1 Aug 2013

2013 is likely to be a year in which the fluidity of the sustainability agenda poses mixed challenges for office owners, occupiers, developers and lenders.

Miles Keeping, Deloitte Real Estate, is a member of the BCO's Environmental Sustainability Group.

In a selection of blogs from the BCO's ESG Miles shares his views on challenges of the sustainability agenda in 2013...do you agree?

Will energy performance become a bigger value bargaining chip?
Last year I predicted that 2012 would see an increase in investor attention towards the energy ratings of their assets and portfolios as the Energy Act 2011 promised to mark offices with poor energy ratings as unlettable without certain steps being taken to improve them. It seemed like a safe bet that Minimum Energy Performance Standards (MEPS) would be a motivating force.

Certainly, some investors took a more rigorous approach to investment due diligence with regard to the energy performance of prospective acquisitions. A number of property owners have also taken steps to assess the exposure of their standing investments to the risks that the prospective regulations hold, and to begin to put in place strategies for dealing with them. Moreover, we’ve seen lenders begin to factor these issues into their lending decisions and this trend will almost certainly continue through 2013, as Government consults upon its detailed regulatory proposals during the year.

What is somewhat surprising is that office occupiers haven’t to any great extent begun to consider the risks from MEPS that face them. There are downside and upside issues here: Potential restrictions on sub-letting surplus space on the one hand but also, perhaps, having a whip hand in releasing, rent review and dilapidations negotiations in the run in to 2018.

Regulatory uncertainty
However, this particular area of regulatory risk (and opportunity, for the savvy) sits within a much broader context of policy and legislative ambiguity. Whilst the broad direction of travel in the UK is reasonably clear, there is a significant number of policy and regulatory reviews on-going which are creating uncertainty within the market on how the relevant policy objectives will be implemented in practice. This affects many aspects of the property lifecycle, and is a key concern for many office owners, developers and occupiers. Key examples include the future requirements of Building Regulations for new construction and refurbishment, the next iteration of which is due in 2013, and the future of the CRC Energy Efficiency Scheme, which will remain in simplified form until 2016 but is to be reviewed thereafter.

From 2013, new regulations extend the requirements for Energy Performance Certificates (EPCs) in commercial property. Perhaps most notably, from January 2013 it is a requirement for all non-dwellings over 500m2 frequently visited by the public to display a valid EPC in a prominent place clearly visible to members of the public. The definition of what property this includes will be open to some considerable interpretation, and we expect this to cause confusion amongst office owners and occupiers. This move also goes against the recommendations of a strong industry lobby to mandate the use of Display Energy Certificates in certain commercial buildings. It’s likely that this new requirement to display EPCs, a mechanism in which the market has little confidence, will fuel more intense debate in this area.

Mapping carbon penalties & incentives
More broadly, there is likely to be considerable focus afforded to the array of financial penalties and incentives which currently relate to the energy and carbon performance of commercial property. The Green Property Alliance, including the BCO, with co-funding from the Green Construction Board, has instructed Deloitte Real Estate to engage with representatives from across the sector, and Government, to assess the effectiveness, proportionality and consistency of the existing fiscal framework with a view to positively influencing future Budgetary policy.

So, 2013 is likely to be a year in which the fluidity of the sustainability agenda continues to pose challenges for office owners, occupiers and developers. With the political cycle moving towards the next iteration of party manifestos, we can expect intense debate in this area to continue.

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