Developments sector focus: Real estate must shine a new light

In an age of growing environmental awareness, there has never been such a sharp focus on climate change and energy transition, writes Carol Nisbet.

This presents both a challenge and opportunity for the UK commercial property sector, which is coming under increased scrutiny for its significant impact on the environment.

A 2016 report by the World Economic Forum revealed that the real estate sector uses more energy than any other and is a growing contributor to global CO2 emissions.

It highlighted the sector’s consumption of more than 40 per cent of annual global energy – higher than transport and industrial sectors – with 20 per cent of greenhouse gas emissions originating from buildings.

Commercial buildings account for 40 per cent of raw materials globally – equating to three billion tonnes per annum – and the

report forecasted a 56 per cent increase in building CO2 emissions by 2030.

The sector is already subject to a raft of energy-related legislation. A 2010 directive on energy performance made it mandatory for most European properties to hold an energy performance certificate (EPC) and monitor energy use.

Here in Scotland, nearly all commercial property sold or leased must have a valid EPC.

Additional legislation came into force in 2016, requiring many commercial properties to undergo an assessment of carbon and energy performance and carry out improvement measures.

England has a tougher regime of minimum energy efficiency standards, which make it unlawful for a landlord to lease properties with an energy rating below a prescribed threshold.

While these standards do not currently apply in Scotland, it can only be a matter of time before we see similar regulations.

Therefore, investors and owners with Scottish-based assets need to take steps to reduce their carbon emissions before costly

regulation and enforcement sets in.

Occupiers will be impacted as the costs of improvement measures are passed down the chain.

Increasingly, commercial landlords require tenants to identify environmental performance improvement strategies, carry them out and provide detailed energy data.

Climate change is also playing a significant role in many commercial property investment decisions.

While taking a proactive approach in advance of further legislation may be costlier in the short term, adapting existing buildings and constructing new developments to be more energy efficient and less reliant on fossil fuels can create more resilient, and therefore more valuable, assets in the longer term.

Any business that does not take steps to address the environmental efficiency of its properties also runs the risk of devaluing its portfolio, making it harder to sell or lease its assets in the future.

With predictions of a substantial increase in commercial property CO2 emissions, there is little doubt that further legislation will be introduced to regulate the sector.

Property owners and occupiers must plan for this inevitability to avoid a longer-term impact on their business.

Carol Nisbet is a partner at law firm CMS

This article first appeared in the spring 2020 edition of The Scotsman’s Vision. A digital version can be found here.