How can retail property demonstrate its green credentials?

THE PLACE OF ESG PERFORMANCE CERTIFICATION AND HOW ASSETS CAN BE MEASURED

THE CHALLENGE OF NEW VERSUS OLD

The acceleration in ESG and sustainability requirements has not been evenly spread across real estate asset classes. As an example, offices, logistics and the build to rent residential sector have seen expectations, requirements, and standards increase considerably both pre and post pandemic. Not only that, but they have also seen an increasing take up of certifications and measures designed to assist stakeholders in understanding the conundrum of good vs bad stock from an ESG and risk-management perspective.

These sectors have seen considerable new build development, which has brought increasingly stringent building regulations and planning requirements that have driven up performance standards and certifications. For example, many new builds will have high energy performance ratings and are more likely to also have BREEAM New Construction ratings. The residential sector has seen the launch of both Home Quality Mark and BREEAM In-Use Residential in 2019 and 2020 respectively to quantify sustainability standards for that sector. These act as third party verified benchmarks for investors and asset managers in relation to ESG and give the security. Arguably, all these sectors are more mature in being able to articulate ESG performance and disclosures than retail, acknowledging the slightly calmer storm of sectorial and market pressure points.

So how does this relate to retail? If anything, it highlights how the sector is currently playing catch up as the post pandemic recovery continues. The challenges the retail sector has had are well documented; competition with online retail, the Covid-19 pandemic and the cost-of-living crisis affecting consumers’ wallets or changing their shopping behaviour. In addition, the sector also has seen considerably less construction over the past five years, particularly of new shopping centres. Although St James Quarter in Edinburgh opened during 2021, it remains the exception rather than the rule.

This results in aging building stock (particularly an issue across shopping centres and high street retail), which requires investment to bring it up to the required standard. Equally, it also means that ESG credentials and baselines are either not available or are not relevant to the actual performance of the property. This causes issues for stakeholders as they reach for a tool to put their minds at ease when making investment decisions. Retail parks continue to see good levels of investment across the country, but there are continued issues over a lack of direct control for landlords, so performance data is hard to understand or quantify.

WHAT DO WE USE TO ASSESS VALUE?

However, the retail sector is beginning to catch up and we’ve seen considerably more interest post-pandemic as green finance requirements are taking hold—particularly for shopping centre and retail park assets. High street retail remains a hard asset class to pin down as it lacks an appropriate metric that is ultimately occupier friendly or can gain buy in from all parties.

The question remains, how do investors and asset managers determine how the asset performs against ESG standards? Currently, it seems that the sector is reaching out for EPCs to fill that gap, a job that they are ill-equipped for and not designed to do. Whilst In-Use Performance metrics are likely to become mandatory for the office sector from 2023, there are currently no plans or timescales for a similar move in the retail environment. In a way this is understandable, there are real compliance risks as the potential for a minimum EPC rating of B is now only eight years away and will impact upon around 85% of all properties in England and Wales. However, this risk should be treated with a lot of caution due to the theoretical approach to the application of EPC assessments. The sector itself would benefit from a more impactful and meaningful framework for assessing properties. So, what options are there and how could this change in the future?

CERTIFICATION IN PRACTICE

There are a couple of certification options that we could see establishing themselves:

BREEAM In Use – The Building Research Establishments staple In Use performance certification has 64 certifications against its Retail scheme as of March 2022. The majority of these are held by institutional investors’ assets. BIU covers sustainability holistically and scores buildings from a Pass to Outstanding

rating based on its sustainability performance. There are no ‘Outstanding’ rated retail in the UK, but four ‘Excellent’ rated schemes (St James Quarter, The Brewery, Westfield’s London sites) and 11 ‘Very Good’ rated schemes).

Fitwel – There are currently two shopping centres with a Fitwel certification in the UK. Investors looking for market differentiation and wanting to focus on health and wellbeing rather than environmental metrics could find Fitwel a suitable certification methodology. Assets are scored on a 1–3-star basis to demonstrate the performance of assets across health and wellbeing categories. Fitwel offers a flexible, people-orientated methodology for existing assets to assess their impact.

Display Energy Certificates (DECs) – DECs have always struggled for traction outside of the public sector (where mandatory requirements exist) in the UK. They consider actual performance use within a building and therefore can help demonstrate actual property energy performance. However, DECs have been bypassed by the NABERS rating as the In-Use rating of choice in 2021 and it’s hard to see how they make a push into retail now given the lack of take up outside of the public sector.

LEED – From US Green Building Council, is a rating system that assesses the performance and credentials of a building’s construction, materials, design, and operational performance and provides guidance on interior spaces and shop fit used to conduct the retail sale of consumer product goods. Various multinational retail chains, including IKEA, are incorporating LEED principals for their showroom and storage areas.

“We anticipate that frustrations with EPCs will continue, and the sector will ultimately seek to respond and utilise a more meaningful certification—much like the office sector has with BREEAM and WELL standards.”

WHAT NEXT?

We anticipate that frustrations with EPCs will continue, and the sector will ultimately seek to respond and utilise a more meaningful certification—much like the office sector has with BREEAM and WELL standards.

The standard provides a structured, third-party audited framework that provides an improvement action plan. We see this as adding value and provides a transparent approach to making property and scoring improvements upon reassessment. The push towards net zero emissions is also well covered in the Energy module, as the BRE actively is working with other key stakeholders in the built environment sector to ensure both whole-life carbon is accounted for

For retail parks and high street retail, this challenge will likely continue and there are no easy answers due to the lack of direct landlord control and a continue reluctance for occupiers to want to work collaboratively on building certifications. A new solution may be required that will require industry and sector-wide collaboration between landlords and occupiers.

Furthermore, the fragmented ownership of lower grade stock is a considerable challenge. We would anticipate key owners of retail real estate to have a handle on this by the end of the decade. How we deal with the rest of the stock is less than certain.