Retail buildings are typically the largest consumers of energy in the property industry. The Carbon Trust recently stated that the 40 largest shopping centres in the UK consume £40 million worth of energy per year and that for most retailers reducing energy consumption by 20% would have an effect on the bottom line equivalent to a 5% increase in sales.
If that is not motivation enough to implement change, governments continue to look at legislation to encourage energy efficiency improvements. The EU 2030 climate change policy sets targets of a 40% reduction in greenhouse gas emissions and a 27% increase in energy efficiency. National governments are responding with legislation to support these targets with initiatives of both the carrot and the stick variety. For instance in the UK, there are currently tax breaks for installing more efficient equipment i.e. Enhanced Capital Allowances and effective from 2018 Minimum Energy Performance Standards(MEPS) are due to come into effect. More information on this legislation can be found on CBRE’s global sustainability blog, The Green Perspective.
Despite this, many believe that energy efficiency is not getting the attention it deserves or requires to meet high level climate change goals. The recently released report “Sustainable Shopping Centres, Energy, Performance and Value” seeks to address this. Undertaken by CBRE, in partnership with the British Council of Shopping Centres (BCSC), the report seeks to raise awareness about the benefits of improving energy efficiency in shopping centres, and the costs of achieving these improvements.
Whilst there have been several academic studies investigating the impacts of sustainability related criteria on asset value, these have been focused on the commercial office sector and the specific challenges of the retail sector have largely been ignored. These include lower levels of building certification for retail buildings, lack of transparency around energy use and the tendency of retailers to focus on sales and footfall rather than costs of occupancy.
The CBRE and BCSC research analysed 35 shopping centres in the UK to ascertain the relationship between investing in energy efficient features and shopping centre market value. Data was collected around physical characteristics such as age, time since refurbishment and intensity of services; and financial data such as rental income, service charges and investment value. In addition, industry fit data was gathered regarding the costs to operate, maintain and replace energy intensive equipment typical of shopping centres. This data provided a robust and diverse sample representing different UK shopping centres, which the researchers classified under four types. A cash flow model was also developed to allow experimentation with a variety of energy cost scenarios and equipment replacement combinations, and subsequent results were analysed. The research ultimately revealed that investing in sustainable features could increase the market value of shopping centres in the UK by up to 5% for older, less efficient centres.
- Failure to invest in sustainable features decreases shopping centre values in the UK. It’s most defined for older shopping centres (those over 25 years) with up to and over 5% value gains to be made. For relatively modern centres (less than 5 years old), 1% value gains are still achievable.
- Substantial savings are also realisable by investing in new energy efficient equipment, which outweighs the replacement cost. The biggest savings are derived from replacing shopping centre lighting, escalators, lifts, and heating, ventilating systems, and air conditioning (HVAC) units, in that order.
- Maintenance and operating costs are also reduced with investment in energy efficient features. This lowers the shopping centres’ service charge resulting in the increased likelihood of tenants paying higher rents which will provide gains to the landlord driving an increase in value.
- Shopping centre owners should embed analysis of energy performance within the asset’s investment philosophy and due diligence process. For long-term asset holders, regular life-cycle assessments including benchmarking of energy costs against total service charge, and monitoring energy costs as a proportion of rental income, should be instituted.
While energy efficiency may not previously have been top of an asset or fund manager’s agenda for shopping centres, we hope that this research will prompt greater attention to, and investment in, energy efficiency measures to realise the benefits of lower energy consumption, lower maintenance costs and reduced risk.
It means that owners and investors should, as a matter of routine, incorporate medium-to-long term energy improvement plans into strategic asset management planning and to view a shopping centre’s energy credentials with risk in mind. As the report demonstrates, without implementation, value erodes.