making the change

Capita Symonds’ Alan Somerville was a keynote speaker at the recent Scottish Low Carbon Investment Conference. A summary of Alan’s talk – “Creating a Low Carbon Built Environment - Rhetoric into Reality?” – follows…

1) The Topic

For a number of years the real estate market has debated topics such as sustainable buildings, green leasing, energy efficiency etc. The market aspires to deliver a low carbon built environment, however, there are structural issues within the market place which inhibit the wholesale move towards low carbon buildings and a market in ‘Sustainable Real Estate’.

Will the market continue to just pay lip service to sustainability or have energy prices and the environmental agenda now finally reached a level whereby the market will see real value in those buildings which are low carbon? Have we reached the energy tipping point?

2) The Issues

• Cost

‘Green’ or sustainable additions to a building are generally an enhancement of its specification. This increases the overall cost of the building. The real estate market is driven almost entirely by the desire for profit. Therefore any extra cost has to be matched by an equivalent increase in return.

• Value

The fundamental driver of the real estate market is finance. An essential component of securing finance is the valuation of the building. Currently valuers will not ascribe enhanced building value due to a building being sustainable or low energy. Much valuation in the market is carried out on behalf of the investor community. Investors generally are driven solely by financial return and would be unwilling to sacrifice asset performance for the privilege of owning a more sustainable building. Therefore any low carbon enhancement to a building is unlikely to be reflected in the capital value of the building.

• Purchasers

Commercial occupiers and residential purchasers are currently not willing to pay extra for low carbon buildings. Pricing is still driven primarily by location. Therefore any low carbon enhancement to a building is unlikely to deliver extra revenue from the building despite the inevitable extra cost.

• Sellers

Building owners / developers are generally advised by property agents as to what they should build & what the value / revenue is likely to be from the building or development. Property agents at the current time are unlikely to advise their clients to create low carbon buildings that don’t adhere to the traditional needs of purchasers or price the buildings at a level above the current market.

• State of the Market

The state of the real estate market is well documented. It is in a precarious position with a dearth of available finance and limited demand from residential or commercial occupiers.

All parties within the market on both the supply and demand side are focussed firmly on the bottom line. There is little or no room within projects for any kind of discretionary spend. This should have the effect of reducing even further the appetite for investment into low carbon real estate unless there is a structural change in the market.

3) Understanding Energy - The Catalyst for Change?

Are we now at a point in the market where the understanding of energy cost is at an enhanced level & the widely held view of likely continual price increases will finally start to have a demonstrable effect on the market?

Occupiers and purchasers of property must now surely factor the cost of energy into their decision to buy or lease. There is anecdotal evidence within the housing market that purchasers are discriminating against older properties which have perceived higher running costs. Commercial occupiers in the public and private sector are looking in detail at energy efficiency within their estates. Add to this the clear governmental drive towards low carbon and renewable energy then you have a ground swell of pressure which is driving the market towards changing the way it has operated for decades.

Is this changing market likely to evolve into a new world where a low carbon approach delivers definable value or is it a temporary state of affairs until the real estate market recovers? Have we reached the energy tipping point where finally a market will created for Sustainable Real Estate?

Alan Somerville (alan.somerville@capita.co.uk) is Director – Energy, at Capita Symonds.

For further information go to www.capitasymonds.co.uk/energy