Greening commercial property: What is acceptable behaviour in an office?

The non-domestic sector could reduce its emissions by about 35% by 2020 and save about £4.5bn in the process, and there are not many parts of the economy that can do that

James Wilde

To have any chance of hitting its carbon reduction targets, the UK must improve the performance of the existing stock. The reason is that the built environment contributes 45% of UK’s total carbon emissions but only 1% of it is replaced each year. This means that 60% of the buildings standing today will still be around in 2050, when the UK has committed itself to carbon emissions that are 80% lower than they were in the benchmark year of 1990.

The government has finally begun to wake up to this challenge and is beginning to introduce incentives such as the boiler scrappage scheme whereby homeowners get a £400 rebate for replacing an inefficient boiler, and a “pay as you save” loan for energy efficiency improvements, which is repaid by the savings on utilities bills over 20 years or so.

Getting people to take up these incentives should be relatively easy because 70% of UK homes are owner-occupied and owners directly benefit from improvements. But what of non-dwellings, where most buildings are leased? Owners do not directly benefit from improvements to these buildings, because tenants pay the bills, and tenants have even less incentive to improve a building they don’t own.

To try and get to the bottom of this conundrum Building and its sister magazine Property Week teamed up with the Carbon Trust, the organisation taking the lead in tackling this issue, and a panel of experts to debate whether improving existing non-dwellings is really mission impossible.

The challenge

Carbon emissions from the 1.8 million non-dwellings in the UK contribute 18% to the UK’s total carbon output which is equivalent to the entire primary energy supply of Switzerland. Despite all the talk and the targets, this figure has remained worryingly static since 1990, which means there is a lot of catching up to do.

To get things in perspective the average building with a display energy certificate rating of E needs to reach C by 2020 if the government’s interim target of a 34% cut by 2020 is to be met. By 2050, all buildings will need to be A rated. According to James Wilde, insights director at the Carbon Trust, if we are going be ’really serious’ about these targets there should be “no G rated buildings by 2020.”

The financial case for acting now

The Carbon Trust has researched the costs of making the UK’s non-dwellings more energy efficient. Surprisingly it found that on the face of it, improving buildings was a no brainer because savings outweigh the capital costs of simple improvements such as installing better lighting and heating controls, replacing plant with more efficient units, managing that plant better and educating its users. “The non-domestic sector could reduce its emissions by about 35% by 2020 and save about £4.5bn in the process, and there are not many parts of the economy that can do that,” says Wilde, adding that we can get there most of the way (70-75%) to the 2050 target at little or no net cost.

Improving buildings is obviously going to cost money but getting people to be more careful about how they use energy is free. unfortunately, getting people to change their behaviour is easier said than done

But there is a catch: to achieve these savings we must act now.

The Carbon Trust reckons reducing carbon emissions from existing non-dwellings 35% by 2020 means it would cost £13bn to hit the 80% target by 2050. That may sound like a lot, but say we miss the 2020 target and only achieve, say, a 29% reduction by that date, the cost of hitting the 2050 target shoots up to £40bn.

This is because we will miss the quick savings from reduced energy bills and more money will have to be invested in expensive renewable energy technologies after 2020 to accelerate the savings. “So there isn’t really a choice in what we do, the real question is when we do it,” says Wilde.

“Our key conclusion was that the kind of things that are driven by behavioural change and things that pay really back should really be implemented before 2020.”

Rental premiums

So why aren’t people rushing to improve their buildings? One of the main reasons is that there isn’t a clear link between investing in improvements and benefiting from the energy savings. Landlords have little incentive to improve buildings if they don’t command a rental premium, because that is the only way they can get their investment back. “In terms of valuation, I don’t see anything discernible in the market at the moment that shows that this building is green and this one isn’t,” says Duncan Preston, director of valuation at surveyor Aston Rose. Bill Hughes, the managing director of property at Legal & General, is responsible for extracting as much value as possible out of his £8.5bn portfolio. “I firmly believe that the sustainability agenda will start to influence investment returns on real estate at some point in the future. I think there is scant evidence that this has happened in this country yet,” he says. “Unless the tenant can see there’s a financial incentive of some form or other that is either imposed externally or by the market then I’m not sure their behaviour is going to move in the direction we’d like it to.”

The good news is that Hughes thinks there is evidence this is changing. “It seems inevitable with energy prices increasing and the way legislation is going that at some point the sustainability side of things will come into the price of real estate,” he says, adding that Legal & General’s investment committee takes into account how green a building is before buying it. “There are certainly things we’d look at early on and say no, we’re not interested in buying that almost at any price because we think that it’s a nightmare from the sustainability point of view,” Hughes says. “We would see this as a significant thing on the agenda; five years ago it wasn’t.”

People don’t turn the lights off

Improving buildings is obviously going to cost money but getting people to be more careful about how they use energy is free. Unfortunately, getting people to change their behaviour is easier said than done. “It’s been shown by case studies and by us and others that you can achieve double-figure percentage savings almost overnight, and although everybody thinks that’s a good idea, making it happen is hard” says David Farebrother, the environmental director of developer Land Securities.

We’ve been amazed by the savings from small-scale actions and improving the basic running of the buildings, such as resetting the controls on
air-conditioning, heating and ventilation systems

Chris Trott, sustainability director of Arup, says a lot of the work his firm does is as simple as getting people to switch equipment off and make sure time clocks are set. “There’s a big gap between them even knowing they can do it and doing it. I think the first action is to raise awareness and identify where people, without any expenditure can save money.”

Wilde says the Carbon Trust is trying to raise awareness and conducting research to show people what needs to be done. “We work with tens of thousands of companies each year to give them advice about what the quick wins are right now,” he says. “What we are also doing is trying to work out what the next opportunities are, and running demonstration programmes. We are currently demonstrating low carbon refurbishment and have worked with companies from the design phase to completion to track performance. The really powerful thing about that is we can start to say these are examples of things that didn’t and did work. We have already produced a guide for low carbon refurbishment to start sharing the findings from these examples over the coming year.”

Performance certificates

Wilde sees energy performance and display energy certificates (EPCs and DECs) as an essential tool to improve buildings and drive behavioural change.

The Department of Energy and Climate Change (DECC) was occupying Whitehall Place, which had a DEC rating of G, so it got the Carbon Trust to help improve the property. “It was a G-rated building, which was rather embarrassing for them,” says Wilde. “We’ve been working with them on a comprehensive carbon management programme and they are now an E-rated building and all the initial measures paid back in just over a year and they were very, very simple; these things can be done to most buildings.”

Wilde adds that he thinks there should be no G-rated buildings by 2020 and that the government is considering a minimum standard for EPCs and will consult on this shortly. DECs have a part to play, too, as ratings can be improved by behavioural change. Wilde thinks the public sector could lead by example by implementing all the cost effective measures recommended on the DEC. “The key conclusion is the climate regulations that might incentivise and enable this change are going to be coming along,” says Wilde.

The carbon reduction commitment

There is little in the policy armoury to tackle carbon emissions from the existing stock. Building Regulations do require energy efficiency improvements when a building is refurbished, but that doesn’t happen often enough. The carbon reduction commitment (CRC) is meant to change that. “Landlords pass the energy bill to the tenants, and the tenants have no opportunity to change the structure of the building,” says Fiona Tranter, the senior policy adviser at the DECC. “That’s why we have introduced the CRC, to tackle that organisational inertia. Energy prices aren’t that expensive at the moment but in the future they’re going to increase so we start needing to make the changes.”

Where a company comes in the carbon emissions league table is having a more powerful effect than the costs. People don’t want to be at the bottom of the lis

Fiona Tranter

Not everyone is happy about this. Farebrother says Land Securities has spent 29 years trying to reduce energy use in its portfolio but is now being hit by the CRC, particularly in the retail sector, where it has no control over energy use. “We have no influence at all over how Sainsbury’s or Marks & Spencer or anybody else uses energy in its store,” he says. “But if we’re paying the CRC allowance costs they effectively have a licence to pollute without any payment so that link is completely missing. The CRC is probably fine for most sectors but in commercial property and multi-occupied buildings there are some big issues, and the fact that it is not addressed through legislation means we’ve spent most of our time and most of our money lining the pockets of lawyers.”

Hughes thinks that the positive aspects of the CRC outweigh the negatives. “There might be some more progressive organisations out there that have been thinking about it hard but I think this will have a significant shocking effect on a number of participants in the market. That may feel uncomfortable but I think it’s a powerful and necessary - albeit blunt - tool to get things going.”

Tranter says: “Where a company comes in the carbon emissions league table is having a more powerful effect than the costs. People don’t want to be at the bottom of the list.”

Embrace the challenge

The Carbon Trust, Threadneedle and Stanhope have set up a £350m fund called the Low-Carbon Workplace Fund that will work with occupiers to refurbish buildings and lease the mat market rents. Russell Tame, managing director of Low Carbon Workplace, says it is essential to work with occupiers once they move into the building to keep emissions down. “It’s an opportunity for a much closer relationship with the occupiers of buildings that will in turn reduce carbon emissions and increase building efficiency for us and our investors, which we believe will drive our returns,” he says, adding there is no shortage of interest from occupiers.

“I think the proof’s in the pudding; we’ve been working on this project for 18 months and we’re overwhelmed by interest from occupiers who tell us they want to reduce their carbon footprint, but don’t know how to go about it when it comes to our buildings and we want to ensure we are going to do it in a way that futureproofs us and takes us forward in a recognisable way.”

Clearly there are signs of change. Occupiers would like greener buildings but don’t know how to go about it but this should change with the efforts of organisations like the Carbon Trust. The more enlightened developers recognise that in a few years inefficient buildings will become much harder to lease out as tools like CRC and EPCs begin to bite. Smaller organisations will present more of a challenge as they generally have less money and awareness is also an issue. So change is gathering momentum, and the industry needs to start thinking what to do and how.

To watch a video of the debate, visit www.carbontrust.co.uk/buildingsdebate