property management and accounting software systems in the UK and US. Supplies can even be broken down daily or even hourly, revealing hidden problems when run through computer analysis.
Lees points to one case where a monitoring system discovered that lights were kept on for three hours longer than expected each evening. A bit of digging revealed that the service agreement with cleaners demanded work was completed by midnight, but the contractor had been saving its own money by cutting staff, dragging out the task. The property manager was losing out, however, by paying higher utility costs, and the contractor was given marching orders. This shows that while technology can help reduce costs, it is most useful when integrated into attempts to improve overall management. Even landlords are beginning to recognize the benefits, says Lees. Monitoring can reveal which tenants are underusing property. It may seem perverse to suggest they reduce space but this can help retain those who might otherwise be struggling with costs and eventually move out. Even straightforward advice on cutting costs can help. The Carbon trust says saving 20% on energy translates into the equivalent of a 5% boost in sales.
Self Help Tips
Source: www.thecarbontrust.co.uk
Capital allowances
Although many energy saving measures involve little or no expenditure, financial help is available for new or upgraded equipment. Capital allowances are generally set at 25% a year on plant and equipment but businesses can write off 100% of the cost of energy saving against taxable profits within the first year. The Carbon Trust warns that only products approved for the Energy Technology List can qualify for enhanced allowances, however. For more information , visit the ECA website www.eca.gov.uk or call the helpline on 0800 58 57 94.
Source: www.thecarbontrust.co.uk
Carbon Trust Case Studies
The London International Exhibition Centre (ExCeL) is the largest open exhibition space in Northern Europe. An energy site survey helped cut its £1m annual fuel bill by approximately one third - mostly through no-cost measures. Further action could save another £100,000 per year.
Porters Horticulture has 30 employees and three centres producing bedding and pot plants. After a detailed survey of its Moss Side site and advice on general energy efficiency and good practice, Porters was able to cut gas consumption by 20% and significantly reduce overall energy costs. This came from measures including a database to monitor energy use, reducing service periods on the two boilers from annually to every six months, and lagging heating pipes. A servicing company was also found that is cheaper despite the extra work.
DHL is the world's largest international air express network, servicing 120,000 destinations in more than 220 countries. Its main UK hub at East Midlands Airport and has been certified to the environmental management standard ISO 14001 since 2000. However, senior management decided to target additional energy savings within their commercial offices. A two-day site survey identified opportunities which have reduced electricity consumption by more than 20%, saving over £120,000. Gas was also cut by 42%. DHL has now adopted a recommendations from the Carbon Trust to appoint a management energy ‘champion’ to explore energy saving in all its UK offices.
HBOS has cut more than £1m from energy bills at offices in Halifax and Leeds through adoption of energy efficient practices. This eliminated 7,500 tonnes of CO2 a year, the equivalent of 2,045 tonnes of carbon.
Ninemeister, in Warrington, Cheshire, is an example of investing in more substantial measures to save energy. The firm, which specialises in design, development, repair, body paint, restoration and racing development of Porsche cars, asked for input into designing new workshops This has involved insulating the high bay roof, cladding walls and installation of high frequency lighting. Longer-term projects include installation of gas services, a new heating system, point-of-use water heating, high efficiency shutter doors and inert gas outside lighting. Ninemeister expects the new lighting system to reduce costs by 30%, shutter doors will save about 20% of heat normally lost and a radiant heated workshop is anticipated to cost between 25% - 60% less to run.
Is Sheffield set to disappear into the bowels of hell? Is Bristol, set among the rolling greenery of the west, really the most polluted city in the UK? It certainly appears so in the first comprehensive map of environmental risks faced by Britain’s top 10 cities. Landmark Information Group has fed information on thousands of buildings through its computers and come up with some surprises. For instance, almost 40% of the commercial properties in Bristol are at risk from pollution – far higher than northern industrial centres such as Manchester [26%] and Leeds [31%].
This shatters a disturbing calm that engulfs the property industry: the conviction that environmental threats are obvious. It comes as no surprise that Sheffield ia top of the list for subsidence because mining was once so prominent. Yet poor old Bristol is not far behind, with 75% of commercial property facing the same risk. It is easy to overlook that the West Country capital also had a coal industry. Yet subsidence can be a threat for a variety of other reasons such as soil instability, putting London on equal, if shaky, standing. Three-quarters of its addresses are also at risk.
This does not mean our cities face armageddon. Landmark routinely produces online reports like Enviroscreen which mark potential risks within 100 metres of any property. The information, drawn from a huge databank ranging from historic maps to pollution enforcement records, has been crunched to give a countrywide picture. They are risks rather than immediate threats – a warning for further investigation to developers, occupiers and investors. Contamination, for instance, is not considered actionable under the Environmental Protection Act unless it is a potential threat. That involves creating a ‘path’ and ‘receptor’ – in other words development which disturbs what has been a benign threat.
Endless hours of number-crunching were aimed at showing such potential problems are almost commonplace. Yet they are virtually ignored except where most obvious. House buyers and builders have got the message since the Law Society flagged up legal threats about liabilities to hidden problems which may have been created centuries ago. Solicitors insist on environment checks on around 90% of deals. Commercial developers are catching up slowly as planners demand more detailed site investigations but a huge gap remains which could cause problems over the next decade.
Valuers are dragging their feet despite explicit instruction in the RICS Red Book to calculate potential risks, says Richard Pawlyn, managing director for property and environment business at Landmark. Less than 1% of the 550,000 commercial transactions a year include an environment report. Is that, perhaps, because no-one wants to know that Bristol is prone to pollution and flooding while Sheffield is sitting on a honeycomb? Nothing quite so obvious. Former mines are just one small element in a complex assessment of multiple issues that may present no immediate danger but should be assembled in a risk assessment to decide whether more intense site inspections are needed.
The real villains are lenders, who have transferred responsibilities to valuers without offering to pay extra to explore the risks. That means most reports are laced with caveats as professionals seek to protect their backs. Rather than follow the simplest housing conveyancer, they insist on excluding areas in which they have no expertise. Yet the RICS has warned that such exclusions are ‘potentially unsafe and professionally dangerous’. It may be a matter of time before a tidal wave of flawed valuations are challenged in the courts. And with limited cover from most indemnity insurance, valuers could be the ones facing armageddon.
POLLUTION
[Source: Enviroscreen – Landmark Information Group]
% Properties at Risk
Bristol 39
Sheffield 34
Birmingham 31
Leeds 31
Bradford 27
Manchester 26
Glasgow 23
Edinburgh 21
London 21
Liverpool 20
Average 25
Anyone could guess that Bristol and Liverpool would be at either end of the pollution league for Britain’s top 10 cities. But few would expect the West Country city to be ahead of Merseyside, with its tradition of heavy industry. That shows how dangerous it is to expect the obvious. Liverpool, like Manchester and Bradford may have dominant images of satanic mills but places like Bristol were laying down problems long before the industrial revolution.
‘This is a medieval city, says Keith Nepean, chairman of locally-based engineer Clarke Bond. ‘Development goes back many hundreds of years, leaving near-invisible remnants buried away in the ground.’ The term ‘mad as a hatter’ stems from the mercury they used, which rotted brain cells. Glass works also used mercury and these were common in Bristol. Much historic pollution is revealed only by using one of the online checking services. Landmark’s Enviroscreen offers a further step, passing information to consultants who can issue indemnity certificates against a range of risks. But such services are increasingly used as a first step to calling in environmental consultants for more intense investigation.
What is Contaminated Land?
Part IIA of the Environmental Protection Act 1990, which came into force in 2000, gave local authorities the duty to order a clean-up of land where there is even the possibility of significant harm to the environment, or water pollution. For land to be considered contaminated there must be a:
Circular Facilities v Sevenoaks DC
A legal ruling is sending tremors through the property industry after developer Circular Facilities lost an appeal against a remediation notice from Sevenoaks District Council, The appeal court found the firm responsible for contamination from landfill done under previous owners but which did not become a problem until gas emerged from the ground after homes had been completed and sold.The firm should have known about the risk because of a previous inspection report placed on the planning register. And even though Circular did not cause the contamination, it introduced a pathway [development] and created a receptor [home owners], thereby creating the risk.
‘The case is particularly chilling,’ says Luke Bennett of lawyer Nabarro Nathanson. ‘The Court was retrospectively judging the actions and inactions of the developer in 1980 (the year of the site investigation and the development) - and with the benefit of hindsight and 35 years of subsequent technical development. This is an example of "sins of the fathers" coming back to haunt. ‘There is no limitation period or "state of the art" defence provided under the Part IIA regime, therefore the prospect of "old" development schemes (and their adequacy as regards management of residual contamination) is brought into sharp focus. Consultants such as Landmark says this kind of liability can be avoided if developers and investors use environmental reports to reveal potential risks.
Heavy Penalties Expected for Contamination
Tough new environmental controls are being pushed onto the backburner as the country dives into a general election. Deadlines for measures such as energy labelling of buildings and finding space to store electrical goods for recycling have slipped as ministers plead lack of time and resources. But they will return with a vengeance if Labour returns to power, along with renewed vigilance on contamination. The Environment Agency is expected to be handed extra resources after a parliamentary committee found most problems are being overlooked. Even where traced and taken to court, offenders have faced little more than a slap on the wrist.
This loophole is also expected to close. Cases are likely to be switched to civil courts, where punishment will be much more painful. Apart from stiffer fines, thousands of smaller firms blamed for around 80% of environmental problems could face clean-up orders that could eat heavily into profits. Developers and landlords will have to come to terms with the cost and inconvenience of a new era in environmental control. Tougher rules on waste disposal which came into force last year have already pushed up costs by 80%, says Mike Benton, UK sales manager for disposal specialist Wastefile.
They will soar further as more rigorous sampling comes in within months. This is on top of escalating landfill taxes and the impact of new restrictions on working hours for skip drivers. David Thomson, MD of Waterman Group, believes overall costs may triple. The problems are no longer restricted to obvious locations such as former steelworks and giant sites like the Greenwich Peninsula. Regeneration of brownfield land is now the norm and the most innocuous sites could be drawn into the net as planners demand stiffer controls.
Every town and village once had a gasworks which will have left traces of heavy metals, says Mike Barker, director of environmental management at engineers Faber Maunsell. In fact, any factory that burned coal is a potential hazard, because the ash left behind may be hazardous. Many, if not most, sites will have already been redeveloped, so the danger is hidden below the surface. Asbestos is another latent danger. Landlords already face regulations which demand every building is inspected for this lethal poison but at least they are safe if it remains undisturbed. This ignores vast amounts of roofing and cladding ploughed into the ground over the decades, posing huge potential problems for developers.
The traditional ‘dig and dump’ techniques for clearing sites is no longer viable because EU regulations demand that inert and hazardous waste is separated. But so few sites have been allocated for dangerous waste that it is already virtually impossible to handle, says Thomson. A new burden is also about to emerge. From July plasterboard, one of the most common materials in demolition, joins the ever increasing list needing special treatment. Gypsum must be separated from food, domestic and garden waste in landfill, says Mike Benton national sales manager for disposal experts Wastefile. The firm estimates expenses similar to disposal of asbestos, which costs an average of £55-60 a tonne (plus transportation). This is expected to increase significantly as fewer landfill sites can take the material.
Developers will have to turn increasingly to on-site remediation such as soil washing and biological treatment. These have traditionally been more expensive than clearance yet the critical factor may not be up-front costs but handling more red tape. This approach requires a Mobile Plant License (MPL) from the Environment Agency, which adds time sorting out paperwork and liaising with the regulators, says Clive Barnwell of remediation specialist Vertase. Securing approval can take weeks compared with the near-immediate solution of traditional ‘dig and dump’.
Some methods may also stretch development schemes beyond breaking point. Barker points out that one technique involves spreading bacteria to literally eat away the dangers from hydrocarbons like oil. This could take a year or so, during which time interest payments may be clocking up, adding up-front costs that make development uneconomic. That will cut little ice with ministers and local planners determined to drive through tougher regulations. They can cite the fact that the effects of limiting hazardous landfill have not been as bad as anticipated over the last year, with far less material reaching the few licensed sites than anticipated. Barnwell says the EA believes this is because the industry is adjusting. But some insiders suspect waste is being wrongly classified.
Landlords secure behind freeholds or long leases cannot brush off potential contamination problems as relevant only to developers. Everyone moves and/or sells at some point and they could be sitting on time-bombs set to go off whenever a property hits the market. Increasing threats of taxes and penalties mean purchasers regularly carry out environmental audits but sellers rarely know what they are sitting on. This leaves them open to big shocks when offers hit the table, says Stewart Cooper, director of property at Argyll Environmental.
Without this information, their negotiating position is weakened and could result in reducing the sale price by more than the true remediation cost. Even tenants could face problems assigning or sub-letting, as any lawyer will spot conditions transferring liability for environmental risks which can be revealed by a routine audit. By anticipating such problems with an environmental investigation, a seller may be able to pass on liability for existing contamination to a purchaser under the "sold for information" clause of Part IIA of The Environmental Protection Act. Specialist consultants can also recommend on-site treatment favoured by environmental agencies rather than potentially more costly - and possibly more disruptive - removal.
One of the key issues for the property industry will be to find sites for processing the waste which will no longer be allowed into landfill, says environmental consultant White Young Green. EU directives mean the UK must reduce landfill or face crippling financial penalties. The government has set local authorities strict targets which will require a large number of major waste recycling and treatment facilities. ‘Finding suitable sites and obtaining planning permission is extremely challenging,’ says WYG.
More than 2000 incinerators and recycling plants will be required by 2010, according to the Institution of Civil Engineers. Regional planners are so desperate in the south east that they even suggested using green belt land. WYG says final guidance is likely to be toned down. ’But the facilities will have to go somewhere.’
Lawyers have a wonderful talent for covering client’s backsides. It’s why they are paid so well. But Luke Bennett knows he will be lost for an answer to one question at the property monitoring committee of a major institutional client. What should investors be doing about pending laws aimed at energy saving? ‘It comes up every quarter,’ says Bennett, who specialises in environmental law for Nabarro Nathanson. ‘And the answer is still the same. Nothing has been decided so we can’t advise.’
New EU regulations insist that all buildings must be tested for energy efficiency from the beginning of next year – commonly dubbed energy labelling. Yet boffins are still working out exactly how that will be done. This is not about procedures for reading thermometers and tape measures. Labels will be awarded after various factors are tapped into a computer and run through a program, rating a building against a set of standards. Until that program is agreed by a committee of specialists from 22 professional institutions, Bennett is stumped.
This vagueness has reinforced a dangerous apathy among landlords and developers already weary of endless warnings about potential restrictions. The latest excuse is even if these new laws come in, there won’t be enough inspectors to do the job. ‘Don’t bet on it,’ says David Strong, chairman of the DIAG committee advising ministers on implementing the EU measure. The same argument was put forward against home inspection reports, and they will still come into force next summer.
But anyone committing to development or buying space needs answers today. What is the point of putting money into something that could fail a few years down the line? What can landlords do to anticipate the army of testers? DIAG warns against advisors already touting building energy rating services. They are as much in the dark as anyone until the computer methodology is decided. Common sense is probably the best weapon.
Labelling is only one thread in a tapestry of new measures aimed at meeting commitments to energy saving. A host of simultaneous measures are planned in the regular revision of building regulations. Lawyers are on safer ground here. Bennett’s colleague Jonathan Cohen is able to reel off a list of responsibilities covering areas such as heating systems, airtightness of exteriors, insulation, and the likely new rules encouraging use of ‘low carbon’ power supplies like solar and combined heat and power systems.
. Uncertainty still hangs like a stifling fog, as details will remain unclear as consultations fly back and forth between ministers and buildings professionals, but this at least provides a focus for danger zones. Taking the next step into anticipating the impact of energy rating also benefits from a dose of simple logic. New buildings over 1,000 sq m are pretty certain to be targeted from next January first. Designers are already well aware of the likely upgrades necessary on previous building regulations and will be taking an educated guess about factors such as glazing and power systems to match the computer model..
Even the most mundane refurbishment could trigger the new rules. Any project of more than £8,000 will require another 10% on top to upgrade energy saving. That figure was obviously set for housing and could be pushed up once the inadequacy for commercial property is realised. But it could still come as a surprise to unsuspecting landlords. Major renovations to buildings of more than 1,000 sq metres will bring them firmly into the same realm as new buildings. So will a sale or new lease, spreading the impact to just about all larger premises.
But does it matter? Many are still unconvinced that tenants and investors will care whether a property achieves a high score. But one key issue has been overlooked. Every owner will need to commission a report on the shortcomings of their property – just like the dreaded home inspection reports for homes. Potential buyers and tenants won’t have to go looking for faults. They will be set out in plain sight. Strong suggests cynics imagine the embarrassment for an institution or company trying to explain to concerned investors or customers a few years down the line that it owns or occupies earth-threatening premises. His solution is to future-proof buildings. Don’t go for something cheap and cheerful, he says. The odds are that it will produce low scores in a few years and have to be torn out again.
Future proofing should go far beyond short term threats to meet energy targets, according to the British Council for Offices. Developers should be thinking about what kinds of buildings will be needed for decades to come. Tim Battle, who has overseen an update of the BCO guide to best practice in office specification, says this can be boiled down to six key points:
Wireless communications: There will be a continuing push of wireless in fitting out offices to support mobility of the workforce. The added convenience should be measured against security, as ‘open’ systems can be hacked with comparative ease.
Flexibility, flexibility and more flexibility: Commercial office space must be able to respond to higher rates of churn and the increasing mobility of staff. Fan coil air conditioning systems are less amenable to adaptation than underfloor or chilled beam systems
Part L - One: The implications are not yet factored into designs because of uncertainty about how changes will be implemented and certified. The only certainty is that over the decade energy regulation will move from being a good idea with green tinges to another item on the statutory list of building regulations that will impact on the occupier.
Part L - Two: Business performance and workplace productivity is coming sharply in to focus as the next key issue in the sustainability debate. But there is a conflict between the ‘good thing’ of being to be able to open windows - the personal control of space - against wide fluctuations in temperatures that can adversely influence business performance.
Part L - Three: Building regulation changes are a response to global warming. Wider bands of weather patterns with extremes of temperature and rainfall will impact on working conditions. ‘Green engineering’ of the past decade may not be robust enough to cope.
Mixed use: The implications of mixed use on the commercial office market are coming into focus and as new sources of funding emerge, will become more prevalent. Viewing the take up of commercial office space without considering the wider picture may be short sighted.