Pressure on landlords to keep up with government legislation around sustainable buildings

November 29, 2023

In the contemporary landscape of property management, the imperative for sustainable buildings is increasingly underscored by their demonstrable benefits to environmental stewardship, public health, and economic efficiency. Empirical studies reveal that green buildings can yield operational cost savings in the range of 14% to 19% compared to their non-sustainable counterparts. This economic advantage, coupled with burgeoning environmental and public health considerations, is catalyzing a paradigm shift. Consequently, landlords globally are confronting escalating pressures, both ethical and legislative, to steer their building operations towards maximal sustainability. Asset Managers, particularly those overseeing portfolios for major Real Estate Investment Trusts (REITs), are intensifying their efforts to align with these emerging standards. In this endeavor, the integration of analytics Software as a Service (SaaS) technologies is proving to be a linchpin, significantly streamlining the process of implementing and monitoring sustainable practices within the property management sector.

Why is there so much pressure?

The intensified pressure on landlords and property managers to embrace sustainable building practices is primarily driven by the urgent global need to combat climate change. Phenomena such as rising sea levels, increasing ocean temperatures, and shifting agricultural patterns underscore the far-reaching impacts of this crisis. The adoption of the 2030 Agenda for Sustainable Development by all United Nations (UN) member states highlights a worldwide commitment to address these challenges, emphasizing the crucial role of sustainable development in mitigating climate change impacts.

Beyond climate change, the real estate sector faces additional environmental responsibilities. These include managing commercial waste, preserving biodiversity, ensuring water efficiency, and mitigating pollution. Given the significant contribution of the real estate sector to global greenhouse gas emissions, primarily through energy consumption and construction, there is a growing imperative for sustainable building practices. This is evident in initiatives like retrofitting buildings for energy efficiency, adhering to green building standards such as LEED (Leadership in Energy and Environmental Design), and integrating renewable energy sources, which are becoming increasingly standard in the industry.

Laws and regulations

Despite so many environmental issues affecting the world and constant calls for commercial buildings to become more sustainable, landlords have been slow to respond. For example, in the UK, just 30% of commercial landlords say they have a sustainability strategy in place. With a lot of work still to be done, laws and regulations are growing to force landlords to get on board. In the UK, one key regulation owners must address are the minimum energy efficiency standards (MEES). This regulation states that landlords can only let out properties that have an energy efficiency rating of E or better, unless an exemption certificate is held.

Australia is planning new energy efficiency laws and regulations too, which will add even more pressure onto commercial landlords. The Property Council of Australia and the Green Building Council of Australia have recently recommended several measures, including:

  • All new residential and commercial buildings should operate on high-quality electric equipment in the National Construction Code 2025.
  • Commit to being zero-carbon-ready for all new and existing government-owned and leased buildings by 2030.
  • The need for a long-term strategy for zero-carbon-ready buildings.

In fact, The Australian Government recentlyreleased the ‘Net Zero in Government Operations Strategy’, demonstrating a commitment to reduce the Australian Public Service's own emissions to net zero by 2030.The strategy outlines the approach and important steps to reducing emissions from Australian Government operations and transitioning to net zero in areas like property, energy, procurement, fleet and travel. Some key takeaways for the property industry:

  • From 2025, where a lease is entered into for 4+ years for an office space of 1000sqm+, 5.5 star base building and tenancy NABERS Energy ratings are required.
  • From 2026, where a contract is entered for the purchase or construction of office space valued at $15 million or more, the space requires a 6 star NABERS Energy rating.
  • From 2026, any office space purchased or constructed by the Commonwealth valued at $15 million or more must obtain a 4 star Green Star certification.
  • From July 2024, where a lease is to be entered into for office space, entities should prefer all-electric buildings. By 2040, entities should only lease or own office space that is all-electric.

Getting landlords on board

Asset managers must remain abreast of their legal duties surrounding sustainability. A recent Direct Line study found that 24% of landlords don’t feel on top of changing regulations, while 36% say it’s difficult to keep on top of the changes. This is unsurprising as there are a growing network of laws and regulations that landlords need to be mindful of, including ones relating to accessibility. People with disabilities mustn’t be discriminated against and there are laws advising landlords that reasonable modifications and accommodations must be made. These include things such as adding ramps, grab rails, railings, and wide doorways.

Using technology to respond

With so much pressure and legislation in place, commercial landlords have no option but to make their buildings more sustainable. One way to do this is via the latest technology. CIM’s PEAK platform helps landlords to effectively manage their energy consumption. By using AI-powered analytics, PEAK can support landlords in cutting carbon emissions and reducing energy consumption. This technology can also be used to monitor and avoid energy drift so that upgrades can be made and the building optimized. For landlords based in the EU, this is crucial as new energy-saving targets were recently announced as part of the European Green Deal. Under the deal, members must cut their energy consumption by at least 11.7% at EU level by 2030.

Work with tenants

To effectively facilitate sustainable transformations in building management, a symbiotic collaboration between landlords and tenants is paramount. This approach is vividly exemplified in Hong Kong, where joint efforts are being channeled to achieve the city's ambitious objective of diminishing carbon intensity by 65 to 70% by 2030 relative to the baseline year of 2005. The momentum in Environmental, Social, and Corporate Governance (ESG) practices is accelerating, with tenants increasingly expressing a readiness to participate in sustainability endeavors. These initiatives encompass enhancements in waste management and advancements in energy efficiency. Given that asset managers bear the primary responsibility for the building's operational performance, it is incumbent upon them to spearhead energy efficiency improvements. This proactive stance is essential, as relying solely on tenants to initiate changes may prove insufficient in meeting broader sustainability goals.

Financial incentives and implications

Financial incentives are currently in place for commercial buildings with solar panels in places across Asia, the US, Canada, Germany, and India. Failing to follow regulations and laws relating to sustainability can also result in hefty fines. UK landlords caught renting out commercial property that does not meet MEEs standards could be fined £5,000, or 10% of the property's rateable value, up to a maximum of £50,000. With sustainability and energy efficiency laws and regulations getting stricter and the impact of global warming, climate change, and similar getting more serious, the penalties landlords face could get significantly bigger.

What the future holds

The pressure on landlords is unlikely to ease in the future. Regulation reviews and amendments are sure to occur regularly and asset managers will need to adjust accordingly. Things could get stricter in some locations, including Hong Kong. Locals there want landlords and tenants to sign legal green leases that force them to hit sustainability targets or have to pay penalties. Governments worldwide are focusing heavily on making commercial buildings in their countries more sustainable. As a result, many landlords have to make big changes to their buildings in order to stay within the law.

Produced with support from writer Jackie Edwards

Chris Joannides
November 29, 2023