A Greener Real Estate Industry


Although the world will always need competition to thrive, slowing down climate change is an objective where we need global collaboration for long-term security. With real estate responsible for 40% of global greenhouse gas emissions, it's crucial that net-zero is the focus for all aspects of the sector. Real estate is in a privileged position, where there is no longer an excuse that being 'green' is not financially viable. We now see occupiers paying more to lease greener buildings, with property consultancy company JLL finding that more sustainable buildings can have an increased rental value of 6-11% and lower void periods. A priority in the UK is to find local authorities that want to engage positively in improving the environment by constructing green buildings and converting older buildings using energy efficient forward-thinking designs.

The real estate sector has been incredibly wasteful over the past 50 years, with repurposing and recycling of materials only being considered fairly recently. The time has come for the 'decade of delivery' by society, businesses and the government. It's clear that we need a just transition to transform our world – a mantra frequently used by the UK Green Building Council ("UKGBC"). The real estate sector needs to work together, work systemically and work hard to create buildings that are sustainable and carbon efficient.

While legislative requirements for net-zero buildings are needed to enforce change, investors are already publicly demanding transparency throughout supply chains. ESG disclosures and climate risk assessments are now a strategic advantage for tenant attraction and retention, as highlighted by the Task Force on Climate-related Financial Disclosures ("TCFD"). Investors can be seen to support sustainable objectives, lending and providing preferential rates depending on the nature of the investment. In addition, investors are increasingly looking to the energy efficiency of buildings, their carbon footprint and the use of innovative technologies.

The Supply Chain

Many see the process to achieve net-zero carbon operational portfolios by 2030 as an overwhelming challenge. Organisations can break it down by firstly reducing their energy demand by improving energy efficiency, before then focusing on energy procurement and using offsetting as a last resort. Developers and landlords need to review their entire supply chain. It's simply not enough to focus on direct emissions (Scope 1) and indirect emissions (Scope 2) as in fact organisations Scope 3 emissions usually represent the greatest proportion of greenhouse gas emissions. These are emissions associated with travel, procurement, waste and water, amongst others. The supply chain is much wider in scope than initially thought, but must be assessed and measured in its totality to meet the net-zero targets.

How can Landlords and Tenants Drive Sustainability?

Landlords and tenants have their own part to play in building a more sustainable real estate industry.

Landlords need to ensure that monitoring and data sharing is accurately recorded and relying on estimates is not enough. The UKGBC suggest that landlords should first understand how much energy reduction is required to reach net-zero, and then work backwards to ensure results – 'you can only improve what you measure'. This critical first step can then lead to the implementation of strict targets and open dialogue between the landlord and tenant regarding the sustainable operation of the building.

Leased buildings should be designed to EUI standards (Energy Use Intensity that correlates the buildings energy use as a function of its size) to ensure the building has the capacity to operate efficiently. Landlords can ensure standards are complied with by incorporating specific reference in their leases ("green leases") to metering, data sharing, EUI standards and procurement of energy, amongst others.

Tenants seeking to move to a new building should secure space designed to be energy efficient, which in fact will be cheaper for them long term. An existing tenant needs to understand their energy consumption and reduce as far as possible. Tenants should be actively encouraged to discuss potential improvements such as energy procurement or system replacements with a better greener option with their landlords. Dialogue is therefore a vital component to reach net-zero.

Can the Future Include Re-Purposing?

The housing shortage together with the need to repurpose vacant units has encouraged the government to back changes to the planning regime to facilitate the conversion of unlet properties. The opportunities for developers to repurpose will only increase over the coming years. John Lewis has even announced plans to soon convert unwanted department stores into flats for 'good social use'. However, in order to repurpose sustainably, it's vital that these repurposed buildings recycle materials, implement green energy usage and ensure their supply chain follows suit.

One of the biggest hurdles moving to net-zero is the UK's vast old housing stock. New regulations that are being introduced revolve around new builds, but do not consider all retrofit challenges. This is a particular challenge in the residential sector, which has no major stakeholders beyond local and central government. Involvement of local authorities (including local planning) is therefore critical in breaking down barriers to reaching the 2050 target.

Another hurdle of converting existing buildings is the potentially higher carbon cost than re-building from scratch. This point is vastly under-valued, with homeowners and developers not being fully informed as to what measures they can do and which ones will have greatest impact. A supply chain which performs whole house/building evaluations and has the capacity to install the required retrofit would revolutionise the industry.

Looking Forward

A recent seminar given by UKGBC to Howard Kennedy advised they are already seeing many external drivers from the investor and client perspective, but also from developers who wish to improve the energy efficiency of existing buildings. However, there are many developers who are not thinking of future consequences – which will be detrimental in the long term as the government is actively considering future regulations to enforce carbon-reduction changes in the property sector.

These include a recent consultation that highlights the government's commitment to upgrade as many private rented sector homes as possible to Energy Performance Certificate ("EPC") Band C by 2030, where practical, cost-effective and affordable. Similarly, the Energy White Paper 'Powering our Net Zero Future' (December 2020) promotes the government's aim to ensure as many existing home as possible meet EPC Band C by 2035 and require all rented non-domestic buildings to be EPC Band B by 2030. These aims are amongst a plethora of others, such as reforming the energy system such that it is fit for future purpose and create a 'fair deal' for energy consumers by increasing price transparency, providing more opportunities for consumers to save money on bills and by protecting the fuel poor.

In addition, the Committee on Climate Change at the 6th Carbon Budget report aims to accelerate plans for a novel in-use performance standard for commercial real estate with all efficiency improvements to be finished by 2030.  The report also recommended that no new residential homes should be sold by 2028 without an EPC at Band C. 

Developers need to ensure they are ahead of the curve and will be ready for these radical but welcomed changes. As Boris highlights, we need the UK to 'Build back better and build back green'.

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