Management

Is commercial property a Deal breaker?

5 January 2012

Concerns have been voiced over how the much-vaunted Green Deal will stack up when it comes to commercial buildings. Denise Chevin reports

Will the Green deal work for commercial property? And can the construction industry look forward to another slice of work on the back of it? Much of the debate so far about this flagship green policy has centred on whether it will provide enough of an incentive for households to make their homes more energy efficient. But there are just as many question marks over its take up among landlords and occupiers, where the Green Deal is supposed to provide a cost-effective way of helping to finance upgrades to their building stock.

In the domestic sector carrying out improvements will be voluntary. But under the Energy Act 2011, which passed into law in November, from 2018 any commercial property that does not have an energy performance certificate rated E or above will have to upgrade the property before it can be let.

“Any property that has less than an E on its energy performance certificate must have a Green Deal assessment, and any recommended works must be implemented, even if they fail to improve the rating to an E,” explains property energy consultant Andrew Cooper.

There are plenty of properties that will require an upgrade, as David Rees, a director at construction consultant Davis Langdon, points out: “Given that three-quarters of commercial property buildings were built before 1980, and half before 1939, there are significant numbers of buildings that will be at the low end of the energy performance certificate scale and could be affected.”

The Green Deal could, in theory, provide a cost-effective means of making buildings more energy efficient because the bill payer pays nothing up front for upgrades and repays the costs through savings on fuel bills over a certain period.

That all seems straightforward enough for domestic properties. But the Green Deal is not as clear cut for commercial property for a variety of reasons, not least the complicated relationship between occupiers and landlords.

Multi-tenanted

Commercial properties are usually occupied by more than one tenant, each of which might have different energy suppliers and different views about the Green Deal, says Patrick Brown, assistant director in charge of sustainability at the British Property Federation.

“It will probably work in a number of ways: the landlord may choose to simply make their own improvements aside from the Green Deal; they may end up brokering deals with a number of tenants; or perhaps come to some kind of cost-sharing arrangement.”

There is also the issue that if the tenant has made improvements under the Green Deal, but subsequently moves out and leaves the property vacant, the landlord will have to pay back the Green Deal loan.

Most experts agree that landlords with smaller portfolios or less prestigious properties, who cannot borrow readily from the banks, are the ones most likely to take up the Green Deal.

But there’s another big unknown: will the finances stack up? The basic guidelines are that the Green Deal must adhere to the so-called Golden Rule that energy savings must cover the cost of doing the work. Originally, the savings were to be have been made over 25 years. But studies by Richard Quartermaine, an associate director at construction and property consultant Cyril Sweett, showed that over this period, the cost of doing the work would outweigh the cost of the savings for most types of buildings.

The government has been clearly listening to the property industry’s concerns. At the end of November it introduced a consultation on the Green Deal, which contained a section for commercial property which introduced more flexibility into the process. Quartermaine remarks: ”The details set out in the consultation will certainly make the Green Deal more attractive for commercial property.

“The Golden Rule has been subtly changed so that the savings can be made over the lifetime of the energy savings measures. So if designed to last 60 years then that’s how it will be measured. Also, it will be possible to part-fund the measures yourself and the actual energy used in the building will be taken into consideration. Previously this was likely to be based on performance modelling, which would have been less accurate.”

“There are a whole range of measures too which will be covered by the Green Deal”, adds Quartermaine. “These cover fabric improvements as well as kit such as lighting and renewables”.

The British Property Federation’s Brown says: “The consultation suggests the government has listened to concerns. There are still a number of unanswered questions, but at least things are moving.”

There’s also another positive, says Davis Langdon’s Rees, in that the government is putting forward £200m as an incentive for people to take up the Green Deal. There areas yet no details on how it will be spent, or whether, in fact, it will apply to those in the commercial sector. “It is not an insignificant amount, and it is a very welcome gesture,” says Rees.

He adds: “Clearly there are issues to sort out, but we ought to strive as make it work. Yes it will be hard, but we’re in hard times. Anything that helps turn the wheels ought to be welcome.”

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