19 December 2018

“Our greatest threat in thousands of years”- is the real estate industry listening?

Opening the UN’s recent climate change summit in Katowice, Poland, Sir David Attenborough described climate change as “our greatest threat in thousands of years”. His message, at least in part, was no doubt directed at the real estate industry, where the sector purportedly accounts for over 25% of global carbon emissions. With David’s message in mind, what can we expect to see on the real estate “green” agenda in 2019?

CRC

Firstly, 2019 marks the “end” of the CRC Energy Efficiency Scheme (CRC), the mandatory emissions trading scheme for large businesses and public sector organisations. 2018-2019 is the last CRC compliance year and CRC participants must surrender allowances for the final time by 31 October 2019 (i.e. a sufficient number to cover their emissions for the current compliance year, ending 31 March 2019). We suspect many in the industry (including lawyers) will breathe a sigh of relief as the administrative burden of compliance falls away (together with the need for drafting in leases and share purchase agreements). However it is worth noting that CRC obligations will continue. Environment Agency guidance has recently confirmed that CRC participants need to maintain up-to-date contact details on the CRC Registry (until March 2022) and maintain a CRC evidence pack (until March 2035). In addition, if participants need to make corrections to historic reports, the deadline is February 2022, with the risk of fines for non-compliance lasting until March 2025. So 2019 perhaps isn’t quite the end…especially from a due diligence perspective?

There are 2 related points of note, even though the government is not replacing CRC:

  • By abolishing CRCs the government will not lose out in monetary terms. The climate change levy (“CCL”), which is a carbon tax that adds to energy bills of business and public sector organisations, will increase. The CCL is simpler than the CRC in terms of collection as the CCL is levied by the energy suppliers when they bill the consumer, where the sums collected are then passed on to HMRC.
  • 1 April 2019 marks the start of the streamlined energy and carbon reporting regime (“SECR”). For the period from 1 April 2019, quoted companies, large unquoted companies and large LLPs must report on greenhouse gas emissions, energy consumption and energy efficiency. We anticipate guidance shortly.

EPC Consultation

In August, we reported on the government’s consultation on energy performance certificates (EPC). The consultation closed on 19 October 2018. We are likely to see the government’s response in 2019. On the face of the consultation, it looks like a genuine effort to re-visit not only the failings of the current EPC regime, but also the opportunity for a complete refresh, particularly in the context of those climate change concerns highlighted by Sir David. Will the government fully embrace the opportunity? We will soon have an indication one way or the other. At the very least, we can expect the government to clarify uncertainties that remain in the context of EPCs and minimum energy efficiency standards (MEES)- the status of listed buildings, “shell and core” properties and EPCs on lease renewal- unsurprisingly, each identified by the British Property Federation in their response to the consultation as demanding clarification.

MEES

On 29 November 2018, the government published draft regulations to remove the “no cost to landlord” principle in domestic property. In summary, the regulations now require that a residential landlord makes a minimum commitment of £3,500 (VAT inclusive) out of its own “pocket” to improve any F or G rated EPC on a property to the minimum standard of E. This contrasts to the original position, which assumed that landlords could fall back on green deal financing for necessary improvements. If no works are available within the cap, or all works within the cap have been carried out but the rating still rests below E, the landlord must look to rely on an exemption. It is worth a reminder that commercial landlords benefit from no such cap- there is no exemption available to commercial landlords on the grounds of affordability.

Being green…in two thousand and nineteen…

2018 has seen a number of encouraging developments as the industry embraces the “green” agenda. In early December, Frances Ivens reported in Property Week that Argent had secured a “green loan” facility from Wells Fargo, HSBC and Helaba. The loan will fund two new office buildings in Kings Cross, which according to Property Week, will have at least a 50% lower carbon footprint than a typical office. In response to the question “Is this set to be an increasing trend?”, Jon Lovell co-founder of consultancy Hillbreak, replied in frank terms on twitter: “Yes”. On this note, 2019 could see the government build on March 2018 recommendations from the “Green Finance Taskforce” to accelerate the growth of green finance, as previously reported.

In December, FTSE Russell also launched green index (FTSE EPRA Nareit Green Indexes), “designed to allow investors to identify real estate companies with strong sustainability performance”. There is little doubt that ESG credentials are attracting greater attention in the real estate industry, and the launch aptly illustrates this. On this note, the Urban Land Institute recently held a panel discussion, entitled “ULI UK Capital Markets Forum: The Rise of ESG”, and this report by John Forbes of John Forbes Consulting is an excellent summary. As John states, “a gradual shift over the last decade has achieved real momentum in the last two years”. Does the index launch mark a further key step in the right direction? As Gareth Lewis, head of real estate research at PwC UK, stated on twitter in referring to the index launch: “I’m sure there will be ongoing debate about what ‘green’ is & whether this approach incentivises the right kind of behaviour by investors & operators, but they have the clever folks at @GeoPhy involved & on balance I think this is encouraging...”. December 2019 will be a great opportunity to re-visit the question.

Edward in a senior associate in our Commercial Real Estate team.

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