British American Business 2008

British American Business 2008 | Practical Advice | Environmental Sustainability

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ENVIRONMENTAL SUSTAINABILITY

Building a greener future

Steve Timbs, CB Richard Ellis’s EMEA Building Consulting Director, examines green diligence and best practice building consultancy

The trouble with buildings is there is always something wrong with them. It’s inevitable, really, given that every building is a one-off; a prototype with its own idiosyncratic features and flaws. And while no investor would realistically expect to find the “perfect” building, it is probably fair to say that in the current market, real estate is more risk-averse and price-sensitive than ever, and even the smallest issue with a property can cause a transaction to drag and perhaps stall. In recent years, about one in five investment deals were delayed or aborted due to technical due diligence.

Expect this figure to rise. The question that faces vendors, therefore, is what can be done to safeguard a transaction, and ensure the smoothest possible sales process and handover? We all understand the vendor’s objectives – to achieve a guaranteed outcome (security of transaction), at the maximum price possible, within a definitive timescale. What needs to be appreciated is that in order to fulfill these objectives, a streamlined due diligence process needs to be put in place – from the moment the decision is taken to sell an asset, right up to completion of the deal. In the past, building surveys were used as a negotiating tool either to seek a price adjustment, to agree upon a retention for remedial works, or to act as a catalyst for future asset management action.

More recently, the vendor’s pack has been seen as the essential ingredient in making a property transaction work. Today, every detail of every building needs to be assessed, quantified and resolved. Statutory compliance, asbestos, concrete defects, cladding air conditioning and neighborly issues are all areas that can create excessive buyer contingencies; hence the risks must be addressed up front, and placed in context, so that the deal can progress. And within this rigorous due diligence process, of course, is the growing need for “green diligence” – factoring a building’s green credentials and sustainability pedigree into the transaction. A brand new, technical discipline, requiring a highly sophisticated engineering capability, green diligence is currently more “desired” than “required”. However, this is likely to change before long, as market forces increasingly demand proof of higher green standards.

Currently, green standards are patchy across Europe. France and Scandinavia are examples of early leaders, having energy certification systems already in place, and the UK’s equivalent comes into effect for commercial property in April. Similarly, some property sectors are further ahead than others on green awareness issues, with the logistics sector at the vanguard. As the logistics market has matured and intensified over recent years (largely due to the solid returns the sector offered while others fluctuated), tenants – specifically largescale retailers – have become more and more demanding in their specification requirements.

Matt O’Shaugnessy, head of industrial project management at CB Richard Ellis explains: “These customer-facing companies, such as the supermarket groups and national retailers, know that their green credentials, from transparent, sustainable supply chains right through to the premises they occupy, affect the way their The trouble with buildings is there is always something wrong with them. It’s inevitable, really, given that every building is a one-off; a prototype with its own idiosyncratic features and flaws. And while no investor would realistically expect to find the “perfect” building, it is probably fair to say that in the current market, real estate is more risk-averse and price-sensitive than ever, and even the smallest issue with a property can cause a transaction to drag and perhaps stall. In recent years, about one in five investment deals were delayed or aborted due to technical due diligence.

Well designed, green buildings are cost effective to run

Matt O’Shaugnessy, head of industrial project management at CB Richard Ellis explains: “These customer-facing companies, such as the supermarket groups and national retailers, know that their green credentials, from transparent, sustainable supply chains right through to the premises they occupy, affect the way their customers see them. It is not just about products and services any more: it is about green ethics, too, and this needs to be reflected in their real estate.” But there is another benefit too. Beyond the perception of “doing the right thing”, is the reality, as supported by recent studies, that well designed, green buildings can lead to increased productivity through efficient and effective floorplate design, better lighting and improved air quality.

And so to cost. A common view of green buildings is that they have a significantly higher initial cost than traditional buildings – generally commanding a 10-15% premium over market rates. However, this cost is falling fast. The need to comply with new legislation to reduce carbon emissions has increased the cost for a “traditional” building – so the extra premium to construct a fully sustainable building is now more in the order of just 5%. The occupier is therefore paying small, if any, premium for a sustainable building, particularly when the long-term, lower running costs of occupation are taken into account. So what does the future look like for green real estate? It will certainly be about occupiers wanting sustainable buildings, and being prepared to pay for them as the benefits become more apparent. Already, 35% of CB Richard Ellis’ due diligence engineering work is focused on carbon reduction schemes. If future demand follows estimates, this demand is expected to double within two years.

Whatever form of due diligence is procured, the market is about to undergo a significant change which will affect almost every transaction, driven by new legislation, technology and ethics. And there are challenges for all participants within the real estate industry. Businesses want better buildings; developers and investors need to understand how to provide them; and valuers need to tackle how to quantify the benefit of green buildings. Building “defects” and the soft gains associated with being “green” will need to be scrutinized more closely than ever, and the rapidly-developing green specializations will be vital in the real estate landscape of the future.

For more information, contact:
Tel: +44 (0) 20 7182 2000
E-mail: steve.timbs@cbre.com
Website: www.cbre.com

Case Study

The issue

A prospective purchaser commissioned CB Richard Ellis to undertake technical due diligence (TDD) on the acquisition of a 100,000 sq ft office building in the City of London. The building was listed within a Conservation Area, and consisted of offices, developed in 1998, within historic retained external facades and various heritage interiors. The internal environment was a problem, however, with the tenant reporting that the air-conditioning system provided insufficient cooling at peak times and was also prone to shutdown failure.

This resulted in staff issues, disruption to business and discord with the landlord. Some remedial measures had been put in place, yet the system would still not provide the capacity that might be demanded by the tenant if they increased their occupation to the full design potential.

Analysis

Research revealed that the building had been designed to operate on a 12-hour/five-days-a-week basis, rather than 24- hour/seven days-a-week which the tenant required. The system was already running at full capacity, consuming substantial quantities of electricity. On warmer summer days, it had shut down completely. In normal circumstances, if the tenant wished to operate its offices on a 24-hour basis in a building that had not been designed to support this, then it would be the tenant’s cost to alter the system. However, following a forensic review of the 1998 development construction documents (such as the employer’s requirements, contractor’s proposals, contract drawings, technical specifications and warranties), it became clear that that whilst the building had been designed for 12-hour/five days-a-week use, the base build specification appended to the lease indicated 24-hour/seven-days-a-week use.

Challenge

It was clear that there would be no recourse for the landlord with the contractor and professional team responsible for the development under the available construction warranties. The building and engineering systems had been designed and built in accordance with the employer’s requirements, and the tenant was within its lease terms as to its usage of the building. For the purchaser, this was a major issue, as the costs of resolving it were estimated to be in the region of £750,000. The vendor’s resistance to accept full responsibility for resolving the problem or to make an appropriate price adjustment, caused the transaction to stall.

Solution

To break the deadlock, the TDD team met with the vendor to discuss the problem and clarify the issue of liability, using their research to support the negotiations. Since the vendor could not negotiate on price, an agreement (Deed of Indemnity) was reached whereby liability for the issue remained with them beyond the sale of the building. This allowed the transaction to proceed, while safeguarding the purchaser’s financial and legal position.

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