POSTED 12 March 2020
It’s taken a while, but sustainability is increasingly becoming a fundamental driver in the commercial property market. As such, sustainability credentials which are over and above baseline statutory requirements are becoming both desirable and more commonplace in new builds. Indeed, many Local Authorities require new builds to go well beyond these baselines.
But what about existing buildings?
The benefits of sustainable buildings are well documented. However future proofing against changes in legislation and putting practical sustainability principles into existing buildings is often a more complex proposition.
More and more, investors are now recognising the benefits of sustainability due diligence to improve and subsequently ensure the long term value of their properties.
Initiatives like the Better Building Partnership through its Real Estate Environmental Benchmark (REEB) and the GRESB ESG Benchmark have provided accessible detailed systems to measure sustainability goal progression. This is a positive step for both the general commercial property market and specifically investors; enabling the improvement and better understanding of the sustainability credentials of existing buildings. Importantly, this enables the investment market to identify sustainability through green funds as a specific investment goal; which in turn drives it up the agenda and promotes innovation.
When and how best to access this information is however a consistent issue in most transactions.
The required data is generally obtained at the design stage of new build. For existing occupied properties, gaining such information can be a much more difficult exercise.
Experience has shown that obtaining the required level of information is not currently feasible within the typical timeframes of standard commercial property transactions. So how can the investment community be sufficiently informed during this critical process?
Looking at these key issues, Paragon’s Environmental Director, Dan Fitch outlines his thoughts on some of the current issues and how he sees the way forward in addressing them:
The industry is becoming more sophisticated across the board and investors are realising that measuring the sustainability credentials of a building goes way beyond just having a good EPC rating. Measuring and reporting are fundamental to understanding investment risks / opportunities. It enables property owners to identify poorly performing assets and to use this data to identify opportunities for improvement and / or innovation.
So what limits the due diligence process?
Time – This is the perhaps the key limiting factor on traditional due diligence reporting. Too frequently they are conducted in way too short a timeframe.
Lack of data – There is often little or no sustainability information available on a property, so reporting is regularly based on observation and not hard factual data.
Differing standards and attitudes of investors/landlords – some see the benefit of a good ESG assessment while others still see it as something of a tick box exercise.
In order to meet the sustainability objectives of our investor clients, Paragon can produce varying levels of sustainability report; from a brief subjective summary snap shot, to a much more in-depth benchmarking report which acts as a working document. Such documents have proved very effective at demonstrating the sustainability improvements and outcomes which many green funds now require.
However, in my experience the discord between what meaningful information is available within the transactional timeframe and what is required to effectively measure/benchmark a property could be greatly reduced by education and better communication between the relevant parties.
For example, I recently worked on a transaction with a Paragon due diligence team which included a building surveyor, M&E and BREEAM consultant on providing a sustainability assessment for an existing multi-tenanted office building on the south coast. This was the first time the client’s board had stipulated the need for a full sustainability assessment on which the investment decision was to be based. The vendor agreed to extend the usual transaction deadlines, notify the tenants and agents and allow the collection of essential data such as meter readings; technical information of the electrical systems, lighting, heating and cooling operations etc. This initial work took approximately 12 weeks – which clearly shows the difficulty in obtaining such information and the need for appropriate time to be added to the “normal” transactional timescale.
So what can be done to help?
The single most important thing to change is the sharing of information. Different parties have different roles in improving the overall process. Better platforms to add and share information on a building’s metering, energy usage, and detailed technical information would certainly help and reduce the time required.
Sustainability consultants are often embedded at investor level and need to understand what can be done during the standard transactional timeframe. I.e. a recognition that it is rarely feasible to obtain 100% of the required data. Sustainability consultants must work with the due diligence teams – surveyors, M&E and environmental consultants, to target the most meaningful data within these timescales. Dialogue between all these parties is imperative.
The landlords and tenants hold the key information in this process. If made available, the informed asset managers and sales agents would then present assets for sale with much of this information included – essential if a more joined up approach is to work.
At the conclusion of this transaction I recommended a collaborative forum be set up which included the investor and the Paragon team (including BREEAM consultant). This was both a review of the deal, but also somewhere in which we formulated a process to speed up any future transactions. It quickly became apparent that big gains could have been made to this process by one; simply informing all parties at the outset that a sustainability report was a fundamental requirement and two; providing a suitable platform for the sharing of information. It is my view that if the above had been in place, the relevant data could have been collated in 4 weeks rather than the 12 we actually needed.
I understand that not all transactions are straight forward; but the sustainability agenda is one which affects all aspects of business and we are now seeing it factored into investment decisions at the highest level. It will not be long before the language and availability of the benchmarking information will become familiar and more commonplace in this evolving and maturing process.
If all parties are aware of the need for better information – it should in theory make getting the information easier. The more open the conversation with agents, consultants, investors and tenants; the better the process will become. This in turn will promote the investment cycle to identify assets with more improvements, innovations and ultimately better performing and more sustainable buildings.
I would greatly appreciate the views of sales agents, asset managers and tenant occupiers on my observations. If you would like to talk to us about any of the above then please get in touch via firstname.lastname@example.org or 07725 791507
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I predict that in the very near future, such detailed benchmarking reporting will be embedded in the due diligence process as a matter of course as the sustainability performance of an asset is driven up the investment agenda. We may well be at the tipping point where investors are driving this forward. The transactional community of agents, landlords and asset managers will then see the benefit as they become more desirable and easier to transact.