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Climate, sustainability issues and real estate

Vanessa Havard-Williams

Emma Bennett

Huw Baker

Béatrice Taylor

21 October 2009

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What and why?

What is “sustainability”?> Focus in the real estate sphere to date = ENERGY EFFICIENCY

> Thinking is becoming increasingly sophisticated

> Concept is coming to encompass a broader range of considerations

Why is it of increasing importance? > The environment and climate change are at the top of the political agenda

> The UK adopted the EU’s “20-20-20” Climate Change and Energy Package in April

> This year also saw the UK’s first carbon budget (34-42% by 2020, 80% by 2050)

> Tenant demands

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Lifecycle thinking

CONS

TRUC

TION

DESIGN

PROCUREMENT

OPERATION

DEM

OLIT

ION

RENOVATION

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Overview of presentation

1. Design phase

Overview of the current planning regime

2. Construction phase

Part L of the Building Regulations and sustainability clauses

3. Operation and renovation

Current policy and some commercial considerations arising from the direction in which this policy is travelling

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Design Phase

Planning for sustainable buildings

Emma Bennett

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Legislation and national planning policy

> Planning and Compulsory Purchase Act 2004 & Planning Act 2008

> EIA Regulations

> PPS 1, Delivering Sustainable Development (2005) and Planning and Climate Change (2007)

> PPS9, Biodiversity (2005)

> PPS10, Planning for Sustainable Waste (2005)

> PPG13, Transport (2001)

> PPS22, Renewable Energy (2004)

> PPS25, Development and Flood Risk (2006)

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PPS1

Planning authorities should expect new developments to (amongst other things):

> comply with development plan policies for decentralised energy and sustainable buildings unless it can be demonstrated that it is not feasible or viable

> secure a proportion of the energy supply of new development from decentralised and renewable or low-carbon energy sources

> take account of landform, layout, orientation, massing and landscapingto minimise energy consumption, avoid solar gain, minimise CO2 emissions

> give priority to sustainable drainage systems, water harvesting and waste water recycling and provide for sustainable waste management

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Update of PPS1

> Planning and Climate Change (2007) to be updated

> To be combined with PPS22

> Strengthened?

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The development plan

> Determined in accordance with the plan unless material conditions indicate otherwise

> PPS1 “in considering planning applications before RSSs and DPDs can be updated to reflect this PPS, planning authorities should have regard to this PPS as a material condition which may supersede the policies in the plan”

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The London Plan 2008 v Boris’ new draft (Oct 09)

Policy 4A.2: reduce CO2 by 60% by 2050 60% 2025 (draft policy 5.1)Policy 4A.3: future developments to meet the highest standards of sustainable

design and construction and demonstrate that sustainability is integral to proposal (draft policy 5.3)

Policy 4A.4 &Policy 4A.7: assessment of energy demand/CO2 emissions (Sustainability

Statement & Energy Statement) / reduction in CO2 emissions of 20% from on-site renewable energy generation (include decentralised) unless not feasible energy hierarchy – lean, clean, green (draft policy 5.2)Target emission rates E.g. Non-domestic buildings 2010 – 2013: 44% (% improvement on 2006 Building Regulations)

2013 – 2016: 55%(towards zero carbon 2019)

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The London Plan 2008 v Boris’ new draft (cont.)

Policy 4A.5/4A.6: decentralised energy 25% of heat and power in London from decentralised

Draft policy 5.4: identify opportunities for retrofitting (more detail in forthcoming draft Climate Change Mitigation and Energy Strategy)

Draft policy 5.11: major developments should be designed to include roof, wall and site planting, especially green roofs where feasible

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The Merton Rule, Merton-Plus Rule and beyond

> New developments to generate 10% of energy from on-site sources of renewable energy

> New developments to secure a proportion of energy from decentralisedand renewable or low-carbon energy sources

> all new residential developmentto meet “the highestcommercially viable level ofCode for Sustainable Homes”

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BRE Environmental Assessment Method (cont.)

> “BREEAM” is the most widely used environmental impact assessment method for assessing the performance of new or refurbished buildings. Rates buildings from ‘Pass’ through to ‘Outstanding’

> Looks at a building’s environmental impact from design, through to construction and proposed operation in terms of management, health and wellbeing, energy, transport, water, material and waste, landuse and ecology and pollution

> Provides developers and clients with market recognition for low environmental impact buildings

> Increasingly, ratings are taken into consideration by both LPAs and funders

> “All minor and major commercial development will be expected to be built to a minimum of BREEAM Very Good standard” (Merton, draft Core Strategy)

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Enforcement – planning conditions

“The development shall be constructed to achieve “BREEAM”excellent and shall be maintained permanently in that form to the satisfaction of the LPA.”

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Enforcement – Section 106 obligations

“Clause 4.6 - The Sustainability Plan1. On or prior to the Commencement Date to submit to the Council for approval

the Sustainability Plan.2. Not to Commence nor permit Commencement until the Sustainability Plan

has been approved by the Council as demonstrated by written notice to that effect.

3. Not to Occupy or permit the Occupation of the Development until the Council has confirmed in writing that the measures incorporated in the Sustainability Plan as approved by the Council have been implemented in the construction of the Development.

4. Following the Occupation Date the Owner shall not Occupy or permit Occupation of any part of the Development at any time when the Development is not being managed in strict accordance with the Sustainability Plan as approved by the Council and shall not occupy or permit occupation of the Development otherwise than in strict accordance with the requirements of the Sustainability Plan.”

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Enforcement

Barking and Dagenham

Trialling “Energence”

Merton

> A system that monitors the amount of energy produced by micro-renewables

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Sustainable infrastructure

> District heating projects

> MUSCo

> “The Developer shall ensure that….provision is made in the design of the Development for a connection to the district heating element of the MUSCO Network……in the event that the Council procures the installation of the MUSCO Network with sufficient capacity to serve the Elephant & Castle Regeneration Area and provided that the MUSCO Network is capable of connection to the Development……the Developer shall use Reasonable Endeavours to enable the connection of the Development to the MUSCO Networkto allow the heating, power and hot water requirements of the Development to be supplied through the MUSCO Network and to enable a data connection between the MUSCO Network….”

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Community Infrastructure Levy

Could CIL be used to finance sustainable infrastructure?

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Construction Phase

Construction requirements

Huw Baker

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Building Regulations: Part L

> Zero carbon homes by 2016 and zero carbon non-domestic buildings by 2019

> Part L aims to regulate the CO2 emissions from buildings through:

> reduction of energy use

> improvement of energy efficiency

> utilisation of renewable energy systems

> improvements in the operation of buildings

> Requirements set out in Regulations – guidance given in Approved Documents

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Consultation on changes to Part L

> 2006 - last major overhaul of Part L (25% increase in the energy efficiency requirements for buildings and building systems)

> Consultation on latest proposed changes closed 17 September 2009

> New Regulations due to come into force in October 2010> Proposed changes include:

> further 25% incremental increase in energy efficiency> energy efficiency requirements will now apply to all building spaces

where energy is used to condition indoor climate (e.g. computer rooms) and not just those areas where energy is used for human comfort

> the introduction of stringent benchmark for limiting the effects of solar gain in summer

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Solar gain

> Proposed new Regulations are not prescriptive as to how new buildings are to be glazed and/or the proportion of new buildings which are to be glazed

> However, they do stipulate that solar gains through glazing to occupied spaces within new buildings are to be no greater than would ordinarily occur through one or other of the following reference glazing systems:

> for every space that is predominantly side lit, the reference case is an East facing façade of the same total area that is 40% glazed (with window unitshaving a specified framing factor and solar energy transmittance);

> for every space that is predominantly top lit, the reference case is a horizontal roof of the same total area that is 15% glazed (with rooflights having a specified framing factor and solar energy transmittance)

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Consequential improvements to existing buildings

> Where extension / refurbishment / improvement works are proposed these must comply with Part L requirements

> Certain “consequential improvements” may also be required in relation to some works

> Regulation 17D – extension – initial provision of any fixed building services –increase to installed capacity of fixed building services

> Improvements only required where and to the extent work is “technically, functionally or economically feasible”

> Section 6 of Approved Document L2B (2010) provides guidance

> Measures that achieve simple payback not exceeding 15 years will generally be considered economically feasible unless there are unusual circumstances

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Transition from existing to new regulations

Transitional provisions not yet published but based on previous transitional provisions it is anticipated (but not guaranteed) that provided:

> Building Regulation Approval is sought and obtained prior to the new Building Regulations coming into force (circa October 2010); and

> Construction of the Works is commenced within 12 months of the new Building Regulations coming into force (circa October 2011)

the current existing Building Regulations will apply; not the new Building Regulations

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The JCT and sustainability

The JCT have just published a new Guidance Note on sustainabilityand introducing sustainability provisions into contracts

> JCT Framework Agreement – general sustainability

> JCT Constructing Excellence Contract – deleterious materials and environmental impact

> Value Engineering> Performance Indicators and Monitoring

> JCT Standard Building Contract 2005 Revision 2 - Sustainable development and environmental considerations:

“The Contractor is encouraged to suggest economically viable amendments to the Works which, if instructed as a variation, may result in an improvement in environmental performance in the carrying out of the Works or of the completed Works.”

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Operation & Renovation

The direction policy is travelling in and its commercial impacts

Béatrice Taylor

Vanessa Havard-Williams

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Energy Performance of Buildings Directive

A recast Directive 2002/91/EC is due by the end of 2010

i. cost-optimal levels of minimum energy performance requirements

ii. minimum energy performance requirements will apply to all “major renovations” (1,000m2 threshold is removed)

iii. Member States will be required to use national strategy to promote the uptake of low or zero carbon buildings

iv. buildings over 250m2 that are frequently visited by the public will have to display their EPC in a prominent place visible to the public

v. Members States will be required to implement the Directive’s provisions more rigorously than previously

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CRC Energy Efficiency Scheme

What is it?> An emissions cap-and-trade scheme for the UK aimed at large non-energy intensive

businesses (i.e. those with HHM and over 6,000MWh electricity use in 2008)

What will it do?> Require participants to report on their annual carbon dioxide emissions

and purchase sufficient allowances from the Government to cover these

> From Phase 2 of the scheme allowances will be auctioned and the number available will be subject to a steadily decreasing capto encourage energy efficiency

When does it come into force?> Phase 1 of the scheme begins in April 2010, with Phase 2 starting

in April 2013

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Some key features to note about the CRC

> Increasing cost of allowances

> League table ranking

> Recycling payments

> Compliance

> Trading of allowances

Government response to consultation> Tenants are now required to cooperate

with landlords

> Early action now due to receive further benefit

> No double sale in April 2011

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CRC: Landlord & tenant issues

> Responsibility for emissions: the counterparty to the energy contract

> Cost of allowances and compliance: can this be shared or passed through by landlords to tenants?

> Cash flow issue and recovery from tenants

> Reputation of landlord and league table

> How to incentivise tenants to be more energy efficient

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Green leases

> Potential vehicle for CRC Energy Efficiency Scheme management

> Place obligations on the landlord and tenant in respect of environmental considerations

> No market standard as not widely used at present

> Better Buildings Partnership released a Green Lease Toolkit earlier in 2009> model clauses developed for new leases / renewals

> also model MOU developed for existing leases

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Emissions reporting going forward

> Climate Change Act 2008> voluntary greenhouse gas reporting guidance published

September 2009

> to be reviewed by December 2010

> legislate for mandatory reporting by 6 April 2012 or explain why it is not doing so

> September guidance will be further consulted on, and is expected to form the basis of mandatory reporting

> Based on GHG Protocol and covers mainly Kyoto Protocol GHGs

> Many discretionary options as to how you report

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What does the guidance say?

> Recommends reporting on all emissions from entities (both UK and non-UK) over which a company has financial control

> Emissions covered: > Scope 1 (Direct) – from activities owned / controlled e.g. vehicles, LEASED ASSETS

> Scope 2 (Energy Indirect) – from sources not owned or controlled, i.e. purchased electricity, heat steam and cooling

> Scope 3 (Other Indirect) – from other sources not owned or controlled, e.g. business travel, waste disposal, supplied water, LEASED ASSETS

> Report on:> Gross figure – all emissions before accounting for purchased or sold reductions

> Net figure – reduce gross figure by amount of ‘good quality’ emissions reductions (i.e. carbon credits and green tariffs) purchased

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Producing sustainable energy

UK Feed-in Tariff> Coming in from April 2010 and will oblige energy companies to offer a fixed

tariff payment per kWh of electricity generated by selected renewables

> Also guarantees a minimum payment per kWh exported to the grid

> Projects up to 5MW are eligible (Renewables Obligation for larger projects)

> Designed to offer 5-8% return on investment and to be easy to administrate

> Other countries with feed-in tariffs have already seen roof rental agreements between renewable energy companies and commercial property owners

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BREEAM in use

> Released in March 2009

> Looks at:

1. asset performance

2. building management performance

3. organisational effectiveness

> Little standardisation of certification schemes, so difficult to use these as an investment tool although this is changing…

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Sustainable procurement

> UK Sustainable Procurement Action Plan 2007> Aims:

> lead EU in sustainable procurement by 2009

> transform market for sustainable solutions, making these more widely available and affordable for companies

> BREEAM excellent standard for all new builds and major refurbishments

> Centre of Expertise in Sustainable Procurement – Delivery Plan

> CESP published update on the Delivery plan in December 2008> Government estate set to fall short of 2020 water use targets

> Water efficiency drive planned

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Climate change adaptation

> EU White Paper in April 2009

> The Climate Change Act 2008 requires a national climate change risk assessment to be carried out every 5 years

> Adapting to Climate Change Programme to be overseen by ASC

> Mayor of London has produced draft adaptation strategy

> Insurance is going to be a key driver

> Poorly adapted assets may attract increasing insurance premiums over their lifetime and make them lessdesirable to future investors

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Pulling policy together: commercial implications

1. Financial drivers> Property with low sustainability ratings may attract lower rent> Link between sustainability and valuation

2. Regulatory drivers > CRC widely expected to influence market behaviour

> Planning authorities’ approach increasingly sophisticated> EU/national regulation of pre-existing and new build buildings

3. Market drivers > Tenant demand for sustainable new build > Investor need to green portfolios

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Keeping one step ahead…

> The risks of non-compliance with an evolving set of environmental standards are more easily quantified and mitigated than the risks of Government and industry not properly understanding sustainability

> The Government’s lack of understanding is leading to flawed sustainability legislation which may negatively impact industry

> It is therefore key that industry is able to steer a Government which does not fully comprehend the complexities of ‘sustainability’ in new climatic and economic conditions

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Contacts

Vanessa Havard-Williams Direct Tel: +44 (020) 7456 4280Email: vanessa.havard-williams@linklaters.com

Emma Bennett Direct Tel: +44 (020) 7456 4851Email: emma.bennett@linklaters.com

Huw BakerDirect Tel: +44(020) 7456 5180Email: huw.baker@linklaters.com

Béatrice TaylorDirect Tel: +44(020) 7456 4825Email: beatrice.taylor@linklaters.com