A new lease of life? Investigating UK property investor attitudes to low carbon investment decisions in commercial buildings

Abstract

This paper reviews the barriers and drivers for energy efficiency investment decisions in the commercial property sector in an effort to find signs of a new lease of life in the sector. A review of both the academic and ‘grey’ literature shows that the primary barrier is the lack of a compelling business case, as buildings with improved energy efficiency do not command premium rents or capital values. The UK Government has introduced policy drivers aimed at influencing change by requiring the mandatory improvement of poor energy performing buildings and tougher building regulations on new property. Senior UK-based investment decision-makers are interviewed to understand ‘real-life’ perspectives on how energy efficiency drivers affect the market and their decisions. The interviews reveal that where the business case justifies, investors will take a beyond compliance approach, but otherwise, there is little appetite for such initiatives. The market is coping with the government’s mandatory approach because the cost of compliance is manageable. However, the relatively low cost of energy within total business costs means that interest by landlords and tenants in reducing energy continues to be weak and this will present difficulties if policies are extended to capture more properties. Further research is recommended to see whether these conclusions are representative of the wider market.

Appendix: Interview schedule

The decision was made to develop five statements as a structure for the interview. The five statements with secondary question areas are set out below:

• One The Government has adopted a mandatory approach to improving the worst carbon properties, therefore EPC ratings will become more important when making investment decisions.

  • 1. Have you changed your approach to investing in response to the Government’s proposed changes to F&G EPC’s?

  • 2. How will you tackle this issue, are you just looking to comply or to improve?

  • 3. Do you think that this will create a market opportunity?

• Two Lots of barriers have been identified to investing in low carbon buildings with lack of material incentive being the primary one, therefore unless there is real upside opportunity or downside risk, nothing will happen.

  • 1. Does CSR have a role to play for your company when making these sort of decisions?

  • 2. How could the government create a situation where there is sufficient upside or downside to transform the market?

• Three If investors and occupiers become more concerned about EPCs, a tiered market will form, therefore investment property values will begin to reflect energy efficiency.

  • 1. Some commentators have said that the worst buildings have increased obsolescence, do you think that’s true?

  • 2. Do you think this will encourage investors to develop to higher standards or just comply with F&G rules?

  • 3. How do you think occupiers will respond in this area—do they care?

• Four If there is growing concern among banks about energy efficiency and they are less willing to lend on the worst properties, or require better terms, then the value of those properties will begin to fall.

  • 1. Loans are the lifeblood of commercial property, what role do you think the banks will end up playing in this?

  • 2. What about valuers—what is their role, they have been much criticised for not reflecting ‘sustainability’ is that fair and is that their job?

• Five The Government initiatives to improve the worst properties won’t extend to other buildings; therefore, this will end up as a compliance issue and very little will change.

  • 1. Do you think this will ever move beyond low cost/no cost issues?

  • 2. Are you struggling to figure out what needs to be done to comply?