Copyright: David Lawson– appeared Property Week Oct 1998
Home pageAustralian children in silly hats could provide a lesson in protecting the investment value of UK property in the next century.
Thousands of words have been written over the last decade about the need for 'greener' buildings. Hundreds of speeches have warned of tough measures to cut global warming. Dozens of plans have emerged for eco-friendly schools, libraries, social housing estates and the odd council building. Yet only a handful of pure commercial developments would qualify as a break with the wasteful past.
'Occupiers are still not convinced of the need for change,' says Trevor Silver of Akeler, who has probably produced more green developments than any other commercial operator. Energy-saving alone is not enough, as it contributes only a fraction of the cost of occupation. And tenants have a suspicion of new-fangled techniques.'
So why does Akeler keep indulging in eco-friendly schemes? Because the tight-knit band of managers like the idea of investing in the future rather than returning a quick buck.Alastair Elliott, who is out on the streets for Knight Frank every day testing the demands of occupiers, has a similar explanation why the property industry has been so slow to respond to these pressures. 'A company has to have a green culture, otherwise it will not spend time trying to shave 50p a sq ft off running costs,' he says.
That may be starting to change, however. The government is well aware that buildings contribute around two-thirds of man-made 'greenhouse gases' and is drawing up tougher measures for specifications. Planners have already been given new guidance on pushing for sustainable development in line with policies for restricting transport-generation. Occupiers realise they may be caught between demanding politicians and lack of suitable buildings.
An insight into potential changes emerged in a report from the influential Property Advisory Group which crept out with little fanfare. This suggests new taxes on occupiers which are 'environmentally inefficient', forcing an economic case for better use of buildings. It also offers carrots to go with the big stick, however. They include accelerated capital allowances, grants and a code of conduct for the property industry to share information.
Elliott sees 'more stick than carrot' emerging from these deliberations over the next few years. 'That could make a difference in how occupiers choose their buildings,' he says. Silver puts more hope in carrots. 'Bankers make the real decisions,' he says. 'Give them extra on a yield through capital allowances and they will make a bigger difference than tenants working out fractional differences in running costs.'
The Australian children may be a pointer to the future. They once spent a legendary amount of time sunning themselves. Skin cancer scares made little difference until an unwritten rule emerged that those without head protection would be turned away from school, says Silver. Again, acceptance was grudging - until it became fashionable to wear 'foreign legion' hats. Now they all wear them.
Occupiers in the UK are starting to court fashion. Major names like Boots and Marks & Spencer see a benefit in appearing eco-friendly in purpose-built developments for themselves. Castlemore took advantage of this trend with a 13,000 sq metre (140,000 sq ft) state-of-the-art scheme at Temple Quay, Bristol. It could have been just another conventional giant tweaked to the minimum required by planners. But the developer knew the DETR was in the market and would aim for a green building.
When private-sector tenants start making the same kind of judgements, greener development will spread out of the purpose-built sector. Environmentalist Tim Battle says this pressure is already rising as evidence emerges that greener buildings are more people-friendly. As staff are the main occupation cost, keeping them happy becomes a major factor.
'It has been difficult in the past to prove this. How do you show a solicitor is more productive? But studies of the new call centres show better working conditions improve efficiency,' he says
Stick or carrot, fashion or efficiency, changes are coming, and these will impact on buildings going up today. In future, occupiers will be more inclined to seek buildings which minimise taxes and keep staff productive. That means green property will be more valuable than conventional buildings.
Obsolescence is already being factored in a new approach to property values by City analysts. Green credentials will be another ingredient to measure the cake. That will be a carrot for investors, picked out by the PAG report as another barrier to change. They think short-term, worrying about yields eroded by higher construction costs.
Silver admits that extra spending cannot be immediately justified. The Equinox development with Alpha-Laval in Slough, for instance, will cost an extra œ3.50/sq ft to build because of the battery of energy-saving measures. Rents will be set by the local market, however.
But he sees benefits flowing through in future - a view obviously shared by Capital Security, the giant US investor which recently bought Akeler. 'We are building for tomorrow,' he says.
Extra construction costs are not necessarily as severe as the 5-20% premium estimated in the PAG report. Mason points out money spent on a green facade can be made up on lower-powered plant. Silver also aims to juggle what he calculates as 2.5-3% higher costs for buildings like Equinox. 'You can always find marble that can be replaced by tile,' he says.
Cost in use could also begin to play a much bigger role as another kind of property revolution brews. Akeler is one of the pioneers looking at shorter, more inclusive leases. These are expected to evolve into agreements where landlords provide all services as part of the occupation cost.
This will have an immediate impact in raising awareness of running costs, as buildings will be provided on service contracts. Owners will not be able to 'lease out and forget'. They will constantly compete with other accommodation seeking to lure away tenants. Returns will be based on performance rather than market rents - a marvellous incentive for producing more efficient, greener buildings.
PAG PROPOSALS
Commercial buildings produce 15% of CO2 emissions but there are barriers to green development which should be swept away, according to a report by the government's Property Advisory Group.
The panel, headed by Jones Lang Wootton chairman Robin Broadhurst, includes property professionals, academics and private sector investors. It recommends measures including:
- taxes on inefficient building use
- capital allowances for energy-efficient plant
- a code of conduct on sharing green information
- special city centre sites reserved for air-conditioned blocks
- development of occupation agreements to shift energy costs
- property companies to publicise environmental performance
- environmental audits
- building regulations to match best European practice
- planners to specify green designs