Are Landlords Putting Investments at Risk By Blindly Following Building Regulations?
Buildings are at risk. Property, by its very nature, is relatively permanent, often difficult to adapt and slow to reinvent. However, as the nation returns to work post-Covid, the needs of those that use buildings are changing rapidly with factors such as health and wellbeing, social value and sustainability rising in importance to us all.
In a recent report by TFT, occupiers have shown they require a building that performs to these factors or they will be held to account by their staff, customers and stakeholders. However, the report also shows that in some cases owners, investors and developers are being left behind.
According to a survey of 200 decision makers, occupiers view building performance as part of a long-term strategic plan, with 88 per cent having a plan in place (to enhance the value and future resilience of their buildings, up to at least 2030). Just 62 per cent of investors and only 38 per cent of developers have an equivalent plan in place.
The pandemic has reinforced the importance of surpassing current building regulations and market standards in order to attract people back to work spaces again. The needs of occupiers are becoming more complex as they consider not just their space requirements but wellbeing alongside environmental impact and social value. Occupiers are therefore looking for buildings that surpass current building regulations to meet these emerging requirements. Not doing so could result in costly retrofits for owners, or a failure to attract occupiers and secure long lease lengths. Fundamentally, this means investors who fail to respond will find the value of their buildings diminishing over time. Whereas those that respond now, can secure long-term returns on their portfolios.
Alistair Allison, Managing Partner of TFT said: “It is clear from our report that the expectation of occupiers is leading the way on future building performance, with many investors playing catch up. However, most concerning is developers falling behind – meaning many buildings being delivered now are at risk of failing to meet future occupier needs. This will directly impact the bottom line for investors and owners over the medium to long term. Building regulations take time to match market expectations in many key areas, but especially in health & wellbeing and sustainability. Investors and developers making decisions based on regulations, or even to a slightly higher spec than regulations, will therefore not meet occupier needs. Too often these newer concerns are seen as good strategy but have yet to widely inform property investment decisions which unlock value and improve asset resilience.”
To attract occupiers who are willing to commit to the long-term, investors and developers need to know how to pre-empt these requirements and curate spaces that meet them now, or at least ensure their buildings have the flexibility for the future.
However, the report highlights there is a mismatch between investors’ long-term objectives and developers’ shorter-term horizons (i.e. those developers that sell developments on completion/once let). This is especially true in the context of forward funded developments, as investors are often involved when a design is well-advanced and have limited leverage to implement changes to the design that would have a positive impact on performance. It is essential to help close the performance gap between what a developer plans to deliver and investor requirements, with effective project monitoring bringing together surveying, M&E and sustainability skills for developments that are already underway.
The report also shows many building owners are aware of occupier expectations, but are not yet taking adequate steps to meet future needs. 94 per cent of investors said they believe safety will be an important part of investment criteria in 3-5 years, but less than half (41 per cent) have already implemented safety improvements. In addition, 90 per cent of investors predict sustainability targets will be stricter in 3-5 years, but only 70 per cent are considering environmental criteria in their investment decisions now.
Alistair Allison continued: “What we are seeing is a clear divergence between ambition and action. Investors recognise the importance of sustainability, flexibility and wellbeing to occupiers and in building performance, but are not making the necessary decisions now to meet the performance demands and therefore protect against future risks. Quite simply, investors and developers must address the decision lag.”
A significant issue is with new buildings. As these are often speculatively developed, the distance between what developers are creating and what occupiers want can be significant and our research suggests this is widening. This means there is a danger that buildings being created and designed now might not meet sustainability, flexibility and wellbeing requirements in 3-5 years. This could leave investors with buildings becoming prematurely obsolete necessitating costly retrofits to enhance building performance, subsequently decreasing the potential returns from a building or portfolio. The gap needs to be closed.
Alistair Allison added: “Investors are at the heart of this, sitting between developers and occupiers. Through collaboration and accurate measurement they can bridge the divide between what is being delivered and what occupiers need. This applies to both new and existing assets and is the only way to protect the long-term value of investment portfolios. It is therefore a win-win for all involved. This has never been more important as every company is looking at changes to the way their people and spaces are managed following the last lockdown. However, this is not just about Covid. In fact, we commissioned this research in 2020 before the first lockdown. The pandemic has only served to accelerate changes already underway.”
To do this, TFT argues, it is crucial investors and developers go beyond current regulations and that requires a cultural behaviour shift. The industry needs to start seeing social value, sustainability, health & wellbeing and flexibility as being at the heart of investment and development criteria. This will ensure the industry delivers buildings fit for future occupier needs, that hold value and unlock returns.
However, the report highlights the need to address existing buildings. More often than not buildings are designed and then left, we do not monitor, measure or improve the performance of those assets through time. With 80 per cent of buildings that exist today likely to be around in 2050, greater emphasis is required on measuring performance and seeking occupiers’ views on their experiences ahead of taking action.
Existing buildings which aren’t performing to occupiers’ needs will likely lose out to competitors, as occupiers will vote with their feet.
Alistair Allison concluded: “Forward-thinking, holistic, expert advice across a property life-cycle can help investors meet both existing and future building performance requirements. TFT offers services covering development, built asset management, sustainability and engineering, which focus on commerciality of buildings and advocate for more progressive standards across our client base. By working with advisors using TFT’s approach, investors can unlock the value of their properties, outperform regulations, and exceed occupier requirements.”
TFT’s report surveyed 200 developer, occupier and investor decision-makers to explore how the industry achieves, measures and thinks about building performance.