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SUSTAINABLE SHOPPING CENTRES ENERGY, PERFORMANCE AND VALUE

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  • SUSTAINABLE SHOPPING CENTRESENERGY, PERFORMANCE AND VALUE

  • Foreword

    This report is the third in the BCSC low carbon series. The first report, Accelerating Change: Towards Low CarbonShopping Centres explored the opportunities and challengesfor furthering energy efficiency in retail property. Followingthis, our Cutting Carbon, Cutting Costs AchievingPerformance in Retail Fit Outs report provided, for the firsttime, a collection of real life energy efficient retrofits forretail units. This third report takes the positive findingsfrom the previous report which explored operationalimpacts, and looks at it from the asset value aspect.

    Managing energy efficiency is not just about reducing youroperational costs and being able to reduce service chargefor your occupiers. This report, finds a material impact on your retail asset. These are not insignificant amounts,sometimes up to 5%. Through our three part series, wehave found the case for energy efficiency so compellingthat those which are not capitalising on the efficienciesmust ask themselves why not.

    The old adage of you cant manage what you dontmeasure is proven again to be true in this report. With a better understanding of your energy use and your

    maintenance plans you are able to reduce the operationalcosts and therefore derive a better return on your asset.We recommend a rethink-replace strategy; where youshould be asking whether your current position is optimal.

    All players in the retail property industry need to takemedium to long term energy plans into their strategicasset management planning. Those that do not are at risk of devaluing their assets.

    We are proud to have partnered with CBRE to carry out this research and I would like to thank the BCSC Low Carbon Working Group for overseeing this work.

    David AtkinsBCSC PresidentHammerson, Chief Executive

    Shopping centres have much to gain from energy efficiency. Retail is the second largest consumer of energy in the UK, costingthe sector 3.3 billion in 2013. The Carbon Trust states a 20%reduction in energy costs for retailers equals a 5% increase in sales.This represents a significant amount of money that is being wastedthrough low awareness of energy use in retail environments.

  • Sustainable Shopping Centres:Energy, Performance and Value

    Researched and written by:Dr Neil Blake, Head of EMEA Research, CBRERichard Holberton, Senior Director, CBRERebecca Pearce, EMEA Head of Sustainability, CBRE

    CBREHenrietta House Henrietta Place London W1G 0NBT: 020 7182 2000

    BCSCCharter House13-15 Carteret StreetWestminsterLondonSW1H 9DJwww.bcsc.org.ukT: 0207 227 4480

    ISBN: 978 1 897958 64 3 BCSC (British Council of Shopping Centres) 2015

    DisclaimerThe text of this publication may not be reproduced nor may talks or lectures based on material contained within the document be given withoutthe written consent of BCSC.

    No responsibility for loss occasioned to any person acting or refraining from action as a result of the material included in this publication can be accepted by the authors or the publishers.

    Acknowledgements

    BCSC would like to thank the following members of the BCSC LowCarbon Working Group which acted as the project steering group,and colleagues at CBRE for their support on this research:Carl Brooks, MJ Mapp / Helen Drury, intu / Sophie Elliot, RedwoodConsulting / Victoria Harris, Hammerson / Nick Hogg, Deloitte /

    Davinder Jhamat, BCSC / Tim Keeping, The Marlands / StuartLaidlaw, Capital & Regional / Mitch Layng, M&G / Angus McIntosh,Real Estate Consultant / Alan Silvester, JLL / Bill Wright, WrightEnergy and Environment / Kwashie Yawson, BCSC.

    01 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • 02

    Contents

    SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    Foreword

    Executive summary 3

    1 Introduction 5

    2 Data, methodology and analysis 8

    3 Results and scenarios 12

    4 Asset management issues and landlord-occupier relations 16

    5 Legislative and policy framework 18

    6 Owner, retailer and consumer interest in energy efficiency and sustainability 21

    7 Investment considerations 23

    8 Optimising operations 26

    9 A whole building approach 29

    10 Conclusions and recommendations 31

    Appendix 1: Literature review 34

    Appendix 2: Model structure and principles 35

    Appendix 3: Scenario analysis details 36

  • 03 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    This report finds that there is a persuasive case forimproving energy efficiency and enhancing asset value,through the complete or partial replacement of energyintensive equipment, with new apparatus that offersenergy saving features as standard. This producespositive impacts in terms of reduction in energy andmaintenance costs, and upward shifts in shoppingcentre value.

    The apparent business case for equipment replacementis so compelling, especially for older centres, that it isworth asking why this has not been carried out morewidely already. It is likely that there is a range offactors at play including constraints on the availabilityof capital, limited awareness of the costs and benefitsof equipment replacement, and the potential role offixed service charges in preventing upgrades.

    The scale of value benefit depends on the nature of the intervention and the pre-existing condition of a centre. Information from 35 UK shopping centresforms the foundation of a valuation based modelstructure which assesses the impact of differentchanges to energy using equipment on value. This isexamined across a range of centre types accounting forbuilding age, the level of services provision and energyuse at the centre. The purpose of developing a modelof this type was to provide a rigorous numericalframework for assessing the value impacts of differenttypes of intervention for a range of centre types. The framework examines the value effects of variousassumptions such as energy costs. Crucially, the modelallows assessment of how changes in energy costs andservice charge affect rents and therefore, of thebenefit of spending on energy cost-saving equipment in terms of profitability and value of a centre.

    In the case of replacement of all energy intensiveequipment, positive value impacts are recorded acrossall types of shopping centre. For relatively moderncentres, a value gain of over 1% would be realisable.Larger value increases accrue for older centres, wherethe replacement of equipment generates substantialvalue gains of over 5%. For a centre with an initialcurrent value of 100 million, this could boost theasset value to over 105 million. Conversely, failure to undertake this investment, in whole or part, wouldrisk effective loss of value of up to 5.5 million.

    Given the strength of these findings, there is a clearcase for embedding awareness and analysis of shoppingcentre energy performance both in the investmentphilosophy and in the due diligence processes of alltypes of owner. For long term asset holders, regular life cycle assessments that monitor the relationshipbetween energy and value should be instituted,including benchmarking of energy costs against totalservice charge and energy costs as a proportion ofrental income. Moreover, medium to long term energyplans should be routinely incorporated into strategicasset management planning. A proactive and plannedpreventative maintenance (PPM) approach isrecommended as opposed to allowing assets to degradeto the point where major refurbishment and capitalexpenditure is required.

    A shopping centres energy credentials should beviewed as an element of asset risk. Specifically, theextent to which a centre does or does not possessoptimal energy using equipment is a useful gauge of its susceptibility to value erosion or price-chipping by prospective acquirers.

    The possible impact of higher direct energy costs onvalues is attracting less immediate attention as a resultof recent falls in oil prices. Nevertheless this reportmodels the effect of real growth in energy prices,assuming no change in the provision of energy intensiveequipment. As would be expected, the value impact of higher energy prices in isolation is felt most by theweakest centres, where this produces a net presentvalue (NPV) impact of -3.1% compared with impacts of around -1% to -1.5% for other centres.

    Executive summary

    The UK shopping centre market has much to gain from heightenedawareness of the links between energy efficiency and value in theshopping centre market, and of the current contribution of energy to overall operational costs. This report is the third part of a trilogy,commissioned by BCSC to investigate and highlight these issues to shopping centre owners, investors, managers and retailers.

    Value increasesLarger value increases accrue for oldercentres, where the replacement ofequipment generates substantial valuegains of over 5%. For a centre with an initialcurrent value of 100 million, this couldboost the asset value to over 105 million.Conversely, failure to undertake thisinvestment, in whole or part, would riskeffective loss of value of up to 5.5 million.

  • While legislation, building certification, changes inconsumer behaviour and other factors are allimportant, ultimately it is prospective enhancement in asset value that is most likely to drive change.

    There are substantial operating expense savingsassociated with investing in new equipment. Based ondifferences in the energy consumption characteristicsof new equipment against old, the biggest savingscome from replacing the lighting followed by heating,ventilation and air-conditioning (HVAC), lifts andescalators. In addition to savings on operational energy costs, there are also substantial savings onmaintenance costs.

    The combined effect of these two impacts means thatthe savings on operating and maintenance costs fromreplacing equipment outweigh the initial replacementcost. This means higher rents and positive valueimpacts in the future.

    There are other influences separate from the age andefficiency of equipment that have a bearing on theenergy efficiency of shopping centres and thereforetheir value. These include:

    - the incidence of capped or fixed operating cost leases

    - delays in the impact of replacing equipment

    - quality of operational management, including thatof management personnel

    - lack of transparency around energy performancedata in the sector, coupled with over-reliance on official classifications of energy usage, such as EPCs, which in reality may convey little aboutactual energy consumption; and

    the behavioural aspects of consumer and retailersensitivity to environmental and sustainability issues, including the extent to which consumersdifferentiate between centres on the basis of their sustainability features.

    Particularly with regard to lighting and HVAC, retailershave much to gain from greater consideration ofenergy efficiency and the impacts of their fit out andbehaviours, including potential reductions in servicecharges and their own energy costs.

    Development and implementation of a holistic range of best practice measures covering these variousaspects will assist in preserving and enhancing assetvalue across a range of centre types. These are likelyto include:

    - consideration of upgrading building systems and fabric

    - benchmarking and monitoring energy performance

    - ensuring management staff have appropriatetraining and resources

    - post completion performance evaluations followingupgrade projects; and

    - review of maintenance contracts to include energyimprovement expectations.

    04 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    Value impactsThe purpose of developing a model ofthis type was to provide a rigorousnumerical framework for assessing thevalue impacts of different types ofintervention for a range of centre types.

    Expense savingsThere is substantial operating expensesavings associated with investing innew equipment. Based on differencesin the energy consumptioncharacteristics of new equipmentagainst old, the biggest savings comefrom replacing the lighting, lifts,escalators and heating, ventilation and air-conditioning (HVAC).

  • Introduction

    1

    05 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • 06 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    This report focuses on the links between the costand efficiency of energy usage, and financialperformance in the UK shopping centre marketrather than the overall carbon emissions from theiroperations although the two are linked.

    The sources and carbon intensity of the energy consumedhave not been reviewed, nor has the presence orapplicability of photovoltaics, wind, geothermal andother forms of renewable and low carbon energy. Theresearch acknowledges that energy efficiency is only oneaspect of the environmental sustainability of a shoppingcentre and that other aspects require consideration toform a holistic view of a sustainable shopping centre.While mainly directed towards shopping centre owners,the report highlights issues of relevance to a range ofstakeholders including retailers, shopping centremanagers and lenders.

    There is a widespread perception in sustainability circlesthat, among the major commercial property use types,retail is different. Observers who view an environmental/financial relationship in other sectors of the industry oftensuggest that the demand for, or interest in, sustainabilityfrom retailers is less than that for other sectors. Manyretailers, particularly smaller ones, are more interested inoverall occupational costs and customer traffic and perhapsless interested in energy performance. To many, the marketfor energy efficiency in retail appears to be less developed.

    It is also the case that the existing stock of UK shoppingcentre space is extremely diverse in terms of age, energyequipment usage and efficiency, operational managementcapability and a host of other factors. These includecritically, the ability of occupiers to absorb higheroccupational costs as a result of the increased servicecharges that arise from landlord actions to improveenergy performance. Even from a cursory consideration of the characteristics of the UK shopping centre market,it might be expected that there would be a varied andwide ranging set of issues at play.

    The diversity of the sector does present certain analyticalchallenges however the importance of the issue isundeniable. Figures from The Carbon Trust for instanceassert that a 20% reduction in energy costs for retailerswould have an effect on the bottom line equivalent to a 5% increase in sales. It also states that the 40 largestshopping centres in UK consume 40 million worth ofenergy per year. Equally, many contend that there is stilla low level of understanding among some retailers andlandlords as to the nature of these relationships, thecurrent contribution of energy to overall occupationalcosts, the actions that could be taken to alter this andthe possible consequences for the value andattractiveness of the centre.

    One of the aims of this report is to raise the baseline level of awareness of this issue and encourage landlordsand retailers to routinely interrogate and assess the energy characteristics of shopping centres by asking such questions as:

    where is the property in its lifecycle?

    what is the relationship between energy costs,maintenance costs, service charge, overall profitabilityand value of the centre?

    what are the costs and potential savings on energycosts and maintenance costs?

    how does the contribution of energy to service chargescompare with typical levels or other centres?; and

    rethink-replace: is the current position optimal and, if not, what actions are available?

    Ultimately, the most likely driver of change or proactiveactions will be the perceived benefits for value. Capitaldecisions are affected by views on the future course ofenergy costs, legislation and changes in consumer tasteshowever in the end, preservation or enhancement of assetvalue will be the key factor. In light of this, the focus of this report is on the relationship between energy,profitability and value. Are more sustainable buildingsworth more? Are there financial benefits from improvingthe environmental performance of shopping centres?

    In order to provide clear and measurable outcomes, this report has focused on energy performance andefficiency as opposed to carbon emissions or broadersustainability metrics. It investigates whether landlordactions to improve the energy performance of a centrewill positively impact the occupancy costs for occupiersand whether this in turn will impact the value of thecentre itself.

    Clearly the income element of value (the rents paid by theretailers themselves) is a key component of this. In makingthe components of retailer costs in different scenariosexplicit, the analysis offers a challenge to retailers who, in many cases, base their occupational decisions purely on the balance between total occupational costs andexpected revenue. The extent to which a centre maybecome more attractive to customers by being moresustainable is a relevant consideration (which is discussedlater in the report) as is the composition of servicecharges since individual components may be subject todifferent influences.

    Introduction1

    Sustainable value?Are more sustainable buildings worth more?

    Financial benefits?Are there financial benefits from improving theenvironmental performance of shopping centres?

  • 1

    This report is the third in the BCSC carbon series. In 2011,BCSC published the first in a series of reports aroundenvironmental sustainability and carbon issues for theshopping centre industry. Accelerating Change TowardsLow Carbon Shopping Centres investigated what the sector needs to do differently to contribute to both the EU and the UKs carbon reduction goals.

    The report highlighted three key challenges the shoppingcentre industry faces in reducing what are acknowledgedto be significant impacts:

    the need for better alignment within and betweenowner and retailer organisations when developing andimplementing strategies to reduce the carbon impactsof the retail sector. Improved communication betweenthese groups is vital to address this

    the requirement for more information and clear,consistent advice around technologies and practicesthat can be adopted to improve carbon performance;and

    the requirement for government policy and regulationto enable and incentivise improvement in carbonperformance more effectively.

    A second report, Cutting Carbon Cutting Costs Achieving Performance in Retail Fit Outs, set out thebusiness case for low carbon retrofit projects by ownersand retailers, with reference to operational costs andpayback periods.

    This research analysed energy data from before and aftera variety of case study retrofit projects. Considerationwas also given to the costs of achieving the improvementsto establish an evidence base refuting the misconceptionthat improvements are expensive, complicated and oflimited effectiveness. The report highlighted a number of case studies with details of the initiatives adopted and the results achieved.

    Key findings:Low cost interventions using simple technology canachieve meaningful improvements, with case studyexamples showing payback periods less than four years.

    As the cost of energy increases the business case for action becomes even more compelling.

    The influence of humans, in the form of managementpractices and education, can be as important if notmore important than technology.

    A fuller review of relevant literature is provided inAppendix 1.

    Section 2 of this report describes and summarises the key elements of the data assembly and analyticalmethodology used in this project.

    Section 3 presents the results of applying the projectmodel under different energy-cost and equipmentreplacement scenarios

    Sections 4 to 9 provide additional narrative on a range of contextual factors which, taken together with thequantitative analysis, moves towards a blueprint for bestpractice in the energy efficient management of shoppingcentres, and associat ed value benefits.

    Specifically these sections cover:

    asset management issues and landlord-occupierrelations

    legislative and policy framework

    stakeholder interest in energy efficiency andsustainability

    investment considerations

    optimising operations; and

    a whole building approach.

    Finally section 10 presents the report conclusions and recommendations.

    SustainableThe extent to which a centre maybecome more attractive to customersby being more sustainable is arelevant consideration.

    07 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • 08

    2

    Data,methodology and analysis

    SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • Data, methodology and analysis 2

    BackgroundA fundamental challenge for the analysis is thetruism that every shopping centre is different. Thismay apply among other things to the layout, shape,configuration, occupier mix and importantly ageand efficiency of energy installation.

    In order to impose some logical structure on the research,the approach and the findings, data was collected on a range of covered UK shopping centres. Key measuresfrom this data collection process were used to inform thecash flow analysis that forms the main basis of theresearch findings.

    The research included an analysis of financial data(including rents, values, operating costs, service charges,etc.) from 35 shopping centres in the UK. This sampleincludes centres managed by CBRE and other client andproperty management organisations, supplemented withdata from centres in mainland Europe. Interviews andworkshops were held with owners, shopping centremanagers, property managers, building surveyors andengineers to gain an understanding of real-life interventionsmade in operating centres and the impacts that result.

    The modelling exercise was undertaken for a number ofstereotypical centres. These centres do not relate to eithersurvey averages or to specific actual shopping centreshowever to different types of centres that the authorsconsider to be useful for illustrating the principles involved.

    Key metrics and shopping centre typesTo understand the potential impact of fluctuations inenergy prices and the impact of investment in newequipment, it was important to identify key metrics andconstruct an information base of relevant variables.

    Data was collated relating to a diverse sample of UKcovered shopping centres. These ranged from centres built in the late 1960s through to more recentdevelopments completed in the 1990s or early 2000s; of differing degrees of service intensity as well as size and value. Reflecting the differences in their inherentfeatures, the data shows very wide variation in servicecharge provisions, the composition of service chargebetween energy and other items, and therefore thecurrent relationship between energy costs and net rentalincome (NRI). Further information was gathered fromindividual consultations with shopping centre owners and managers.

    Across the centres for which data was gathered, totalservice charge averaged approximately 29% of NRI, albeitcovering a substantial range between 9% and 49%.However, the contribution of energy costs to total servicecharges is largely low, averaging around 10%, althoughnudging into the high teens in a few cases. As a result, theenergy cost-to-NRI ratio varies within narrower bands andis typically 4-5% although some centres generate figuresabove 8% (please see Figure 1). This is lower than thefigures implied by The Carbon Trust estimates quotedearlier, as it relates solely to the energy costs accountedfor by the common area rather than the retailers own

    costs. Landlords have control over the costs of thecommon area and therefore the focus of this paper, which acknowledges that the environmental implicationsare much wider.

    Figure 1: Service charge, energy and NRI ratios

    These ratios are significant in themselves as indicators ofthe level and range of energys contribution to commonparts costs. There are two significant points to make here.

    Firstly, across a spectrum of UK shopping centres,common parts energy typically represents a smallproportion of overall service charge. This does not meanhowever, that savings cannot be made, or that these will not have a material effect on the profitability, value and environmental outputs of the centres.

    The second point is that these ratios are not commoncurrency among investors. This implies that differentdegrees of susceptibility to income and value impactsthrough energy price variations may often be missed. The report recommends assessment of these metrics as a matter of routine in particular, a benchmark for the relationship between common parts energy and NRI. For example, say 5-6% would have benefits.

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    1 2 3 4 5 6 7 9 10 11 12 13 14 158

    % energy to service charge% energy to NRI

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    09 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    Income and valueDifferent degrees of susceptibility to incomeand value impacts through energy pricevariations may often be missed. The reportrecommends assessment of these metrics as a matter of routine in particular, abenchmark for the relationship betweencommon parts energy and NRI.

  • 10 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    Energy costs, service charges and rentsHow energy costs and the service charge affect rents isof key importance to understanding the relationshipbetween spending on energy cost-saving equipment andthe profitability and value of a centre. If a service chargeis increased, for whatever reason, there will not be animmediate impact on income.

    If however the increase is above the market norm, theretailer will, all else being equal, be less willing to paythe same rent when the lease comes up for review orrenewal. The amount of increased cost the retailer will be prepared to pay will depend on the attractiveness ofthe centre. If it is a large, modern, regional centre theretailer may be prepared to pay the bulk of the increaseas it may feel it has to maintain a presence in the centre.Even in the case of a smaller centre which is dominant inits catchment area, the retailer may be willing to carry a considerable share of the increased service charge.

    At the other extreme for less attractive centres, retailersmay simply be happy to walk away if the increase in the service charge is not exactly offset by a reduction in the rent. This concept is similar to the theory of howthe elasticity of demand for a product determines whatproportion of an indirect tax increase is borne by theseller and the buyer however with the attractiveness of the centre. Market power takes the place of theelasticity of demand.

    To summarise, any increase in the service charge willeventually be shared between the centre owner and theoccupier by an adjustment in rents. In the extreme, thelandlord will bear all of the cost. This also means that thebenefits of any cost savings as a result of any investmentin energy saving equipment will benefit the landlord aswell as the occupier. The concept of centre attractivenessand its impact on rents is measured by the market powerterm as highlighted in Table 1.

    Strictly speaking, this reasoning applies to a conventionaluncapped service charge however the relationship willalso exist with a capped service charge. With a cappedservice charge the landlord will bear all of any costincrease initially and will subsequently press for a higherrent on renewal (with the success depending on theattractiveness of the centre). Where costs fall, thelandlord will eventually be able to benefit from a higherrent in return for a lower service charge.

    To develop an understanding of the range of energy priceand efficiency impacts on value, the report uses theinformation collated to produce a classification of UKshopping centres according to age, services provision andenergy usage characteristics:

    Type A centres: modern or very recently refurbishedcentres; likely dominant in their catchment; lowservices intensity and vacancy; common parts energyat 5% of service charge; occupiers rent bids insensitive to service charge increases.

    Type B centres: older however still relatively modern centres; 10-15 years since construction orrefurbishment; services intensity higher; common parts energy less than 10% of service charge.

    Type C centres: weaker centres with poorer qualityoccupier base and higher vacancy risk; over 15 yearssince construction or refurbishment; services intensity increasing; common parts energy over 15% of service charge.

    Type D centres: marginal secondary centres; weakeroccupier base; high rental sensitivity to service chargeincreases; over 25 years old; heavy services intensity;common parts energy over 15% of service charge.

    In essence, the categorisation of shopping centre typesreflects the continuum from prime, modern, catchmentdominating centres (Type A centres) where underlyingland value is high and the intrinsic pull of the location isstrong; through to poor quality older secondary / tertiarycentres (Type D centres) where occupier strength isweaker, vacancy generally higher and the underlying landvalue is lower (please see Table 1).

    Table 1: Shopping centre descriptors

    Type A Type B Type C Type Dcentres centres centres centres

    Years since development /last refurbishment 25%

    Services intensity Light Light- Medium- Heavymedium heavy

    Common parts energyas percentage of service charge 5-7% 7-10% >15% >15%

    Common parts energy as percentage of NRI 0-2% 2.5-3.5% 3.5-5% >5%

    Occupier energy as percentage of total 85% 75% 70% 60%

    Market power 0.75 0.5 0.25 0

    35centresThe research included the analysis offinancial data (including rents, values, operating costs, and service charges)from over 35 centres in the UK.

  • These characteristics are reflected in the market powerratings ascribed to each of the four shopping centre typesin Table 1, which is a measure of centre attractiveness in the sense discussed earlier. The extent to which anyadditional service charge (due to higher energy costs) canbe passed on will depend on the relative bargaining powerof the landlord, the occupier and consequently on thestrength and catchment pull of the centre. In a strongcentre all or most of the increase is likely to be passeddirectly onto the occupiers without detriment to rentalvalue. At the other extreme for a weak centre, additionalservice charges will be fully offset by a reduction in theestimated rental value (ERV).

    The other elements of structure and assumptions behindthe modelling process are explained fully in Appendix 2 Model structure and principles. Key summary points are are as follow:

    Key summary pointsThe model used is a simple cash flow based valuationmodel which aims to capture the relationship betweenservice charges, NRI (and by extension, value) fordifferent types and quality of shopping centre. It alsoaims to capture the impact of changes in energy andmaintenance costs on service charges.

    The main variable in the model, the imputed occupiercost comprises a market ERV element (adjusted fordepreciation) and a share of any increase in servicecharge dependent on market power.

    The energy component of service charge compriseselements of both running and maintenance costs foreach of the main energy using pieces of equipment lighting, HVAC, lifts and escalators separately, withverified industry estimates on running times, numberof each type of installation in a centre, unit costs, etc. applied in each case.

    Maintenance costs increase with the age of theequipment to an extent also verified by industryestimates.

    Cash flows for all four shopping centre types were runover a 25 year period using a discount rate of 6%.

    Any capital expenditure is assumed to be passed onthrough the service charge over a period of five yearsand with an interest cost of 2.5%.

    Using this framework any increase in energy cost, or anyother costs will in the first instance, increase the servicecharge. This will subsequently decrease the rents (to anextent determined by the market power of the centre)which will impact NRI and therefore, the capital value of the centre. Conversely, an investment in energy savingequipment will reduce both the energy and maintenancecosts (as maintenance costs are lower for newequipment) offset by the impact of the capital outlay on the service charge.

    29%Across the centres for which wegathered data, total service chargeaveraged around 29% of NRI, albeit covering a substantial rangebetween 9% and 49%.

    11 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • 12

    Results andscenarios

    3

    SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • 13 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    The model was used to assess the susceptibility ofdifferent types of centre to variations in energy costs. It was also used to understand the impact of replacingequipment with more energy efficient equipment. Sincethe cash flows in the model are based on imputedoccupier costs and therefore capture the impact ofhigher service charges on landlord income, this approachallows assessment of the variations in NPV between thebase case and a range of alternate scenarios.

    In doing so, the model captures the relative scale of valueimpact across the four centre types. It is a simplified viewof reality and it is not sufficiently detailed to meet theRoyal Institute of Chartered Surveyors (RICS) valuationcriteria. Nonetheless, it goes beyond the standardvaluation criteria in facilitating the analysis of the linkbetween costs and values and by permitting a realisticassessment of the full costs and benefits of investing inenergy intensive equipment.

    A key finding is that it is possible to profitably increaseenergy efficiency and therefore enhance asset value. Thisis achieved through the replacement of some or all of theenergy intensive equipment with positive impacts in termsof reduction in energy / maintenance costs and upwardshifts in shopping centre value.

    Moreover, the benefits of such actions are proportionatelyhighest for the weaker shopping centres. In other words,the capital costs of greening a centre are not necessarilyprohibitive and can actually confer significant landlordbenefits in the form of increased values or, at the veryleast, be carried out with no net financial cost.

    Variant energy costs While the recent fall in oil prices has perhaps reducedimmediate concerns about the value impacts of risingenergy costs, the future course of oil prices remainsuncertain. Until mid-2014, nominal prices had been risingby around 10% per year since the beginning of 2000. This part of the analysis assumes no change in the age or energy usage characteristics of equipment in each ofthe four centre types. The only alteration from base case assumptions is the assumption that electricity pricesrise at 2% per annum (4% nominal) as opposed to 0% real(2% nominal).

    As previously described, an increase in electricity pricesincreases the service charge. This is however eventuallyoffset, partially (totally in the case of the Type D centre)by a fall in rents the fall in NRI affects the value of thecentre. As would be expected, the value impact of higherenergy prices in isolation is felt on the weakest Type Dcentres where this produces an NPV impact of -3.1%,compared with -1.6% for Type C centres and -0.8% forType B centre (please see Figure 2).

    Figure 2: Impact of higher electricity price inflation on values

    The question that arises at this point is whether, in valueterms, there is a financial case for incurring the expenseof replacing some or all of the energy using equipment.This would reduce both energy consumption costs andmaintenance costs for Type B and Type D centres byraising the efficiency profile of the energy usingequipment. This would occur even in an environment of stable unit energy prices.

    The impact of replacing mechanical andelectrical (M&E) equipmentThe data collection part of the exercise indicated thatsubstantial operating expense savings are associated with investing in new equipment. Specifically, the unitenergy consumption of new equipment is between 20%(HVAC) and 66% (lighting) less than with old equipment. Table 2 details the operational energy cost savingsachievable through the installation of different elementsof new equipment.

    0.0

    -0.5

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    -2.0

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    % differen

    ce from

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    base = 0%; scenario = 2% real

    Energy efficiencyA key finding is that it is possible,profitably, to increase energy efficiencyand therefore enhance asset value,through the replacement of some or allof the energy-intensive equipment.

  • 1414

    Table 2: Annual operating costs: energy ( per annumenergy based on a tariff of 11p per kWh)

    Type A Type B Type C Type Dcentre centre centre centre

    HVAC

    New 58,920 44,190 54,010 49,100

    20 years old n/a 55,240 67,510 61,380

    Percentage difference n/a -20% -20% -20%

    Lighting

    New 106,540 79,900 97,660 88,780

    20 years old n/a 239,710 292,980 266,350

    Percentagedifference n/a -67% -67% -67%

    Lifts

    New 31,540 31,540 37,450 43,360

    20 years old n/a 63,070 74,900 86,730

    Percentage difference n/a -50% -50% -50%

    Escalators

    New 52,560 35,040 52,560 70,080

    20 years old n/a 70,080 105,120 140,170

    Percentage difference n/a -50% -50% -50%

    Total identified

    New 249,560 190,670 241,680 251,330

    20 years old n/a 428,110 540,520 554,620

    Percentagedifference n/a -55% -55% -55%

    Note: Percentage differences not applicable for Type A centres asthese centres already have new equipment.

    The figures in Table 2 represent typical energyconsumption costs for new and old equipmentrespectively and the percentage difference betweenthese. They are based on verified numbers and usagepatterns for each type of equipment, with an assumedelectricity tariff of 11p per kWh. In overall terms, on thebasis of new-for-old replacement of all elements, savingsof 55% are achievable. Focusing on individual elements,the largest savings come from replacing the lightingfollowed by HVAC, escalators and lifts.

    It should be noted that these savings occur from replacingold, high energy use equipment with standard, new orrefurbished equipment. New equipment now embodiesenergy saving features as standard. Even lower energy useequipment is available however this comes at a substantialpremium which is not considered here. In due course, theeven lower energy use equipment will become available at a more economic cost and will come to be consideredas standard.

    In addition to savings in energy consumption, there arealso substantial savings on maintenance costs. Maintenancecosts increase with the age of the equipment and replacingequipment brings with it lower maintenance costs as well as energy cost savings. These are outlined in Table 3. The savings are substantial and in the case of Type Dcentres are nearly 40% lower than they would be with oldequipment. This indicates that maintenance cost savingscan be added to energy costs savings when calculating the benefits for equipment replacement.

    Table 3: Maintenance costs after replacing all energy-intensive equipment ()

    Type A Type B Type C Type Dcentre centre centre centre

    Existing 112,740 135,430 172,960 216,260

    Full replacement n/a 108,370 126,290 137,230

    Percentage saving n/a -20.0% -27.0% -36.5%

    Note: Based on 2015 figures.

    Value impactsTable 4 and Figure 3 summarise the value impacts ofdifferent energy equipment replacement programmes based on the calculated NPV differences between thebase position and the various new equipment scenarios.

    Table 5 summarises the monetary savings available fromfull replacement / refurbishment, Table 3.a in Appendix3 details these savings for each element of equipment.

    The value impacts vary between centre type, partlybecause of differences in market power, partly due to theamount of energy intensive equipment used and partly as a result of differences in the age of the equipment and the consequent saving on maintenance costs afterreplacement. Note that the Type A centres results are notprovided, since Type A centres already have energyefficient equipment.

    Table 4: Value (NPV) impacts of different equipment replacement scenarios

    Percentage difference from base with replacement of:

    Type A Type B Type C Type Dcentre centre centre centre

    HVAC n/a 0.0% 0.1% 0.3%

    Lighting n/a 1.0% 2.1% 3.8%

    Lifts n/a 0.1% 0.2% 0.5%

    Escalators n/a 0.2% 0.4% 1.1%

    All n/a 1.3% 2.7% 5.7%

    SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • Figure 3: The impact of replacing energy intensive equipment on values

    On the basis of the data collected on energy, maintenanceand replacement costs, there is a very clear value casefor investment in all kinds of energy saving equipmentwhere energy saving equipment in this case, simply meansreplacing old, energy inefficient kit with new. The impactis most substantial for the weakest Type D centres.

    In each case, the saving on operating and maintenancecosts originating from the investment in replacementequipment outweighs the replacement cost. This meanshigher rents and positive value impacts in the future.

    The largest single contribution to higher NPVs would comefrom the replacement of old lighting with new and moreenergy efficient LED lighting. Indeed, the energy and costsavings from replacing the lighting are so large that somecentres have already made this investment while keepingthe other old equipment in place. In these cases themarginal savings and improvements in values fromreplacing additional kit will be lower. Replacement ofHVAC, escalators and lifts produce a lower however stillpositive NPV impact. In other words, centres can still begreener without incurring a net financial cost.

    In the case of replacement of all equipment, positivevalue impacts are recorded across all centre types. In thecase of a Type B centre, the model indicates that theadditional investment would increase the net presentvalue by 1.3%. The large increase comes from investmentin the replacement of equipment in Type D centres wherethe model indicates that the NPV would increase by amassive 5.7%. For a centre with an initial current value of

    100 million, this could boost the asset value to over 105 million. Conversely, failure to undertake thisinvestment, in whole or part, would risk effective loss of value of up to 5.5 million.

    The apparent business case for equipment replacement is so clear, especially for Type D centres that it is worthasking why equipment has not already been replaced. It is possible that there is a range of factors at play hereincluding constraints on the availability of capital, limitedawareness of the costs and benefits of doing so, and thepotential role of fixed service charges in preventingupgrades. If nothing else, hopefully this study will makecentre owners aware that installing new energy usingequipment carries with it a financial benefit, as well asallowing them to claim green credentials.

    More broadly, there is a clear case for embeddingawareness and analysis of shopping centre energyperformance both in the investment philosophy and in the due diligence processes of all types of owner. As therelationship between energy performance and value comesto be more widely understood, informed investors willincreasingly use the prospective value gains or lossesassociated with changes in energy provision as an elementof transaction negotiations. This may appear most pressingfor investors with relatively short holding periods due tohigher trading frequency however in reality, it is alsoimportant for long term holders. For such investors, energyrelated value impacts may be less evident in the absenceof transaction evidence. Underlying asset performance willalso be affected and cumulative value impacts willeventually become apparent at the point of disposal.

    The analysis has identified that there are potentiallysignificant value impacts associated with bothfluctuations in energy prices and proactive programmesto replace energy intensive equipment. The potentialbenefits highlighted in terms of greenness and valueprotection / enhancement may appear to be the resultsof an entirely technical exercise, separate from anyother aspects of operation.

    In addition to the technical consequences identified earlier,there are a wide range of legal, contractual, operationaland behavioural factors that interact with, and impact theeffectiveness of energy equipment installation programmes.Addressed properly, these could be taken as a blueprint forbest practice in the energy management of shoppingcentres. These are discussed in the following sections.

    6.0

    5.0

    4.0

    3.0

    2.0

    1.0

    0.0

    % differen

    ce from

    bas

    e

    Centre typeC DB

    HVAC Lighting Lifts Escalators

    Table5: Summary of annual energy and maintenance cost savings from full replacement / refurbishment

    Energy costs Maintenance costs Combined energy and maintenance costsReplaced / Replaced / Replaced /

    Current refurbished Current refurbished Current refurbished Savings

    Type A 249,560 n/a 112,740 n/a 362,300 n/a n/a

    Type B 428,110 190,670 135,430 108,370 563,540 299,040 264,500

    Type C 540,520 241,680 172,960 126,290 713,480 367,970 345,500

    Type D 554,620 251,330 216,260 137,230 770,880 388,560 382,320

    15 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • 4

    Asset managementissues and landlord-occupier relations

    1616 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • Asset management issues and landlord-occupier relations

    Fluctuations in the non-recurring cost componentsof service charge such as the capital cost ofreplacing equipment are generally managedthrough negotiation and spread over a number ofyears in order to avoid sharp one-off hikes in anysingle year. In the model, replacement costs areamortised over five years at an interest rate of2.5% with this being added to the service chargefor the first five years after installation.

    This may be affected by the increasing practice of servicecharge capping (for example limiting annual increases to the rate of RPI growth) or other lease amendments.This is particularly emphasised in weaker centres whereoccupiers may have greater scope to resist service chargeincreases by lowering rents. Some retailers are writinglease clauses that push all or most costs back to thelandlord, or are agreeing fixed operating costs as thebasis for occupiers outgoings. The effect of such shiftscould be to alter (reduce) the extent to which increasesin service charge are fully recoverable from retailers andtherefore increase the landlords vulnerability to increasesin energy prices or equivalent capex. In reality though,landlords will only accept capping-style arrangements if they think they can get a higher rent as a result so the ultimate impact may not be that different to that in the model.

    Depending on the strength and quality of a centre, theremay be differences in the sensitivity towards servicecharge inflation and / or potentially rent bidding behaviourof anchor occupiers as against smaller ones. By extension,popular and dominant shopping centres will be moreinsulated from the value eroding effects of higher energyprices. This is simply because retailers will be morewilling to maintain or increase their rental bids (even inthe context of higher service charges) in order to securetrading positions in such a centre. This distinction iscaptured in the market power rating for different types ofshopping centres within the model (please see Table 1 inSection 2).

    It is not necessarily the case that the prospective benefitsof new equipment installation are immediate. Operationalteething problems are relatively common and can delayimpact. There may also be differences in the duration ofvalue benefit whereby some value gains are one-off stepchanges to NRI and others more incremental. This is notin the current version of the model.

    Proactive management is also likely to be beneficial.Separate from any improvements to equipment, thequality of energy management in shopping centres is an issue that should be addressed, where in many caseswill result in impacts on value. There are at least twoelements to this. One is that some centres are, in effect,over-engineered so rectifying this by using fewer unitsmay be beneficial. Secondly, the quality of personnelemployed to manage a system / centre will have a directimpact on the energy consumption and strategy forreplacement of equipment. In many cases, too littleattention is paid to the quality of hires in this area andtoo much to cost. Given current salary differentials,

    potential rewards in operational savings and consideredreplacement strategies will outweigh the additional salarymany times over.

    In any case, the relationship between general energyprice levels and the actual cost of energy consumption toa shopping centre owner is not straightforward. Differentenergy procurement strategies can result in significantlylower (or indeed higher) prices than those implied by spot price forecasts, or even delivered price forecasts. In general, shopping centre owners have not pursuedinnovative energy procurement strategies widely despitethere being increasing scope to reduce energy spend andprotect asset value, for instance by block-buying fixedrate two or three year energy packages.

    Occupiers, particularly those in weaker centres, may look to avoid their obligations to contribute to costs ofworks that improve the energy credentials of a centreparticularly if the aim is to overtly improve on EPC ratingsfrom which the landlord stands to benefit.

    These issues present a strong argument for engagingproperty asset managers (as well as owners and occupiers)in a broad and regular dialogue around energymanagement. Medium to long term energy plans should be routinely incorporated into strategic asset managementplans where asset managers should be integrally involvedin formulation of policy towards energy management forshopping centres.

    Proactive management is also likely to be beneficial.Separate from anyimprovements to equipment,the quality of energymanagement in shoppingcentres is an issue that could be addressed, in many cases with positiveimpacts on value.

    4

    17 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • 5

    Legislative andpolicy framework

    1818 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • 19 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    The UK property industry plays an important partin the national approach to meeting the EUscarbon reduction goals. In October 2014, EUmember states agreed on the 2030 framework for climate and energy policies.

    The framework sets a binding target to reduce greenhousegas emissions by at least 40% below the 1990 level by 2030(moving towards the objective of cutting emissions by atleast 80% by 2050) and increasing energy efficiency by atleast 27%. The built environment is an area of focus forseveral mechanisms put in place to meet these goals at anEU and UK level. The speed and impact of changes to thepolicy framework cannot be ignored several legislativechanges have occurred during the course of this researchalone. UK owners, retailers and managers need to considerrisk and cost impacts in this fast moving environment.Three key programmes are outlined as follow:

    The Carbon Reduction Commitment (CRC) was initiatedin 2010 as a trading mechanism and is now effectively alevy on carbon emissions through energy consumption.Qualifying organisations measure and report theiremissions annually, buying allowances to cover theirobligations. In theory this mechanism acts as anincentive to reduce consumption although for much ofthe industry, it has been accepted as a normal businessexpense, as opposed to an area of potential costreduction. Nevertheless, reducing energy consumptionand carbon emissions will reduce CRC compliance costsand mitigate regulatory risk.

    The Energy Savings Opportunities Scheme (ESOS) was introduced in 2014. The scheme legislates therequirement for organisations of over 250 employees or 50m turnover to undertake energy audits (orimplement energy management systems) for 90% of thesources of their carbon emissions. Many institutionalshopping centre owners and retailers will be impactedby this requirement with action required for ownedbuildings, leased premises and transport sources.

    The audits which must be completed before the end of 2015 will provide insights into a range of energyefficiency improvements that can be made. While thereis no compulsion for parties to undertake improvementsat this stage, owners and retailers would be wise toconsider the resultant recommendations carefully. As demonstrated in Cutting Carbon, Cutting Costs Achieving Performance in Retail Fit Outs report, simple,low cost interventions can have large efficiency and cost saving impacts. Rather than treating ESOS as a pure compliance exercise, owners, managers and valuers should build audit findings and improvementrecommendations into annual investment plans andappraisals to gain maximum benefits. For moreinformation on ESOS, please see BCSC Guidance Note 94: The Energy Savings Opportunities Scheme.

    The Energy Act 2011 and the related Minimum EnergyEfficiency Standards (MEES) that address the EuropeanPerformance of Buildings Directive (EPBD), is likely to have the largest influence on property values. Theprinciple of this legislation dictates that the leasing ofbuildings or units with low energy performance will beunlawful from 2018. While final legislation is at time of publication, government guidance indicates that theminimum standard will be defined as an E rated EPC.This leaves F and G rated spaces unlettable unlessimprovement works are undertaken. Depending on thefabric and systems, and the extent of work required to meet minimum standards, some buildings could beconsidered obsolete if improvements cannot be madecost effectively.

    Legislative and policy framework

    Simple, low-costinterventions can have big efficiency and cost saving impacts.

    5

  • 2020

    Many commercial landlords are currently reviewingportfolios to determine their risks and investmentrequired to mitigate them. As would be expected, thelettability or otherwise, of a building has a significantimpact on its value. We are seeing valuers building inallowances for improvement works in their appraisals and purchasers proposing price chips during acquisitionnegotiations.

    There is widespread criticism that EPCs are not goodindicators of actual building energy performance. There are inconsistencies between ratings due to thelevel of detail used in the assessment methodology.Ratings themselves are prepared through comparison to a theoretical model and do not take actual energyconsumption into account.

    This is particularly true for shopping centres where theimplications of the MEES requirements are somewhatdiluted due to industry practices. Retail units are generallycertified individually separate from mall spaces and priorto leasing activity. A single unit EPC will therefore notinclude fit out components that contribute a large portionof energy consumption e.g. display lighting. This fails toprovide a good picture of the overall energy efficiency ofthe unit or the centre and is likely to miss some keyimprovement areas.

    Landlord controlled common parts often gain EPC ratingsthat would put them outside the MEES danger zone (Fand G ratings) however at the same time, these elementscould benefit from improvements to plant and buildingfabric. Landlords nevertheless are not without risk as someshop units can fall below minimum standards due to fabricissues such as poorly insulated external walls or shopfronts.

    It should also be noted that Building Regulations areexpected to increase energy efficiency standards for newconstruction over the medium term. The government has announced that from 2019 all new non-domesticbuildings in England will be built to zero carbonstandards. The expectation is that Part L of the BuildingRegulations will be the regulatory vehicle for the energyand carbon elements of the standards. While zero carbonstandards are yet to be defined a further review of Part Lis expected before 2019 to assist transition, which willhave an impact on the EPC calculation methodology. The effect of this will be that a space with a current EPC rating of E could slip to an F without furtheraction. In summary, landlords and retailers would beunwise to rely on compliance today as a strategy foravoiding legislative and value impacts.

    Including energy efficiency considerations in retail valuationsThe RICS Red Book 2014 notes that valuers must assessthe extent to which the subject property currently meetssustainability criteria and arrive at an informed view onthe likelihood of these impacting on value puttingenergy performance at the heart of valuation practice.This will be more difficult for the shopping centre sectorthan many property types. For other building types,valuers may be able refer to EPCs, green buildingcertifications such as BREEAM, LEED and otherperformance metrics.

    For reasons already explained, valuers of shopping centrescannot rely solely upon EPCs as a good indicator of energyefficiency performance when preparing their appraisals.The measurement and disclosure of sustainability andenergy performance for retail property is not as widespreador as mature as other sectors e.g. office buildings. BREEAMin use ratings for shopping centres are increasingly popularin mainland Europe to assess operational performance,however they are not common in the UK.

    In addition, the diverse nature and varying size andservice intensity of shopping centres makes benchmarkingand performance comparisons difficult, even within single owner portfolios. There is generally a lack oftransparency around energy performance data from both owners and retailers, making it difficult to establishenergy efficiency as a factor in valuation appraisals and leasing decisions. While a number of proprietarybenchmarking schemes exist (e.g. Better BuildingPartnership and JLL Real Estate EnvironmentalBenchmark) and industry discussion continues, there islittle detailed publicly available information for smallerowners and retailers to compare performance.

    Industry education (including this study) and attention to energy performance and maintenance regimes in pre-acquisition due diligence investigations are likely to raise awareness among investors and valuers of theimpacts of energy efficiency on operational costs andrents. This will lead to impacts on acquisition prices and values.

    Industry education (includingthis study) and attention toenergy performance andmaintenance regimes in pre-acquisition due diligenceinvestigations are likely to raise awareness amonginvestors and valuers of the impacts of energyefficiency on operationalcosts and rents.

    SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • Owner, retailerand consumerinterest in energyefficiency andsustainability

    6

    21 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • 22222222

    Many of the UKs largest property companies havesustainability policies which include targets andobjectives to reduce carbon emissions and improveenergy efficiency. Where they own and developshopping centres these are often actively promotedas case studies for sustainability excellence.

    At a corporate level, many major international retailersaddress sustainability through corporate responsibilityand environmental, social and governance (ESG)reporting.

    At a property level however, demand from retailers forsustainable and energy efficient centres remains low.Retail leasing agents report that energy efficiency andother sustainability factors are rarely, if ever, part ofproperty searches or pre-lease negotiations.

    At a store level, there is generally less importanceplaced on costs of occupancy, from either servicecharges or retailers own energy costs and more focus on turnover and customer experience.

    Consumer awareness of, and interest in environmentalsustainability is increasing however the lack of transparencyaround energy consumption at either a centre or retailunit level highlights that choices are not generally beingmade on this basis. Consumers may even assume thatenergy efficiency is being addressed given the publicpolicy statements of the owners and retailers.

    CBREs annual consumer behaviour survey How ConsumersShop 2014 included questions that investigated theimportance of shopping centres environmental businesspractices in influencing their shopping destination. At anaggregated level, these were ranked mid-range, just belowfairly important, however they were regarded as havinghigher importance than the range of catering facilities,free Wi-Fi, the presence of a department store or one to two large fashion shops. The only two factors achievinga very important ranking were price and cleanliness. This would suggest that consumers do care, however it isquestionable as to whether they have enough informationavailable to them to inform a decision.

    In a retail environment, there are so many competingmessages seeking attention that perhaps it is unrealistic toexpect energy consumption to be prominent. Nevertheless,with the three major stakeholders taking actions aroundenvironmental sustainability it should be possible toachieve better alignment and more measurable outcomes.

    Though retailers may say that their focus is on footfall andsales, there is no doubt that they have an eye on coststoo. A basic tenet of the earlier sections of this report isthat retailers are averse to increases in service chargesand that given an increase in the service change, forwhatever reason but which applies to that centre alone,will result in rents being bid down. In other words, anyincrease in a service charge due to higher energy costs or any other reason will, in effect, be shared between the retailer and the landlord with the relative share being determined by the market power of the centre(please see Table 1 in Section 2).

    New centres built in compliance with current planningand building regulations will benefit from best practicedesign and current equipment specifications. The designof recently constructed centres generally relies more on natural ventilation, with unenclosed mall spaces. The intensity of the services provided will generally belower resulting in lower energy consumption and lowerenergy related service charges. These centres are likely to demonstrate considerable energy efficiencyoutperformance over those constructed in the 1980s and 1990s. This puts older centres at a disadvantage if energy costs increase however it also means that there are considerable potential gains from upgrading the existing equipment in older centres. These gains will come from both a fall in energy consumption andreduced current and future maintenance costs.

    This is demonstrated in Table 2 in Section 3 whichhighlights a general reduction in average energy costs of55% when 20 year old equipment is upgraded. In additionto the energy savings, Table 3 indicates significantmaintenance costs savings which can range from 20% and37% if key energy consuming equipment is replaced.

    Owner, retailer and consumer interest in energy efficiency and sustainability

    6

    Consumer awareness of, and interest in,environmental sustainabilityis increasing however thelack of transparency aroundenergy consumption ateither a centre or retail unitlevel highlights that choicesare not generally beingmade on this basis.

    SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • Investmentconsiderations

    7

    23 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • Part of the research undertaken for this report was the qualitative review of the capitalinvestment decisions that impact the energyefficiency of shopping centres.

    The initial hypothesis investigated the tipping pointbetween a standard solution and a more expensive,energy efficient solution when planning one-off retrofitand replacement projects. This turned out to be thewrong question for two reasons.

    In the first instance, anecdotal reports from owners,managers and consultants revealed that decisions werenot generally being made between standard and energyefficient replacement equipment but rather between a make do and mend approach and replace approach.The new equipment options are generally so much moreefficient than the 10-30 year old installations that arebeing replaced, that the additional benefits of the moreexpensive energy efficient options could be consideredminor increments on the business case for replacement.

    Secondly best practice in shopping centre managementis favouring a planned preventative maintenance(PPM) approach for plant, equipment and fabric ratherthan allow the centre to wind down to the pointwhere a major refurbishment is necessary ofteninvolving a complete overhaul of all systems. Aneffective PPM approach will assess the current state of systems and component parts and establish a 5-10year programme of ongoing proactive adjustment andpartial replacement to maintain performance andextend lifespan. Larger projects will be planned andphased to allow capital costs to be spread, avoidingservice charge shocks. It could be argued that PPM is really a proactive make do and mend approach;however it is one that considers the full buildinglifecycle. PPM in itself does not guarantee that oldenergy inefficient kit will always be replaced with new more energy efficient equipment.

    In reality, the unfavourable economic conditions from2009-2013 have led to some owners to adopt what couldbe considered a do nothing or minimum spend approach,especially in the secondary shopping centre market where shorthold times and uncertain income streams have dictated low capital investment and operationalexpenditure. For other owners already aware of the risks,ongoing energy and maintenance costs are being built in to business cases for improvement works.

    Ignoring the systems and fabric of any building creates risks of inefficiency and significant failure particularly in retail environments where customer experience anduninterrupted retailer operations are the key tosuccess. These risks would generally be consideredunfavourably during pre-acquisition due diligenceinvestigations, creating a barrier to transactions or an opportunity for purchasers to price-chip duringnegotiations especially if an approach similar to thatused in Section 2 were adopted. Earlier and moredetailed assessment of energy performance and valueissues should form a part of due diligence processes forall owner types. For long term asset holders, regularlifecycle assessments that monitor the relationshipbetween energy and value should be instituted.

    This is particularly the case since many of the shoppingcentres constructed in the 1980s and 1990s are nowbeing considered for major refurbishment andrepositioning. For maximum long term benefits theseprojects need to consider more than just the brand,occupier mix and the image of the public spaces in favourof a full operational lifecycle review. The efficacy andefficiency of plant and the condition of the building fabric can have a significant impact on energy efficiencyand ongoing running costs. Some best practiceconsiderations are listed as follow:

    24 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    Investment considerations7

    Ignoring the systems and fabric of any buildingcreates risks of inefficiencyand significant failure particularly in retailenvironments wherecustomer experience anduninterrupted retaileroperations are the key to success.

  • 25 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    The main focus of this report is on the benefits ofupgrading equipment in older centres rather than on thepotential benefits of major refurbishments. This is not tosay that major refurbishments may not be cost effectivein the right circumstances. It is also likely that whenmajor refurbishments take place, the opportunity wouldbe taken to replace all of the energy intensive equipmentand to review other ways that the centre could be mademore energy and cost efficient.

    One reason why replacements or refurbishments may not have taken place in the last few years is thegenerally negative sentiment around secondary shoppingcentres during and immediately after the recession.Valuations appear to imply rents falling steeply into thelong term and under these circumstances, replacementor refurbishment may not have looked attractive. The alternative of selling the assets may have been more appealing.

    Now the market has turned, rents at the prime end at least, are increasing and prime or new property hasbecome fairly expensive. The type of value addedinvestment whereby secondary centres are acquired and capital expenditure used to replace old equipment or even to finance major refurbishments now looksincreasingly attractive. This highlights the fact that thewider property cycle affects the relationship betweenenergy and value. It also highlights that there will betimes in the cycle when the value benefits of enhancingenergy provision will be more apparent or immediate than others. Regular audits of the intersection of energycredentials and value will help highlight optimal timingsfor action.

    The main focus of this report is on the benefits of upgrading equipment inolder centres rather than on the potential benefits of major refurbishments.This is not to say that major refurbishments may not be cost effective in the right circumstances.

    Best practice considerations

    Are the building services over-designed with highlevels of redundancy built into the originalinstallation? Replacement of selected plant canreduce energy consumption and free up space for other uses such as better waste management facilities or on-site energy generation.

    Lighting solutions in retail environments are becomingincreasingly sophisticated. The upgrading of lightingprovides an opportunity to achieve new visual effectswith the benefits of more efficient fittings and control systems to manage the hours of operation.

    Is the building fabric providing adequate insulation?The insulation performance of patent glazing systemsreduced significantly after 20 years. Consider replacingglazed roof and wall areas within an architecturalsolution. Recladding of external walls for aestheticeffect can incorporate an additional insulation layer to improve performance of the envelope.

    Replacement of failing roof membranes will improvewaterproofing however may require upgradinginsulation to meet current Building Regulation U-values. While this is an additional expense theimproved insulation will have better thermalperformance and energy efficiency advantages.Secondary benefits may also accrue for HVAC plant,including longer lifespan and lower maintenance costs from reduced running times.

    When selecting plant and equipment, note that ahigher specification unit may qualify for EnhancedCapital Allowances (ECA). A business that pays income or corporation tax will be able to claim 100%first year capital allowance on a product if it is on the Energy Technology Product List (ETPL) at the time of purchase. The ETPL is a list of energy efficient plant and machinery managed by The Carbon Trust and includes items such as boilers,electric motors, air conditioning and refrigerationsystems that qualify for full tax relief.

    Are there opportunities for renewables and lowcarbon generation on site for example rooftopphotovoltaics, fuel cells, geothermal energy andground source heat pumps?

    Installation of new plant and equipment should trigger a re-negotiation of maintenance contracts from both a cost and key performance indicator (KPI) perspective. This will in turn provide savings and motivate ongoing performance improvements.

    On completion of a major refurbishment, undertakepost refurbishment reviews. Commission these reviewsconsistently to ensure all systems are operating asdesigned and interacting at maximum efficiency.

  • 8

    Optimisingoperations

    26 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • Optimising operations8

    27 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    The importance of human influence on buildingmanagement is often underestimated by assetmanagers and owners. However, with the correctinfluence, this can re-inforce and perhaps evenamplify the investment impact of energyequipment strategies. Conversely, if done badly,this may erode or even undermine the impact ofotherwise well-informed energy policies.

    Investment in high quality technical and centremanagement staff is particularly important for themulti-stakeholder environment of a shopping centre.Whether it is through the effective introduction ofbehavioural changes for retailers and customers orthrough the ongoing commissioning and proactivemanagement of new technology, an experiencedmanagement team (with sufficient resources) can make a significant impact on energy consumption andoverall commercial performance. Conversely, poormanagement can undermine the impact of investmentsin energy efficiency.

    When managing a shopping centre for energy efficiencyand energy cost reduction, it is vital that personnelproactively consider the building as a holistic system thatinteracts with the weather, retailers and customerbehaviour. Calls for increased training to upskill buildingand facilities managers have been recognised by industrybodies and government. This needs to be matched byrecognition from owners that skilled management staffcost more to employ however may in turn generatesubstantial savings through their actions. Some bestpractice management actions include:

    Best practice management actions

    Understanding the centres baseline energy performancethrough benchmarking, with metering and energymonitoring systems to allow timely access toinformation on energy performance.

    Upgrading building management systems (BMS) toensure appropriate levels of controls and granularity of data. This optimises settings to ensure effectivenessand interdependencies are accounted for.

    Ensuring building services (air conditioning, heating,lighting, etc.) align with opening hours and weatherconditions.

    Engaging experts to advise on planned preventativemaintenance regimes and energy efficiencyimprovements. Obtain strategic advice to ensureprojects are complimentary with long term benefits.

    Upgrading light fittings and control systems toincorporate LED and energy efficient fittings and motionsensors to lower energy consumption and heatgeneration, reducing the burden air conditioning systems.

    For enclosed centres, reducing heat loss via entrances,loading docks and delivery doors in winter by using air locks, PVC curtains or high speed motorised doors.

    Upgrading and maintaining elements of the airconditioning system such as air handling unit filters,installing variable speed drives on pumps.

    Reviewing maintenance contracts to ensure scope andKPIs reflect energy efficiency goals.

    Avoiding reactive adjustments without consideration of interactive centre systems and holistic performance.

    Some of these initiatives come under the definition ofequipment replacement examined in Section 2 andSection 3; others come under managerial and proceduralpractices which can still have a significant impact ofoperating expenses.

    When managing a shoppingcentre for energy efficiencyand energy cost reduction, it is vital that personnelproactively consider thebuilding as a holistic system that interacts withthe weather, retailers andcustomer behaviour.

  • 28 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    While it will not directly impact overall energyconsumption, a review of energy procurement practicescan generate savings and reduce the risks of energy costinflation that may impact service charges. Interest inspecific advice around energy contracts and procurementservices has increased exponentially over the last fiveyears, primarily as a result of recent increases incommodity prices and add on charges. A number ofoptions exist for owners and retailers in this complexmarket. For example, the introduction of maximumdemand thresholds at the procurement stage may provide cost savings and encourage more active energymanagement note this could increase costs if thresholdsare exceeded. This highlights once again the need for quality, proactive centre management.

    There are some pitfalls to avoid. In the interests ofenergy efficiency, some centres have significantly reducedthe reliance on mechanical ventilation and landlords airconditioning systems to the extent that they are turnedoff for a significant amount of the year. Common mallspaces are then conditioned in an ad hoc manner throughthe flow of air from open retail units, shifting the onus(and energy costs) onto the retailer.

    While this approach will reduce landlords energyconsumption (and subsequently the energy portion ofservice charges) it will not suit all centres. Lack of freshair circulation and the existence of contaminants cannegatively impact the comfort, health and wellbeing of customers and retail staff. While a reduction in service charges would be welcome, this policy is likely to increase the retailers own energy bills. This willconsequently increase their total cost of occupancy at that location which has have implications for rents that retailers are prepared to pay.

    Public awareness campaigns such as Close the Door are encouraging UK retailers to do just that as a means to save money, demonstrate environmental responsibility,make customers comfortable, provide healthy workingconditions for staff, cut down on shoplifting and cut downair pollution hazards. While aimed predominantly at high street locations with street frontages, the campaignhas the support of leading retailers such as Boots, Ryman, Tesco and Marks & Spencer which are alreadyimplementing these practices to shopping centre locations.

    While it will not directlyimpact overall energyconsumption, a review of energy procurementpractices can generatesavings and reduce the risksof energy cost inflation thatmay impact service charges.

  • 29 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

    9

    A whole buildingapproach

    29 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • Developers and owners of new and significantlyrefurbished centres may address energyefficiency with the introduction of the latesttechnology systems and high performancebuilding fabric. At a whole building level however,retailers will have a great influence on holisticperformance. Owners and managers need toeducate and inform their retailers of the keyattributes and operations of the centre, and howthe retailers fit out as well as their own actions,can impact overall performance.

    In common practice, the lack of transparency aroundowner and occupier energy intensity and maintenancecosts means that, at best, potential synergies can be lostand at worst, systems are working against each other.Greater communication and the sharing of energyconsumption data between owners and retailers are keyto driving mutually beneficial improvements.

    Improvement projects are often held back by the splitincentive where the owner invests capital however theretailer derives benefits in the form of lower service chargecosts. The suggestion embodied in Section 2, that landlordscharge for the improvements through a temporary additionto the service charge gets around this and providesfinancial benefits to both landlord and occupiers. This could still be jeopardised by difficult occupiers.

    The increasing promotion of green leases in the propertyindustry is seeking to address these issues. Theseagreements are being introduced in a range of formats,from binding clauses in the body of leases andappendices to statements of intent in the form ofMemoranda of Understanding. Clauses often address the sharing of sustainability performance data (includingenergy), commitments to meeting specific performancestandards or green building ratings, guidance andrequirements for fit outs and the establishment of forums to increase awareness.

    If successfully implemented green leases can enhancecommunication between landlords and retailers and encourage mutual engagement in performanceimprovement. Challenges are being encountered withtheir introduction across all property types howeverseveral initiatives are promoting action. The UK BetterBuildings Partnerships Green Lease Guide providesrecommendations and guidance although does notaddress the particular challenges of the retail sector.Anecdotal evidence indicates that a crucial enabler formore green lease activity is raising awareness in whichleasing and legal representatives involved in new leasingtransactions explain benefits and address risk aversion to new conditions.

    Other retail leasing trends are likely to have less positiveimpacts on collaboration and energy efficiencyimprovements. Some retailers have requested duringnegotiations that clauses be included that exclude worksto improve a centres EPC rating from service charges dueto the positive impacts on capital value. This calls intoquestion many works that would reduce the energy costsincluded in the service charge and may further emphasisethe split incentive between owner and retailer, re-inforcing the industry stalemate.

    Despite this, results shown in Section 3 may serve toovercome owners reticence to invest in energy efficiencyimprovement projects. Figure 3 shows a positive valueuplift of approximately 1-5% for all centre types,especially for older Type D centres. There is a clear valuecase for investment.

    This report acknowledges that retail properties (shoppingcentres specifically) have broader environmental andsustainability impacts that extend beyond the directenergy consumption related to building operations. Manycentres and retailers are beginning to consider theirenvironmental footprint more holistically, includingcustomer transport modes, access to zero and low carbontransport, the impact of logistics and supply chain energyuse. These are important issues for the industry. Due tothe scope of the research conducted these have not beencovered in this report however further consideration byowners, managers and retailers is recommended.

    A whole building approach9

    If successfully implementedgreen leases can enhancecommunication betweenlandlords and retailers andencourage mutual engagementin performance improvement.Challenges are beingencountered with theirintroduction across all propertytypes however several initiativesare promoting action.

    30 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • 10

    Conclusions andrecommendations

    31 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • The analysis conducted for this report highlightsthe financial and value benefits for shoppingcentre owners associated with the installation of energy efficient equipment. It is hoped thatgreater understanding of these issues willencourage landlords to appreciate that furtheringtheir green credentials produce significant valuebenefits, rather than just incurring costs.

    Two key questions were posed at the beginning of thisreport. Are more sustainable buildings worth more? And are there financial benefits from improving theenvironmental performance of shopping centres? Theseare significant areas of enquiry for shopping centreowners as the answers provide a defensible financial basis for undertaking the capital investment necessary to enhance energy efficiency.

    The report finds that it is possible to profitably increaseenergy efficiency and therefore enhance asset value.This is achieved through the replacement of some or all of the energy intensive equipment with positive impactsin terms of reduction in energy / maintenance costs andupward shifts in shopping centre value. Indeed, the casefor doing so is persuasive.

    Moreover, the benefits of such actions are proportionatelyhighest for the currently weaker shopping centres. Forrelatively modern centres a value gain of over 1% wouldbe realisable. Larger value increases accrue for oldercentres where the replacement of equipment generatessubstantial value gains of over 5%. In other words, thecapital costs of greening a centre are not necessarilyprohibitive and can actually confer significant landlordbenefits in the form of increased values or, at the veryleast, be carried out with no net financial cost.

    One of the contentions at the outset of this research was that the shopping centre stakeholder communitydisplayed limited awareness of the links between energyefficiency and value in the shopping centre market andindeed of energys current contribution to overalloperational costs. It is hoped that the information basisand analytical framework developed for this report will go some way to raising the general level of awareness and preparedness to act.

    In overall terms a centres energy credentials should beviewed by owners as an element of asset risk. Specifically,the extent to which a centre is, or is not, optimallyprovided for in terms of energy using equipment is auseful gauge of its susceptibility to value erosion orprice-chipping by prospective acquirers.

    At a practical level therefore, there is a strong case forroutinely embedding awareness and analysis of shoppingcentre energy performance, in both the investmentphilosophy and the due diligence processes of all types of owner. This would encompass regular life cycleassessments that monitor the relationship between energyand value, including benchmarking of energy costs againsttotal service charge, and energy costs as a proportion ofrental income. Medium to long term energy plans shouldbe routinely incorporated into strategic assetmanagement planning.

    There would also be significant benefit in implementingor expanding regular energy audits that benchmark theposition of individual centres on key criteria such as:

    energy costs as a proportion of service charge

    energy costs as a proportion of NRI

    the current performance of energy equipment; and

    management practices.

    Overall, a rethink-replace mantra (challenging the statusquo) evaluating alternative courses of action will positionenergy efficiency squarely as a component of asset riskthat owners should be keeping under review.

    The precise impact of physical engineering solutions on energy performance also depends on a range ofoperational, behavioural, management and procurementissues that may either re-inforce or dilute the benefit. This is an area that would benefit from further analysis to isolate the impact of individual actions however,addressed properly these could be taken as a blueprint for best practice in the energy management of shopping centres.

    Conclusions and recommendations10

    At a practical leveltherefore, there is a strong case for routinelyembedding awareness andanalysis of shopping centreenergy performance, in both the investmentphilosophy and the duediligence processes of all types of owner.

    32 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE

  • Appendices

    33 SUSTAINABLE SHOPPING CENTRES: ENERGY PERFORMANCE AND VALUE