verdantix low carbon real estate fund launched in the uk

Verdantix Ltd 2007-2011. Reproduction Prohibited.

LOW CARBON REAL ESTATE FUND LAUNCHED IN THE UK MARCH 2011

Verdantix Ltd 2007-2011. Reproduction Prohibited. 2

March 2011

EXECUTIVE SUMMARY

Launched in 2010, the Threadneedle Low Carbon Workplace Trust (LCW) invests predominately

in existing commercial office buildings and repositions them through extensive green

refurbishments. The LCW comprises three partners, Threadneedle Property Investment,

Stanhope and The Carbon Trust. Where possible, the LCW will partner with tenants in pre-letting

agreements, enabling broad based tenant engagement from the beginning of the investment. The

Carbon Trust has developed a new environmental benchmark for buildings, the Low Carbon

Workplace Standard, which will reflect active efficiency measures, passive efficiency measures,

effective operation and occupational behaviour. This benchmark will be a reflection of a well

executed carbon management plan, based on the Low Carbon Workplace Charter, a pioneering

agreement in the UK between landlord and tenant, that stipulates the role of both parties in

constantly managing the carbon exposure of occupiers in individual buildings.

TABLE OF CONTENTS

FUND TARGETS VALUE ADDING

CARBON RETROFITS

Structural Trends Drive The Business Case

For Green Refurbishment

Cradle-To-Cradle Real Estate Fund Pushing

The Green Retrofit Market

The LCW Partnership Structure Enables

Long-Term Carbon Efficiencies

Investment Strategy Aims To Deliver Risk

Adjusted Returns To Investors

2011 Verdantix Ltd. All Rights Reserved. Verdantix, Green Quadrant, Total Portfolio and Critical Moments are trademarks of Verdantix Ltd. All other trademarks are the property of their respective companies. Verdantix clients may make one attributed copy of each figure or paragraph contained herein. Additional reproduction is strictly prohibited.

Figure 1. Typical Characteristics Of A Low

Carbon Building

ORGANIZATIONS MENTIONED

Bridges Ventures Property Fund, Carbon

Trust, Carbon Trust Enterprises, Climate

Change Capital Property Fund, GE Capital

Real Estate, Kingspan, PwC, Igloo

Regeneration Fund, Investment Property

Databank, Low Carbon Workplace, Thames

Valley Housing Association, Stanhope,

Threadneedle Property Investments,

Threadneedle Low Carbon Workplace Trust,

Urban Land Institute

FIGURES & REFERENCES

LOW CARBON REAL ESTATE FUND LAUNCHED IN THE UK HOLISTIC LANDLORD AND TENANT ENGAGEMENT KEY TO VALUE ADD

Licensed Content


FUND TARGETS VALUE ADDING CARBON RETROFITS

Kingspan estimates 90% of a buildings carbon is emitted during the occupational stages of its

life cycle. With a normal annual replacement ratio of circa 2%, the existing built stock, which

The Carbon Trust estimates is responsible for 40% of UK carbon emissions, is where the

greatest carbon savings can be made. Since 2006, four investment funds, the Bridges Ventures

Property Fund, Climate Change Capital Property Fund, the Igloo Regeneration Fund and the

Threadneedle Low Carbon Workplace Trust (LCW), have launched strategies targeting the

UK market to reposition existing commercial buildings through environmentally sustainable

retrofits. The LCW has recently closed four deals with a projected end investment value of 54

million. To better understand the LCW investment platform, Verdantix spoke to the principals

of the three LCW partners: Don Jordison Managing Director of Threadneedle Property

Investments; Rob Watts Director of Stanhope and Katharine Deas Managing Director of the

Low Carbon Workplace, the Carbon Trust subsidiary that advises the Fund.

Structural Trends Drive The Business Case For Green Refurbishment

There are clear opportunities to improve the environmental performance of the built

environment due to the historic under-investment in energy efficiency measures, such as

building insulation, upgrading mechanical and electrical plant, and building management

systems, alongside inefficient occupation and resource consumption patterns. The inertia in

viable and credible investment execution platforms to tackle this problem can be explained

through the short-term outlook, on sustainability issues, adopted by many real estate industry

actors when underwriting new projects. The LCW aims to take advantage of a number of

structural issues within the UK commercial real estate market. Specifically, the Trust aims to

benefit from:

An ever tightening regulatory environment. Climate change related regulations within

the UK and EU are evolving at speed. The latest iteration of the European Performance

of Buildings Directive (EPBD), which comes into force in June 2011, stipulates that all

commercial buildings meet minimum national government requirements regarding

energy performance when renovated. The continued evolution of the Part L building

regulations in the UK is also forcing the real estate market to embed environmental

efficiency within their activities, as is the CRC Energy Efficiency Scheme. The respective

2020 and 2050 emission reduction targets of the EU and the UK parliaments are driving

this focus.

Shifting trends within the commercial occupiers market. A 2010 GE Capital Real

Estate survey, of circa 2,200 respondents from Canada, France, Germany, Japan, Spain,

Sweden, UK and USA on tenant attitudes towards green buildings reported that green

building initiatives are a key influencer when deciding to sign a commercial real estate

lease. The 2011 Urban Land Institute (ULI) / PwC Emerging Trends in Real Estate

Europe report stated that sustainability was now a front and centre issue for tenants

choosing office space. Tenants now consider environmental efficiency to be a proxy for

quality in the leasing market. building initiatives are a key influencer when deciding to

sign a commercial real estate lease.

VERDANTIX LOW CARBON REAL ESTATE FUND LAUNCHED IN THE UK


A large pool of potential buildings and tenants. Around 60% of the non-domestic

buildings in use today will still be in use in 2050 according to The Carbon Trust. Of the

46 billion in the Investment Property Databank (IPD) Office Index, over 90% is more

than 10 years old. As such, this building stock therefore is highly unlikely to be carbon

efficient or comply with current or forthcoming legislation. Over the next five years,

33% of all the leases in the UK market will expire. Verdantix estimates the total potential

addressable market for green retrofits to be 14 billion of investments over this period,

representing in the region of 820 million of annual rental income.

Cradle-To-Cradle Real Estate Fund Pushing The Green Retrofit Market

The alignment of different variables presents an opportunity to take first mover advantage in

the UKs growing green retrofit investment and management markets. The LCW looks to

invest in properties across the UK that can be economically retrofitted and occupied with

tenants who share the Trusts vision. Verdantix research indicates that the LCW differentiates

itself through:

A pre-let strategy to drive carbon performance. The LCW will partner, where possible,

with tenants in advance of purchasing a building. This model enables tenants to actively

participate in all stages of the refurbishment programme, ensuring that building

management and tenant issues fit-out needs for example are addressed at the design

stage rather than after the tenant takes occupation. This approach will also ensure the

investment liquidity of the asset, whilst adhering to good risk management practice.

Amongst the recently closed deals was a 15 year term pre-let agreement with the

Thames Valley Housing Association for Premier House in Twickenham, London. Based

on high occupancy levels, the LCW expect Premier House to achieve around 50%

reduction in carbon emissions.

Industry leading building carbon performance benchmark. Given the slow adoption

of in-use building standards, The Carbon Trust has developed a standard that better

reflects how buildings perform adjusted for occupancy. The LCW Standard marries CO

emissions of the building envelope with a utilization based assessment of how a

building is performing from a carbon perspective, calculated as carbon emitted on a per

person per annum basis. This combined approach will enable a real time activity based

assessment of a buildings performance from a carbon perspective.

Active and continuing tenant engagement. The LCW will redefine the structure of

landlord and tenant relationships in the UK. A more collaborative and pragmatic

approach to managing a buildings environmental footprint will be facilitated through

the Low Carbon Workplace Charter. This agreement commits both parties to work

towards agreed environmental milestones. Regular landlord and tenant meetings, along

with transparent monitoring and reporting, will empower occupiers to strategize for

carbon in their occupational behaviour. The Charter is a non-binding agreement that

signifies the occupiers commitment, lying between a memorandum or understanding

and a green lease on a spectrum of engagement. The LCW has developed the Charter to

maintain the commercial validity of the lease.



The LCW Partnership Structure Enables Long-Term Carbon Efficiencies

Whilst the speculative value-add investment model will not be ignored, the LCW proposes,

where possible, to partner with tenants in advance of investing in buildings and maintain a

close relationship throughout the period of the investment. This model, whilst not

revolutionary, is innovative in that the LCW partners are proposing structural reform of the

UK landlord and tenant relationship. This approach is one where the investor views value

through tenant engagement in as many stages of the execution process as possible. Verdantix

found that the trust benefits from having an:

Investment manager with a track record. Threadneedle currently has 5.6 billion of

property assets under management. Its managed property investment portfolio

comprises over 1,000 directly held properties with over 4,800 tenancies. Threadneedles

responsibility in the LCW, under the leadership of Don Jordison, is to source property

along with typical asset management and portfolio risk management initiatives.

Industry leading development manager. Stanhope has over 25 years experience as a

developer, development partner and development manager. During such time the

company has been wholly or jointly responsible for the delivery of projects with a value

in excess of 10 billion. The Stanhope team, led by Rob Watts, will assist with

identifying potential properties and will undertake the redevelopment works.

Carbon advisor who will bridge the landlord and tenant divide. The Low Carbon

Workplace Ltd is a wholly-owned subsidiary of Carbon Trust Enterprises, the

commercial arm of The Carbon Trust. Under the direction of Katharine Deas, it will

contribute low carbon design advice for refurbishments, coordinate the Low Carbon

Workplace Protocol certification and provide ongoing low carbon assistance under the

Low Carbon Workplace Charter.

Investment Strategy Aims To Deliver Risk Adjusted Returns To Investors

The spread of skills across the partnership should ensure that prudent financial and carbon

management are fully aligned from deal origination through refurbishment and on to

occupation. The LCW simultaneously offers investors both development and investment

opportunities. In addition, LCW partners are incentivised to actively manage the carbon

exposure at all stages of execution. Verdantix research found that:

Risk is split between development and investment categories. The LCW is structured

to allow investors gain exposure to both development and investment activity. The

return on equity profiles for each risk category is different, with development profit

projected at 15% Internal Rate of Return (IRR) whilst the investment portfolio valuation

aims to outperform the IPD Quarterly Index by at least 1% per annum.



Carbon management is integrated across both activities. The LCW will acquire existing

built stock and refurbish it to a low carbon compliant standard. The LCW will target

tenants prior to development in the belief that the quality of the product will help close

pre-let agreements. During the investment stage, the LCW will actively engage with its

tenant pool, through the LCW Charter, in managing the funds refurbished carbon

compliant offices.

Landlord and tenant proactively engage on building carbon efficiency performance.

One of LCWs core aims is to empower the occupier to understand how their offices

should be run. The Low Carbon Workplace Standard looks to reflect active efficiency

measures, passive efficiency measures, effective operation and occupational behaviour

(see Figure 1). This Standard will be an indication of a carefully considered and well

executed carbon management plan.

Performance fees are based on successful financial and carbon management. The

structure of LCW partners remuneration package is based on both successful financial

and carbon management. During the development stages, the LCW development

management and carbon advisory fees will be based on a percentage of the overall

development costs. Similarly, during the investment stages, the LCW will be awarded

an investment management and carbon advisory fee based on a percentage of the

portfolios Gross Asset Value, excluding developments.


Figure 1. Typical Characteristics Of A Low Carbon Building

Source: Verdantix, Threadneedle Low Carbon Workplace Trust

Passive Building

Measures

Active Building

Measures

Measurement,

Management And

Reporting

Occupational

Behaviour

Low Carbon Technology

High Efficiency Lighting

High Efficiency Plant

Lighting Controls

Heat Recovery

Simple Reporting

Good Maintenance

Detailed Measurement

Of Energy Consumption

And Occupancy

Regular

Feedback

Switching Off

Unwanted Load

Occupation Matching Plant

Operating Periods

Good Floor To Ceiling Heights

Good Day Light Flows

High Thermal Mass

Natural Ventilation

Orientation


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verdantix low carbon real estate fund launched in the uk

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