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Sustainability Trends

 

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From carbon to community and everything in-between, here's what will affect you in 2015

In January, we launched our top three sustainability predictions for mainstream UK real estate at BAFTA. Here we discuss all our 2015 predicted trends in more detail and consider the implications for your business.

Download our full 2015 Property Predictions as a PDF.

 

 

 

 

 

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Investors will continue to divest from carbon intense assets, whatever the outcome of the UN Climate Summit >>

Hopes will run high this year that the COP21 UN Climate Change Conference in Paris will achieve a universal agreement on climate change. This is particularly true after the US and China, the world's two biggest economies, announced joint carbon reduction plans in 2014 after years of diplomatic negotiations.

Whatever the outcome of COP21, investors themselves are already stirring, with a fast growing fossil fuel divestment movement including big names such as the Rockefeller Brothers and Harvard University. This movement will continue in 2015 and reflects mounting concerns among long-term investors over the potential for stranded assets, as the political and technological landscapes slowly shift away from coal and oil products.

Fossil fuel divestment will be mirrored by both the expected increase in clean-tech investment and an exponential uptick of the corporate green bond market, predicted to be worth $100 billion in 2015. ESG-tilted capital flows will continue to increase globally -notably in the US, where sustainable, responsible and impact investing was worth $6.57 trillion, equivalent to 18% of the total assets under management in 2014.

In 2015, JLL predicts that real estate will benefit from this trend - new green bonds will be issued and perhaps most importantly, financial capital seeking "carbon-light" investments may start to view sustainable real estate as an attractive safe haven.
On the path to 2050? Real estate companies start publishing carbon reduction targets to get us there >>

The UK's ambitious target to reduce carbon emissions by 80% by 2050 against a 1990 baseline was enshrined in the Climate Change Act 2008.

UK commercial property owners with the most progressive sustainability approaches have already begun tackling this head-on. Our own analysis through the JLL/BBP Real Estate Environmental Benchmark found that these companies have been reducing emissions by circa 6% annually since 2008. And, in doing so, they have been reaping the financial benefits from efficient operations and more stable service charge costs.

However, those who have not yet started reducing emissions will have their hands forced this year by regulations such as the Energy Savings Opportunities Scheme and Minimum Energy Efficiency Standards.
Our research recommends a 3.5% reduction each year, alongside corresponding capital expenditure budgets, to achieve the required reduction by 2050. We predict that 2015 will be the first year where a number of UK real estate companies will show their foresight and explicitly set a carbon reduction goal in line with the national target.
The business benefits of tackling diversity trigger concerted
action >>

The lack of diversity in UK real estate was catapulted into the mainstream in 2014 by high profile campaigns from “Open Plan” and “Changing the Face of Property”, both spearheaded by JLL. These campaigns highlighted the intuitive business case: simply put, mixed groups are more representative of customers and aid problem-solving. For the UK’s leading 30 companies, those in the top quartile for diversity outperformed those in the bottom quartile in terms of return on equity by 11.1 per cent.

In 2015 the property industry will get serious about implementing diversity programmes as it starts to realise the benefits. This will lead to greater engagement with diversity charities such as Stonewall and the Business Disability Forum, as well as the promotion of opportunities for students from wide-ranging backgrounds and a continued ground-swell of apprentices. There will also be more benchmarking of diversity data as it relates to business performance, as well as changes to hiring practices. Occupiers and investors will respond positively to diversity within real estate advisory teams, leading to it becoming recognised as a key part of competitive differentiation.
Green = prime. Healthy becomes a differentiator >>

It is now standard practice for new Grade A buildings to come with a BREEAM, LEED or SKA rating. Those still holding out for the ‘holy grail’ green alpha may find it increasingly challenging to disassociate sustainability features from all other contributors to prime. However, it is a different picture where the "green features" represent an additional income stream: JLL's own analysis with Solarcentury reveals that recent commercial property transactions with solar photovoltaics have traded at premium prices, with greater liquidity, and rooftop solar PV is viewed as valuable in its own right, generating an additional income stream.

Finally, now that wellbeing and productivity are so high on the occupier agenda, reinforced by the WGBC's report in to "Health, Wellbeing and Productivity in Offices", the WELL Building rating is likely to gather momentum. In 2015, we wonder whether ‘healthy’ soon fall alongside ‘green’ as a defining factor of ‘prime’, particularly for office and residential schemes?
Income inequality and the skills crisis enter Boardroom
discussions >>

President Obama recently declared that inequality is “the defining challenge of our age”. The majority of the world's wealth is now owned by just 1% of the world's population and the real estate market reflects this inequality. This ongoing shift of income towards a small wealthy elite has had a massive drag on consumer demand, as well as affecting home ownership trends in the UK. In this sense inequality is linked to both the cause of the economic crisis and the weakness of the recovery that has followed.

Equally pressing is the skills crisis. Last year the CBI raised a warning flag that 50% of jobs will require a university education - or higher - by 2022. But many sectors are feeling the skills pinch already. In the construction industry, due to the lack of "new blood" trained during the downturn, the shortage of suitably skilled labour will be felt strongly in 2015, driving construction cost inflation, economic migration and interest in alternative methods of construction.

JLL predicts that both income inequality and the skills crisis will therefore enter Boardroom discussions in 2015. To tackle income inequality, some will enforce the Living Wage down through their supply chain, others will seek to drive workforce productivity and others will launch policies to help with childcare & housing costs. To tackle the skills gap, we'll see a much more sustained focus on continuous career and skills development, on-line training and possibly the launch of in-work educational opportunities for workforces.
The future is here. Leading real estate players look ahead to protect their business models >>

One of the reasons that successful businesses fail is that they focus on the marketplace of today and fail to plan for the future. The failure of Kodak in the face of digital photography and IBM to anticipate personal computing are two of the best-documented examples.

So when we look forward, it's with a view to placing better strategic bets today. We can't make predictions, but we can safely say that climate change, demographic shifts, technology, urbanisation and resource constraints will massively impact the real estate industry. Some players such as Crest Nicholson, TIAA Henderson, Grainger and The Crown Estate have already launched major futures research reports, and are actively incorporating futures thinking into their business strategies. The question is are you?

In the last 6 months, JLL has been exploring the future of the property sector, identifying the megatrends that we think will affect our sector between now and 2050. Look out for these megatrends - and our perspective on what they might mean for your business in 2015.
Collaboration by landlords and tenants to comply with the Energy Savings Opportunity Scheme >>

For many companies, 2015 will be the year in which they focus on complying with the new Energy Savings Opportunity Scheme (ESOS). What does that mean practically? For many, it means continuing to measure their energy footprint, but more significantly either undertaking energy audits, implementing an Energy Management System or commissioning Display Energy Certificates across the portfolio. The key challenge is completing the compliance process and notifying the Environment Agency by 5th December 2015.

In JLL's perspective, ESOS creates an unprecedented opportunity for landlords and tenants to collaborate, as energy, in most commercial buildings, is typically procured by the landlord but consumed by the tenant. This is a welcome opportunity to break the well-known ‘landlord-tenant divide’. Amongst our clients, we hope to see a shared approach to energy auditing and potentially a shared approach to the implementation of the audit findings. Likewise, collaborative thinking will potentially highlight "win-win" future opportunities to reduce energy use as leases are renewed and service charge budgets set.
Energy compliance dominates the workload of real estate sustainability professionals >>

A running theme throughout many of our predictions, 2015 is definitely shaping up to be the year when real estate sustainability professionals will spend much of their time wrestling with energy and climate change compliance. The CRC and carbon reporting regimes remain, ESOS really kicks off, Allowable Solutions demands by Local Authorities play out (even before the legislative regime is enabled through the Infrastructure Bill 2014/2015), industry will slowly wake up to the implications of the Heat Network (Metering and Billing) Regulations 2014 and minimum EPC levels for rented properties in 2018 are likely to become law. It’s overwhelming just thinking about it!

The majority of this legislation is unaffected by whichever party comes to power in 8 May 2015, as it is driven predominantly by the EU Energy Efficiency and the Energy Performance of Buildings Directives. Of course, the game-changer would be a yes vote to an EU exit in 2016.

But for 2015, the simple reality is that real estate is the sector which remains most cost effective and politically acceptable to target for carbon emission reductions. So expect to be busy in 2015.
Scope 3 footprinting in real estate takes off >>

Thanks to the CRC, as well as mandatory carbon reporting for the listed sector, carbon reporting has been on the rise. However, whilst the last 15 years have been defined by companies and funds getting to grips with carbon measurement and reporting for their direct operations (Scope 1 and 2 under the GHG Protocol), JLL predicts that 2015 will see the next phase of real estate carbon reporting commence, with the increasing collection and publications of Scope 3 carbon footprints by the real estate sector.

There are already real estate companies in the vanguard - namely British Land, Unibail-Rodamco and Sonae Sierra - and in turn, they have been able to learn from leaders in other sectors, such as BT in telecoms and Bank of America Merrill Lynch in finance. For real estate, the biggest Scope 3 emission categories are typically associated with leased assets, development activity and office worker/visitor travel.

Scope 3 - or indirect - emissions are typically in the range of 85 - 95% of a company's total footprint. So, whilst carbon taxes are most likely to be applied to a company's direct emissions, any future carbon price (or energy price rises) would have very significant implications for an organisation's business model and its portfolio. There are huge opportunities to drive major emission reductions through collaborations with the supply chain and with tenants to reduce emissions, but for 2015, we anticipate more companies will simply start getting to grips with the scale of their indirect impact.
Sustainability training for whole workforces becomes the norm >>

Given the complexity of the sustainability issues confronting the real estate sector today, professionals working in the built environment require a more comprehensive understanding of sustainability than ever before. Added to this, we are at a point in 2015 where there are multiple UK organisations – especially those that have been on their sustainability journey for at least 5 years – who are seeking to embed sustainability within all business decision making.

To do this requires the entire workforce to feel both inspired and confident about why sustainability matters to their day to day work and to know how to integrate it in to their property processes and decision-making. What we’ve learnt – both through working with clients and with our own workforce in the UK, Europe and the Middle East – is the solution is a combination of engaging ongoing communications and a base level of sustainability training for the entire workforce. This can then be supplemented by role-specific training, which will look very different for an HR manager, an investment manager or a Head of Real Estate within a major corporate.

So for 2015, JLL expects to see a significant up-swell in all types of training programmes – executive training for senior leaders, entire workforce training (often online to be most cost effective) and role-specific training. This is certainly an area of skills development which real estate businesses will be seeking to solve in 2015.
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