With an anticipated flight to quality on the horizon with both tenants and investors demanding longer term and more sustainable warehouses, or sheds, it is paramount that landlord’s future-proof their assets.
In particular, landlords looking to enter the market, or who are already invested in it, should ensure that environmental, social and governance credentials (ESG) are at the forefront of their strategic agenda.
What is ESG?
The new RICS Valuation – Global Standards, or Red Book, defines ESG as:
“The criteria that together establish the framework for assessing the impact of the sustainability and ethical practices of a company on its financial performance and operations. ESG comprises three pillars: environmental, social and governance, all of which collectively contribute to effective performance, with positive benefits for the wider markets, society and world as a whole”.
How do you achieve this?
Landlords can look at future-proofing their assets and aligning their ESG credentials at every stage of the property’s life cycle.
1. Building the shed
With a large amount of space under construction, and a range of land earmarked for development, it is likely that the construction of sheds is going to continue to experience the same growth as has been seen in the market over recent years. As a result of this, the industrial and logistics sector is actively playing a leading role in driving a net zero future in line with the UK government’s commitment to bring all greenhouse gas emissions in the UK to net zero by 2050. When building a shed, its environmental performance is therefore becoming an increasingly higher consideration for occupiers and landlords alike.
Through designing and constructing the shed, by looking at operational efficiencies such as energy efficiency, waste reduction and increasing the use of renewable energy sources, the carbon off-set can create a net zero building.
Not only this, but using ethically sourced and recycled materials will assist in an ESG agenda.
Many of the standard form building contracts have terms which can assist in reducing environmental impact. For example, in the JCT Design & Build Contract 2016, the parties have the option to insert Supplemental Provision 8, Clause 4. This clause is designed to encourage the contractor to suggest economically viable changes to both the method of construction and the project to improve environmental performance.
2. BREEAM criteria
BREEAM is becoming increasingly important in the construction of sheds. Simply, BREEAM is an internationally recognised sustainability assessment method for infrastructure and buildings. Some areas which are evaluated include energy and water use, health and wellbeing, pollution, transport, materials, waste, ecology and management processes. Each building is given a rating benchmark level which can be compared against other developments.
Within the market, it is being noted that a common planning condition for either retrofits or new builds is for a building to be BREEAM compliant.
3. The legal documents
Either during the development of the shed or throughout its lifetime, it is likely that the shed will be let to a tenant by way of a lease.
Over the last few years, “green” clauses in both leases and development agreements have become more commonplace. The purpose of these clauses is to put into an agreement a series of provisions that encourage or require the developer, landlord or the tenant (as the case may be) to reduce the environmental impact associated with either the construction or use of the shed and improve the sustainability of the premises as a whole. These clauses can include obligations relating to the use of sustainable materials for repair and alterations or permit energy improvement works to raise energy efficiency.
Whilst the inclusion of “green” clauses in leases is often contested, the reality is that an improved environmental performance will bring mutual benefit for both the owner and the occupier. In the case of a landlord, if a shed is sustainable and energy efficient, this will likely increase the value of the landlord’s reversionary interest. For a tenant, improved energy efficiency will often result in reduced utility costs and/or service charge.
4. Fitting out or retrofitting
Constructing new buildings to be sustainable is not the only option to enhance the ESG credentials of a portfolio and there are plenty of opportunities to retrofit existing buildings with new technology which will increase the efficiency of the building and reduce emissions.
Retrofitting the building to improve sustainability could involve anything from converting lighting systems to LED lights, enhancing insulation, installing solar panels or installing a ground source heat pump. Small changes to a building can have a significant effect on its overall emissions.
When undertaking re-fits of existing buildings, property owners can opt to use recycled materials as an obvious method to reduce waste. Using more modern methods of construction (for example, manufacturing off-site as far as possible and using alternative methods of concrete production) are all further ways to reduce carbon emissions.
5. Operational considerations
Energy Performance Certificates (EPC)
The UK government has confirmed that all non-domestic buildings have a long-term goal to have an EPC rating of B by 2030. There are also proposed phases leading up to this deadline. These regulations apply to sheds and are a continuing obligation throughout the shed’s lifecycle. Unless there is a valid exemption, not complying with the EPC regulations carries a risk of fines of up to £150,000 and other penalties.
To avoid any compliance issues when developing or retrofitting a shed, a landlord should aim for the highest EPC band that a cost-effective package of measures can deliver.
For further information and considerations of EPCs, please refer to our previous article here.
Electric vehicle charging points
Within the UK government’s strategy to reduce greenhouse gas emissions to net-zero by 2050, they have included a commitment to a further £620m of investment into zero emission vehicle grants and electric vehicle (EV) infrastructure. New and existing commercial buildings with more than 10 parking spaces will need to have the requisite number of EV charging points. Throughout the lifecycle of the shed, it is therefore important that these continuing obligations are considered both at the outset of the build and during refit works.
By incorporating EV charging points into the build, it is anticipated that this will make the sheds more attractive to tenants which could result in higher rents. It may also help to offset any carbon and assist in achieving any ESG pledges. However, as the installation of EV charging points constitute development, such works will require planning permission.
Please see our previous article for further information on EV charging points here.
6. Dilapidations
Throughout the lifecycle of the shed, it is likely that a number of occupants will occupy the space, each undertaking and repeatedly fitting out and stripping the space creating additional material, resources and costs that are associated with this. This process is unsustainable and can potentially lead to new, serviceable or readily adaptable fit-outs being wasted.
Adapting a tenant’s leasehold covenants so as to not automatically require a tenant to strip out its fit out where it can be reused, will ultimately improve sustainability and avoid unnecessary waste.
Please see our previous article on the sustainability of yielding up obligations for further information and considerations here.
7. End of life – demolition and/or rebuilding
Demolishing and/or rebuilding a shed can be a timely, expensive and wasteful process. By ensuring flexibility within the building and in any subsequent fit-outs, deconstructing the shed will be easier and allow for materials to be reused or recycled. It will also allow the shed to be reconfigured and readapted to allow for a range of businesses to utilise the space post-occupation. To have ESG at the forefront will allow for an ESG focused demolition or rebuild.
As with the initial construction of the shed, the contracts for the demolition and rebuilding of a shed should reflect the need for greater environmental performance in carrying out the works.
At Stevens & Bolton, we have an expert team who have the capabilities to deal with each stage of the lifecycle of an I&L property. Please do get in contact with our commercial real estate team if you have any questions in relation to the above or require assistance with your shed as we would be delighted to assist.
Hannah Bristow