By Kiran Patel
The latest Intergovernmental Panel on Climate Change (IPCC) report showed we still have a chance at keeping global warming levels below 1.5 degrees, but only with systemic, urgent change.
As buildings use about 40 percent of global energy and around 40 percent of the world’s natural resources, real estate needs to respond rapidly, and our window of opportunity to halve emissions by 2030 is closing. This need is set firmly against a backdrop of regulators, investors, occupiers and end clients demanding greater sustainability credentials for assets as part of the wider push towards corporate (and investing) net zero.
In what is a fast-changing regulatory environment, decarbonisation of existing buildings forms a critical part of governments’ net-zero strategies. In the United Kingdom, for instance, the government’s minimum energy efficiency standards consultation sets a target for a minimum EPC rating to a “B” by 1 April 2030 for all commercial rented property, with an interim milestone of EPC “C” by 2027.
Race against time
Research from Savills in 2021 concluded that 87 percent of the office stock in major UK office markets was rated EPC “C” or below. Industry estimates suggest that up to 80 percent of London’s office buildings do not meet an EPC “C” rating and will need to be upgraded by 2030 — given the tightening of requirements — to a “B” rating by then. This is equivalent to refurbishing around 15 million square feet (1.4 million square metres)every year in the UK capital. Furthermore, almost 10 percent of London’s office market is currently rated “F” or “G”, meaning that it will be illegal for this space to continue to be let.
Reflecting on these statistics, a significant volume of office stock — which is the biggest sector in the industry held by asset managers — will become obsolete in the short- and mid-term without investment to future-proof assets and improve EPC ratings to the minimum requirements. Common EPC improvement measures include building envelope improvements, such as roof, wall, floor and glazing insulation; installment of draught-proofing; and improving airtightness. Others include heating, ventilation and cooling improvements. These would require replacing old or inefficient boilers and air conditioning systems with high-efficiency alternatives with heat recovery systems, variable speed drives, improved temperature controls and programmable thermostats. Lighting upgrades are also necessary. Replacing traditional lights with LED or fluorescent lights, installing sensors and controls for dimming, occupancy controls, and daylight sensors are all vital upgrades. And installing renewable-energy systems, such as solar panels, if possible, is also expected.
Although the capital expenditure cost of carrying out such extensive work can appear daunting, not investing in property upgrades of this nature runs the risk of increasing obsolescence and being left with stranded assets with limited value.
The energy performance gap
EPCs are created through modelling, predicting the energy use rather than using measured energy use. The EPC calculations use standardised assumptions about occupancy, heating patterns and geographical location. This allows EPCs for the same building type to be compared. In other words, EPC provides an energy-efficiency rating for the property itself, rather than an in-use rating.
Statistics from Europe show that there is often a gap between predicted and actual energy use in buildings. This is known as the “performance gap”. An EU-funded project called Build2Perform, analysed more than 500nondomestic buildings in the United Kingdom and found that there was an average performance gap of 40 percent. Furthermore, a study by the Technical University of Munich in 2017 analysed data from nearly 900nondomestic buildings across Europe and found that on average, there was a 30 percent difference between predicted and actual energy use.
The performance gap can be influenced by factors such as occupant behaviour, maintenance and changes in building use over time. It is important to use EPC ratings as a benchmark, given their limited scope, but also to monitor actual energy use in buildings to assess the actual performance correctly. The goal to reduce carbon requires actual data collection with a pathway to net zero.
As concluded in the European DataWarehouse (EDW) EPCs across Europe analysis, common conversion factors are needed to make sure that an “A” rating in one country corresponds to a similar level of efficiency in the others. This will benefit stakeholders who work cross border, which is a “must” in today’s globalised world.
One way some countries are approaching the performance gap is through building in-use performance ratings. In Australia, in-use performance ratings have been used since 1998. NABERS stands for the National Australia Built Environment System and is an in-use energy, water, waste and indoor- environment rating system. The data must be from in-use building performance (not predicted, as with EPC data). NABERS ratings have reduced the Australian building performance gap by an average of 30 percent to 40 percent. Itis so successful that UK industry groups spent time looking at how to take NABERS and translate the rating for the United Kingdom. The result is that there is an office-specific NABERS UK rating system that is starting to be adopted in the United Kingdom.
Answering the challenge
The energy-performance gap between the designed performance of buildings and the actual performance in use, poses a challenge to asset and property managers to ensure that buildings are operating as efficiently as possible, given their specifications. The real estate fund management industry needs to actively take steps to answer this challenge by gathering and assessing monitored energy data for its assets under management, and also targeting unregulated energy improvement measures to complement the EPC rating and better inform business decision-making. Setting aspirational EPC targets, such as a minimum EPC “A” rating in the United Kingdom, or equivalent rating in the European context for new development and major refurbishment commercial projects, will reduce the risk of obsolescence. Enhancing occupiers’ engagement and encouraging tenants within leasing contracts to acquire green energy, provide consumption data and minimise the impact of the fit-out works will aid the pathway to net zero.
Looking ahead, there is likely to be extensive activity regarding EPC ratings as momentum around net zero gathers pace and core stakeholders gravitate towards best-in-class assets. This is not going to happen overnight, but all of us operating at the highest level of the real estate sector have to start in earnest now.