A Look Into Sustainable Buildings
I was first introduced to sustainable buildings during my studies at Cass. I was allocated The Edge Building in Amsterdam on a case study. I was impressed and enjoyed the research. Unfortunately, that was the last time I did any research on the subject which is what prompted me to write this article. I recognised my lack of knowledge beyond these buildings being good for the environment.
Here I hope to better understand what they are, what questions we need to ask and what the implications are of investing in sustainable buildings.
A Look Into Sustainable Buildings
Greenwashing no more
ESG has come under a lot of scrutiny lately. Here are some recent stories uncovering:
CEO of Deutsche Bank's top German asset manager DWS announced he will step down after the firm's headquarters was raided by prosecutors over allegations of misleading investors about "green" investments.
Aviation giant KLM will face legal action in what is thought to be the first corporate lawsuit about airlines and net-zero claims, as well as one of the first cases about carbon offsets.
BNY Mellon Investment Adviser paid the U.S. Securities and Exchange Commission (SEC) $1.5 million to resolve charges that it misstated ESG investment policies for several mutual funds it managed.
For too long we have accepted companies’ ESG claims without asking questions. Not many of us actually understand what it actually all means. I certainly don’t. This is the best definition I have come across from Jack Raines (full article here):
A subject so broad we go along with any claim a company makes. Luckily, the tide is changing. We are waking up and realising we should not accept claims that companies are saving the planet. We need to be asking more questions and we need to be doing more research. Here, I do not intend to focus on greenwashing, but rather research the positives and how we can move forward in the right direction.
Defining Sustainable Buildings
Building sustainably means taking into consideration social, environmental, and financial implications. Factors determining a building’s sustainability include:
Efficiency of energy and water use
Use of renewable energy such as solar energy
Pollution and waste reduction measures.
Recycling
Air quality and natural ventilation
Green energy supply and charging points for electric cars, bikes and scooters.
Positive ecological benefit
Knowing this is the easy part. Measuring and quantifying this is the hard part. So where to begin? I personally would not know. Luckily there are companies out there that do know. They measure buildings’ sustainability, provide certifications & ratings and suggest what can be done to improve a building's performance.
Measuring a Building’s Sustainability
In the UK, the most used sustainability metrics are EPC and BREEAM (LEED in the US, DGNB in Germany and NABERS in Australia).
EPC ratings provide information about a property’s energy use and typical energy costs and provide recommendations about how to reduce energy use and save money. There are certain issues with EPC, as some argue they report on theoretical energy performances as opposed to actual. Nonetheless, EPCs are helpful for benchmarking and advising on how to improve a building’s energy efficiency.
We then have BREEAM which sets best practice standards for the environmental performance of buildings through design, specification, construction and operation. These are carried out by certified assessors based on a scoring system with the criteria being: Energy, Land Use and Ecology, Water, Health & Wellbeing, Pollution, Transport, Materials, Waste, and Management. Each criterion is scored and multiplied by a weighting and finally translated into ratings; unclassified, pass, good, very good, excellent or outstanding. Having tried to dig deeper into how the criteria are determined, I hit a major stumbling block. The only available information was a 500 page tech pack. I did not pursue. Additionally, findings of BREEAM reports for specific buildings are only shared with those that commission the report. In my opinion, there should be a summarised tech pack whilst the certified reports should be open source. This would go a long way in helping us research what makes a building sustainable and how the metrics are measured.
Although EPC and BREEAM are the most common criteria, there are many other criteria with specialised firms such as WiredScore (building connectivity), Air Rated (air quality) and WELL (health & wellbeing) measuring specific aspects of buildings. Whilst it is good to have several benchmarks and competition is good, we need to make sure the market does not get saturated with 1000s of different benchmarks.
Another exciting concept is green leases.
Green Leases
Green leases are clauses where landlords and tenants undertake specific responsibilities regarding sustainability. These are general provisions within leases that encourage (or require) both parties to improve a building’s sustainability. Examples of such provisions include:
Waste management by use of recycling receptacles/facilities
Sustainable and/or recycled materials to be used for any repairs and alterations
Electricity usage
Compliance with energy efficiency regulations
Whilst the provisions can be inserted into leases, green leases are not specific documents with no industry standard yet for what is defined as a "green lease". Examples of some provisions can be found here. Green leases are picking up although do not seem to be a hot topic at the moment. I would like to do more research on the mechanics of green leases such as what happens if either party does not comply and whether we can expect a surge in interest in the coming years. This research is for another time.
Benefits of Sustainable Buildings to Investors
What is in it for investors? Sustainable buildings clearly benefit stakeholders, but what about shareholders? Do the numbers stack up?
When it comes to sustainable buildings, it is what occupiers demand and it is what funds are mandated to buy. In turn, this puts sustainable buildings in demand increasing their liquidity and attracting “green premiums”. Research suggests that green premiums are emerging for BREEAM certified assets, achieving premium rents between 3-12%. Research here, here and here. In addition to premium values, sustainable buildings reduce operation and maintenance costs.
The hope is that we shift our focus from green premiums to brown discounts. This means that sustainable buildings become the benchmark and non-sustainable trade at a discount, not the other way round.
What about existing buildings
Whilst this all makes sense for new builds, what about existing buildings? Older buildings are likely not built with sustainability into consideration. Getting them up to industry standard will require creativity and analysis. Landlords will need to compare the cost-benefit of Capex spending versus keeping the building as is. What could (and has already) prompted landlords is the new Minimum Energy Efficiency Standards (MEES) which come into effect in April 2023. From April 2023, all commercial buildings will need to have an EPC rating of at least E. This means that commercial buildings with EPCs of F or G (of lesser energy efficiency) would not be allowed to let (except for where not applicable such as schools and places of worship). The UK government has recently confirmed that the minimum energy standard for all non-domestic buildings is raised to an EPC of B by 2030. The UK Green Building Council (UKGBC) analyse that over 90% of office assets will need to be improved over the next ten years to reach this new requirement. From a landlord’s perspective, owning a sustainable building might not be a choice, but rather a necessity.
Whether achieving an EPC of B by 2030 is a good idea, I am not convinced. Have we done enough research on the costs (financial and environmental) of keeping buildings as they currently are versus bringing them up to industry standards? And if 90% is the actual number, have we considered the consequences? Probably not. And this is why I think we might fail. Whilst working towards net zero is key, we must take a pragmatic approach rather than aiming for unrealistic goals. Especially when there are so many buildings, investors and stakeholders to consider. Others will argue our planet is dying and we have no choice but to act decisively.
Final thoughts
We have a long way to go. What I believe would assist the cause is more transparency. Buildings can have a BREEAM rating of Excellent yet most of us would not know why. It is therefore up to us to put more pressure and ask more questions. With this article, I have not necessarily found the answers but I have at least woken up to the fact that these questions must be asked.
I see green leases as an exciting concept. It requires landlords and tenants to collaborate, something we do not often see. This can be a great common cause with the additional financial incentive of reducing energy costs.
When it comes to new buildings, landlords that can reward shareholders as well as stakeholders are likely to be the big winners. When it comes to existing buildings, there are a lot more questions which need to be asked. As we build better, the hope is that sustainable buildings become the norm and we shift our attention from green premiums to brown discounts.
Slight update to the newsletter format where I share a few thoughts. These can be personal, real estate and broader economy. Or simply interesting conversations I’ve had.
The big personal news is that I have recently moved jobs. After 4 special years at Edward Charles, I have joined Lewis & Partners a niche investment consultancy specialising in the UK commercial real estate market.
Looking at the UK commercial real estate market, there has been a change over the past month between buyers and sellers. Buyers expect a discount as they are factoring in the situation of the global economy (impending recession and falling share prices) whilst sellers have not factored these in and consider real estate a safe haven in times of uncertainty. This has lead to transactions slowing down as parties try to renegotiate.
An interesting article I have recently read is about the city of Reno, Nevada. The city has announced a pilot programme that uses blockchain technology to create and store digital copies of historic building records. Something many cities and countries are in desperate need of and worth tracking how they progress. I previously discussed how the city has also aimed to digitise art in the form of an NFT.