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Friday, 9 March 2012

MIPIM: Calls for Financial Boost to Sustainability Revolution

At a British Property Federation (BPF) and Jones Lang LaSalle event yesterday, at annual Cannes property festival, MIPIM, property chiefs called for further financial incentives to bring about a revolution in real estate sustainability.

Delegates heard that more than 90% of non-domestic stock was built before 1986, when requirements for better thermal performance began to be introduced.

Much of the stock built before then is relatively poor by today's standards and with annual replacement rates of only 1% to 2%, around 60% of the existing stock will still be around in 2050.

BPF chief executive Liz Peace said:

"The property industry has made great strides, but until there is a link between strong sustainability credentials and better financial performance it is difficult for the market to respond without intervention."

This is a slightly different emphasis from the one focussed on at an earlier discussion I reported in my post Out of the Red & Into the Green.

There was an acknowledgment there that despite economic woes, the property industry would strive to meet government sustainability targets, incentivised in part by legislation threatening to leave many old buildings moribund.

The Energy Act 2011 paves the way for secondary legislation making it unlawful from April 2018 to rent out premises which have less than an “E” energy efficiency rating – potentially rendering obsolete approximately 18% of all buildings with Energy Performance Certificates (EPCs) – some 600,000 properties.

There’s a suggestion though that this legislation may not, by itself, be enough of a spur to improving “old” (relatively speaking) buildings.

Hammerson chief executive David Atkins said:

"It is clear current environmental legislation is failing to encourage change particularly for existing buildings and as such we have been calling for the roll out of display energy certificates as it offers a clear link to capital value."

As well as the badge of sustainability that might be offered by display energy certificates, does there also need to be a positive financial incentive?

JLL head of professional advisory Andrew Renshaw said:

"The cost to improve energy performance will have to be met by the owner and it is estimated 18% of properties fall within this category so the impact on existing stock will be a serious problem - financial incentives would mitigate this and even encourage owners to be proactive in improving energy efficiency."

Improving buildings is a challenge for properties that are let.

I’ve mentioned on this blog before (for example in Beware Built-in Obsolescence), how the need to improve or retrofit buildings can put a strain on the workings of the standard commercial lease, which does not establish a framework within which these matters can be resolved easily or amicably.

There’s a Catch-22, or vicious circle, depending on your cliché of choice.

The tenant will not want to pay large amounts towards capital improvements if it’s only going to enjoy a short term benefit.

The landlord won’t see any immediate return on its investment because it doesn’t pay the utility bills.

Perhaps the Green Deal will provide some of the answers.

Details of how the Green Deal will work will emerge in the autumn.

Landlords themselves will be able to make use of the Green Deal to fund improvements; although where the property is already let they would need to get the consent of the tenant as bill payer. The landlord would also need the relevant rights under the lease to access the premises in order to carry out the improvements.

The Green Deal charge would then attach to the bill and be payable over time by the tenant and its successors.

The difficulty comes with void periods, when responsibility for utilities bills reverts to the landlord. Normally that’s not such a problem where no one is using the building. If there’s a Green Deal charge, however, that will continue to be payable and so will have to be paid by the landlord.

Even so, although this might not be the sort of financial incentive many are looking for, it is better than nothing and if F and G rated properties become unlettable without the improvements, landlords may find themselves with no choice.

For residential property, the government announced last autumn that up to £150 cash back would be available for homes taking part in the scheme.

No similar financial inducements have yet been announced for businesses, and for them to have any real effect they would presumably have to be far more substantial than that.

Not sure to what extent the government’s goose will be up for laying that particular golden egg.

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