Sustaining Values

15 May 2005

A central theme of the OPD Conference this spring was the environment and sustainability. As Keith Pratt
reports, time is getting short to take effective action to protect the value of property portfolios that don’t meet new sustainability factors

GLOBAL AWARENESS of the urgency of the impact of global change is rising. However, even as the Russia decides to sign up to the Kyoto Protocol and the USA continues not to do so, the debate continues on what is causing climate change and what can be done to arrest and reverse the changes.

This debate is increasingly becoming more informed at least in the field of building construction and management. UK Government policy to improve energy management in commercial property is driving the issue up the business agenda fast. Professor Sarah Sayce from Kingston University, introduced the findings of research conducted with private and public sector contributors. The aim was to understand the degree to which the issue of sustainable property has risen on the business agenda and to review the extent to which business is aware of its impact on the ‘triple bottom line’ – social, environmental and
economic performance. The increasing level of participation in the ‘Dow Jones Sustainability Index’ and the ‘FTSE4Good’ was also be considered.

The evidence gathered so far has clearly shown that not all property is sustainable. But whilst the data suggests that it would be unrealistic to try to rectify the past, not to do so will have an increasingly adverse effect upon the value of the property and its life. Further research therefore needs to be undertaken to evaluate the impact and assess refurbishment implications in order to assist property owners and occupiers to future proof their portfolios.

Future choices
The research also found that when businesses are identifying property for future needs they are being more selective, choosing those properties where the design offers a greater degree of sustainable operation. She argued that BREEAM and other well-established benchmarks focus primarily on performance but measures of sustainability require a broader spectrum of issues to be considered.

To date, most interest in sustainable property has been on new build. But as building stock is only replaced at the rate of 1 or 2 per cent per annum, in practical terms the impact is likely to fall on existing stock. Buildings that are less likely to be capable of being future proofed, or fail to meet the needs of occupiers and new legislation, will, she argued, experience poor value growth and potentially suffer premature obsolescence.

The growth of Corporate Social Responsibility (CSR) policies and the changes in environmental legislation, particularly those from the EU such as building energy labelling for buildings over 1,000 sq m due to start in 2006, will require some action. However, Professor Sayce found while collecting data for the research, that business managers, property owners and property agents appear not to be well informed about these impending changes. Greater preparedness is essential.

Property appraisal
A consequence of occupiers demanding and the property market providing shorter leases is a reduced the desire to invest. Problems have also been caused in the changes in landlord and tenant relationships with shareholder activism weakening the commitment for improvements to portfolios. To meet these challenges, the Kingston University research suggests that the normal process of property appraisal must be enhanced, incorporating elements that reflect sustainability. This generated a list of possible criteria for commercial property, which if applied, will enable them to be properly assessed. Property appraisal for sustainability could include:
....Accessibility – covering logistics, location, green travel plans, labour pool, etc.
....Adaptability – the ability of the property to accommodate change, impact of daylight penetration, cost of churn, etc.
....Building quality – the level of over engineering, creation of longer refurbishment cycles, simpler infrastructure, etc.
....Climate control – the capability to respond to future climate change.
....Contextual fit – the extent to which the property fits its surroundings and improves values.
....Energy efficiency – capability to meet rising energy costs, address security of supply, be considered by cost per metre squared or cost as proportion of rent, etc.
....Occupier – impact of occupier reputation.
....Occupier satisfaction – social and productivity gains.
....Pollutants – meeting future legislation, avoiding fines, resolving the need for environmental insurance, etc.
....Waste and water – containing the impact of EU Directives, further metering and other controls.The criteria will have varying degrees of importance depending upon the business sector. These can be weighted and a table of significance has been produced (right).

Professor Sayce concluded that whilst the gap continues to widen between business need to address CSR and the amount of sustainable property stock, which does not meet the criteria, property owners are at risk of seeing a decline in value. Whilst some are taking action now to avoid damage to their portfolios, inevitably many will get left behind and see a decline in rental returns.

Co-operative Financial Services (CFS), has however, already begun to take action as Gary Holmes explained. For CFS, which includes the Co-operative Insurance Society (CIS), sustainability is an integral part of its business ethos. CFS identifies its approach directly with its shareholders, customers and staff. CFS research had shown that over 30 per cent of its customers open accounts with CFS because of their ethical and ecological policies and practice. Further, 30 per cent of the bank’s profit is attributable to ethically motivated customers. To ensure that the results achieved are demonstrable, they use independent verification and assurance experts.

Within the organisation, the policies and practice are applied through Energy Teams and Environmental Champions located within in each business unit, and through environmental procurement policies for all suppliers.

A number of targets had been set for sustainability and environmental improvement:
....Shift energy consumption to renewable power – 97 per cent achieved
....Reduce CO2 emissions – achieved 44 per cent reduction
....Reduce water consumption – in process
....Introduce waste recycling – first year achieved 70 per cent
....Green procurement – saving money on energy (buying from wind farms), water, transport, paper and print, recycling and PCB’s
....Environmental management system working to ISO 14001.

As Holmes explained, the bank had for a number of years sourced its energy needs from renewable sources and a premium can be attached to green electricity, however, the user never quite sure if their commitment is actually leading to the creation of new generation capacity. Therefore, with only 3 per cent of UK energy supplied from renewable sources, CFS wanted to demonstrate tangibly its commitment. It has therefore entered into an eight-year energy purchase agreement, which will partly fund the provision six new wind turbines in Lincolnshire.

CFS’ consolidated Sustainability Report on the first year’s work was ranked as the world’s best by the United Nations Environment Programme as part of its reporting across the globe. (Further details on CFS’s web site at www.cfs.co.uk)

The CIS headquarters office, a tower block in the heart of Manchester City centre, is a single tower comprising 56,000 sq m of office space with an external access tower, containing the lifts and stairs. The cladding on the access tower was failing and replaced on all three sides with solar panels. This solution would generated180,000 units of electricity from a renewable source and when finished will be the largest vertical array in Europe. It is being supported by a grant of £885,000, from the Northwest Development Agency and £175,000 from the DTI towards the total cost of the project of £5m. Payback will not be achieved
for 30 years.

Occupier action
More practical advice for approaching sustainability in commercial buildings came from Stuart Morley, Head of Research at GVA Grimley,. He outlined a holistic approach to prioritising environmental action for occupiers. GVA Grimley’s research has developed a number of elements that contribute to sustainability:
....Longevity – optimising the resources and material used in the construction over whole life, from creation to end of use
....Flexibility – designs that provide for adaptation at least cost
....Locations – that provide for minimum transport impact and major emphasis on the use of public transport
....Energy – where natural sources and low impact on the environment are key
....Working conditions – driving greater productivity.

There is clearly a long road to travel before environmental and sustainable properties meet the demands of occupiers and upcoming legislation. The arrival of Energy Labelling of Buildings will focus minds and strategies affecting the property sector from developer to occupier.

....Keith Pratt IFMA CFM is a Director of Thomas Resource, a consulting business focusing on property and infrastructure service management