Are Our Pensions Founded on Sand?

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We are used to seeing environmental protection at the centre of sustainability arguments. We are not so used to thinking about the economic sustainability of what we do in construction. I believe that we may need to rethink the economic model behind commercial construction in the UK or face some dire consequences. Let me explain:

Back in 2009/2010, early in the recession, I was seeking new premises for my business. I identified a recent development in Bristol which was still unoccupied several years after completion. Normally, we would not have been able to afford city centre rents, but I thought that this building should have been ripe for negotiation, having no tenants. However, when I approached the agents I found that commercial property rent is not subject to the usual market forces of supply and demand. The agents gave me the following reason for being unable to reduce the rent. The asset value of the building is determined by the anticipated rental yield. Having purchased the building at a value based on predicted rent the landlord will not reduce the rent in order to attract tenants as this would reduce the asset value leaving them with a loss on their balance sheet. Apparently the paper value of a building is more important than it actually generating revenue. Why would this be?

Well, consider our typical commercial development model. A developer borrows money from the banks in order to construct a building which nobody actually wants. In order to maximise the potential return, the building is constructed to the lowest acceptable specification for its target market. Shortly after completion, the building will be sold to a landlord, typically a pension company. The pension company uses the asset value of the building to underwrite its future pension commitments. The pension company appoints an agent to market the building and then largely forgets about it. Rental revenue pays for the operation of the building. The developer repays the bank loans and pockets the profit.

So, now I understand. The pension companies hold these buildings on their books as assets on paper. It is these paper assets that underwrite the security of my (and your) future pension. However, it seems to me that this is based on the premise that:

  1. the asset will generate revenue;
  2. the asset will appreciate in value.

If the building does not have tenants and is not generating a revenue then what value does it actually have? Consider this other example:

Green Park is a business park development near Reading originally owned by Prudential. The park, which was valued at £500M – £600M in 2008, was held in the Prudential’s Life Fund. Green Park’s principle claim to fame is its highly visible wind turbine next to the M4. Green Park’s other landmark, 450 South Oak Way, the building facing the M4 motorway, together with its sister, 400 South Oak Way, have sat empty since completion in 2002.

450 South Oak Way has sat empty for 10 years, consuming capital rather than generating revenue.

450 South Oak Way has sat empty for 10 years, consuming capital rather than generating revenue.

These buildings were leased by Cisco shortly before the dotcom crash and never occupied. Cisco has been trying unsuccessfully to find alternative tenants since. Now, in order to prevent the building fabric from deteriorating, it must be the case that basic heating and cooling systems are kept in operation and basic maintenance is carried out. This will not be cheap considering the buildings’ fully glazed south facing elevations. So, without tenants, these buildings are consuming capital rather than generating revenue. How does that affect the asset value held on Cisco’s books? Well, Cisco gave up and surrendered their leases in July 2012.

So now the cost of maintaining these empty buildings falls once again on the landlord. Interestingly, by now, Prudential had also gotten out of Green Park, selling to Oxford Properties, the property arm of a Canadian pension fund, in 2011 for £400M (a loss of at least £100M for the Pru, such are the shenanigans of the property world). So the costs of maintaining these “assets” must now be borne by Canadian pensioners until tenants are found. I wonder if they will fare any better than Cisco or Prudential did.

In the past, commercial property has clearly been a good investment for pension funds as the assets typically always appreciated. However, this paradigm is changing. As regulations on building energy consumption are continually drawn tighter, underperforming commercial buildings will quickly become obsolete. Commercial tenants are beginning to demand energy efficiency in buildings and, further, from 2018 landlords will be unable to offer for rent any building with an EPC rating lower than E. 450 South Oak Way is Band D according to the agent’s particulars and so it is not in immediate danger of becoming obsolete. Nevertheless, the longer that buildings such as this sit empty the less likely it becomes that they will ever find a tenant, as newer buildings come along with substantially better energy ratings. Do we face the prospect that recently constructed buildings may even be demolished without ever having generated revenue? I wonder what this does to the asset value recorded in the pension fund’s books. Will we find ourselves in a few years time faced with pension funds loaded down with a whole load of toxic assets as bad as the sub-prime mortgage situation?

I’m not an economist and don’t know the answer to this question, but I do know that if my business does not produce revenue then it has no value as an asset and cannot be used to underwrite borrowing or liabilities. It worries the hell out of me that my pension might be underwritten by assets with no value other than paper.  Does anyone else have any insights on this situation?

Zero Carbon or EcoBling?

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By now, everyone should be aware that the UK is committed to reducing carbon dioxide emissions 80% below 1990 levels by 2050. Most people reading this blog will also be aware that carbon dioxide emissions arising from energy consumption in the buildings accounts for around 45% of the total.

Thus, one of the headline policies in the UK is that all new buildings should be constructed to zero carbon standards by 2020. However, by the time 2050 comes around new zero carbon buildings will only account for around 20% of the building stock, the remaining 80% are already in use today. The low carbon refurbishment of some 20 million existing buildings presents an even greater challenge for the construction industry than that of zero carbon new buildings. Further, in order to meet the commitment we will need to deliver over 2,000 low carbon building refurbishments every working day starting today.

Unfortunately, a number of recent studies of both low carbon housing and low carbon non-domestic buildings have shown that there is still a wide performance gap between the expectations of the construction industry and its clients and the ability to deliver real carbon savings. It is therefore vital that we embark on this journey of decarbonising the built environment with a clear understanding of what it will involve and which approaches deliver the best abatement at the lowest cost. Otherwise, we risk wasting time and money on initiatives that fail to achieve the end goal of reducing the overall amount of carbon dioxide emitted to the atmosphere.

Recently, the conjunction of local planning policies demanding on-site renewable energy generation and the generous financial incentives available for these technologies have created a perverse new market for small scale generation in urban locations. The most common approach now being taken to low and zero carbon housing is to use an electric heat pump in the winter and then provide the building with sufficient renewable generation to offset the electricity consumed by the heat pump over the course of the whole year. What we are seeing at the putative cutting edge of new building design will no doubt become the default approach for refurbishment too unless we do something about it.

Photo of PV shaded by taller building

Incentives encourage the installation of renewable technologies even where they are inappropriate.

In some instances I am even hearing now of projects that are abandoning super insulation and other passive energy conservation measures in order to pay for the revenue earning technologies. Under the right circumstances an owner could now be paid to generate heat that is wasted in a less well insulated building and paid again to generate renewable electricity to offset the wasted consumption and still qualify as zero carbon.

Subsidies aside, this approach to zero carbon, whether applied to new build or refurbishment, may not actually lead to zero emissions, as the assessment of carbon abatement does not take into account the different times at which the generation and the demands occur. The carbon intensity of grid-supplied electricity varies depending on the mix of generation required to meet demand. Generally, in the winter the carbon intensity is higher as more fossil fuel generation is brought into the mix to match the demand, whereas during the summer, when building attached renewables will be generating at their peak, the carbon intensity is low anyway.

Taken to the extreme, if we try to address low carbon refurbishment to meet our national targets using a mix of heat pumps and small scale renewable generators then we will simply exacerbate the problems. As more and more renewable generation is added to buildings, the carbon offset available for each individual generator will get lower and lower. On the flip side, a wholesale move to electric heating in the winter, even with the purported efficiency of heat pumps, will require a vast increase in generation capacity. Even if a substantial proportion of this demand can be met from large-scale renewables there will still be a requirement for backup generation to cover the intermittency of the renewable generators.

Then we need to consider the actual performance of heat pumps in practice. Ground source heat pumps provide pretty consistent performance throughout the year, but are expensive and require large areas of land for heat extraction. The performance of the more popular air source heat pumps depends on the external air temperature. The performance figures that are typically used to assess the carbon abatement potential are seasonal averages corresponding to outside air temperatures of 5°C to 7°C. With well designed, well insulated buildings there should be little demand for any space heating at these temperatures. In the future, heat pumps will be required to work mostly at outdoor temperatures below 0°C, when their performance drops rapidly. Thus, the instantaneous electricity demand from heat pumps during the winter could be much higher than anticipated at a time when the grid has higher carbon intensity.

A further problem with adopting small-scale renewable heat technologies to refurbish British buildings is that we have a history of building buildings that leak. The UK’s relatively benign climate means that, historically, we never really had to bother with insulation before energy conservation became such an issue, whereas our damp weather quickly leads to mould problems in buildings without good ventilation. Our standards of construction therefore reflect these very real drivers. However, this means that our buildings are generally too expensive to heat continuously, as the heat just escapes. Consequently we have adopted a pattern of intermittent heating following occupancy in homes and non-domestic buildings alike.

Intermittent heating requires a high intensity heat source such as a gas boiler, and a heating system that responds quickly, such as the traditional radiator. Low carbon and renewable heating systems work best when they are configured to deliver low intensity heat continuously to a well insulated, airtight building. To size a heat pump to deliver similar peak output to a boiler would be prohibitively expensive and lead to significant problems in its operation.

Dealing with the poor state of the fabric of our buildings must be the priority in refurbishment, before we ever start to think of bolt-on technologies. Insulation and airtightness do not have the “EcoBling” attraction of small scale renewable energy, but will require just as much thought and ingenuity if we are to get it right.

When we try to retrofit high levels of insulation and air-tightness to traditionally constructed British buildings we can quickly run into problems with indoor air quality, condensation and even rot within structural timbers, not to mention bronchial health problems relating to mould. Improvements to insulation and airtightness therefore need to go hand in hand with provision for protection against condensation and controlled ventilation with heat recovery. Thus, an apparently simple measure actually introduces a whole family of additional requirements in order to maintain a safe and healthy internal environment. Is a serious mistake therefore to try and skimp on consideration of issues relating to the building fabric in order to pay for the low carbon technologies.

Therefore, when it comes to retrofit, we must not allow ourselves to become distracted by the apparent financial attractiveness of bolt on renewable energy technologies. It is conceivable that the conjunction of zero carbon buildings, the feed in tariff and renewable heat incentive could actually lead to higher emissions overall, whilst not addressing the root of the problem. The approaches we take in order to meet policy goals in the short term may not in fact be the most sustainable approach in the long term.

The problems facing us in dealing with the building fabric issues in our stock of existing buildings will require considerable effort, expense and innovation. Failing to deal with the building fabric issues will result not just in higher than expected emissions, it could exacerbate health problems and other social issues such as fuel poverty. We need to be aware that the directions we are taking now through expedience may not lead us directly to our hoped for destination and that we may have to change direction several times before we can reach our ultimate goal.

We would be much better off focusing our efforts on building refurbishments that address the fundamental issue of consuming less energy to create comfortable and productive internal environments, rather than continuing to delude ourselves that we can simply bolt expensive technology on top of already failing buildings. That way, the cost to decarbonise our energy supply, the only real way to achieve a low carbon economy, will be reduced in line with the energy we save.

New Professionalism

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Many of the institutions that I’m involved with or watch; The Edge, RIBA Building Futures, CIBSE, even universities, are presently debating what it means to be a construction professional in the 21st century. We all recognise that construction has to change to deliver the required new paradigm but we haven’t yet figured out by how much.

The main problem as I see it is that society stopped trusting the professions a long time ago. When it has become normal for patients to challenge their doctors over diagnosis or choice of treatment, you can be pretty sure that public appreciation of professionality in general has been completely degraded.

It takes considerable time and effort to become a professional. A Chartered Architect or Chartered Engineer will require around 7 years of education and employment training to qualify, similar to the qualification period for a doctor. This is not something people undertake unless they are committed to their profession.

The public interest in ethics appears to be at an all time high.

The public interest in ethics appears to be at an all time high.

All members of professional institutions sign up to a code of ethics. These generally impose a duty on them to act in the best interests of society as a whole, not only of their clients. Yet, whilst the public is clearly interested in ethics, it seems no longer to recognise that professionality is synonymous with such ethical behaviour.

This loss of trust is reflected in many aspects of professional life. I often help evaluate applications for public funding of some sort or another. I also help assess applicants for professional qualifications. In both of these areas assessors are often urged to use their judgement to establish clear differentiation between applicants. Yet the awarding bodies deny assessors any freedom to exercise professional judgement by requiring us to follow a strict checklist process. As professional assessors we are no longer trusted to independently exercise our professional judgement.

The rise of project management in construction is another clear symptom of the death of trust in professionality. Clients, particularly in the public sector, require project managers because they no longer trust architects and designers to act in their best interests. They evidently believe that without the controlling hand of an overseer, highly trained and committed professionals would simply run amok. While it is true that there have been a number of high-profile public building debacles, the vast majority of construction professionals do in fact place the client’s interests at the forefront.

In some cases it is clear that high profile projects have gone wrong because the public sector client was unable to contain its ambition or to manage the procurement process. Equally, some of the blame in these cases must attach to the professionals who failed to advise the client properly and allowed the project to run out of control. Nevertheless, there are cases where architectural ambition has exceeded the clients budget, needs or capability. Whatever the cause, the professions as a whole are tarred with these failures.

The professions need to police themselves, and visibly so, if we are to regain the trust of society. Surely a key feature of the ethics of professionalism is the protection of the reputation of one’s entire profession? Public figures can have honours rescinded. Sportspeople can be castigated for bringing their game into disrepute. Should we name and shame the architects and engineers who blithely ignore their clients real needs or promulgate overpriced, underperforming buildings to the detriment of their whole profession? I wonder which of the professional institutions will have the ethical strength to actually enforce such a code of ethical practice?

I agree that we must find a new professionalism for construction. However I fear that unless we also address the shortcomings of the old professionalism, particularly the enforcement of existing codes of ethics and standards of professional conduct, then we will simply be constructing our houses on sand.

What is Sustainability Anyway?

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I think that I must be getting past it, it seems that I simply don’t understand “Sustainability” anymore.

I recently found it necessary to argue in the Architect’s Journal that teaching “sustainability” as subject matter is nonsense. Sustainable designs arise from a deep understanding of the issues not by adding a separate layer of activity on top.

I’ve recently been told that I am wrong to suggest that sustainability is an inherent characteristic of a construct or system rather than an additional feature. Presumably I must be wrong because that kind of thinking jeopardises the lucrative new industry of Sustainability Consultancy.

I have also come across many discussions about what it takes to be a ‘sustainable business leader” or how to “leverage sustainability” in business. Apparently there was even a Sustainable Leadership Conversation on Twitter, which fortunately I missed completely.

Now this is what I don’t understand:

The Oxford English Dictionary defines sustainability simply as “the property of being sustainable”. It also defines sustainable as “to be capable of enduring”. Now we should all want to be sustainable shouldn’t we. Consider the antonym: unsustainable. This is where we start to expose some of the nonsense in the current jargon.

If a business is not sustainable it clearly will cease to function. Definition. A business leader who fails to lead a business sustainably will bring about the death of the business pretty quickly. Therefore the leaders of any viable businesses are sustainable business leaders. Any business that is providing a service, making a profit and investing in its future must by definition also be sustainable. That’s a lot of people and businesses, much more than the self-proclaimed.

The Oxford English Dictionary also defines the term environmental sustainability as “the degree to which a process or enterprise is able to be maintained or continued while avoiding the long-term depletion of natural resources”. So environmental sustainability is a property of a system or rate of activity, such as constructing buildings or consuming fuel. Clearly such a property can only be designed into the system or activity as it surely cannot be added as a feature afterwards.

A hero of mine, Ted Happold, once said that an engineer is someone who can do for a penny what any fool could do for a pound. To me that is the definition of sustainability pure and simple. The ingenuity of engineers delivers financial, resource and fuel efficiency as a routine part of their work. In order to continue to do what we want to do as a society we need to be able to do it whilst consuming less. Less money, less resource and less fuel.

Gordon E Moore observed that the number of transistors that engineers could pack into an integrated circuit doubles approximately every two years. This ability to do more operations with less silicon has revolutionised computing and communications. Further, by increasing the capability of individual chips you reduce the overall power demand for computers and equipment. So Moore’s law predicts the increase in computing and communications capability as well as the reduced demand for electricity to run these devices.

Indeed we are now seeing the situation where electricity demands for IT are falling as obsolete equipment is replaced with new more efficient equipment. This is clearly a sustainable state of affairs, social development is accelerating whilst the cost of devices, both financial and energy are falling. This is clearly a property of the system. We simply need to balance the demand for products, to address needs not wants, with the rate at which we can safely extract raw materials.

I find myself in agreement with former CIBSE President, Prof David Fisk when he called for the word “sustainability” to be banned from technical discourse. It has become so corrupted as to not only be meaningless, but actually to obscure the real issues that we need to deal with. Lets talk knowledgeably about resources and energy consumption and social development and the economy and protecting our vital biosphere. If we are still talking about these things in 2050 then surely we will have sustained.