LOW CARBON REAL ESTATE FUND LAUNCHED IN THE UK

MARCH 2011

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LOW CARBON REAL ESTATE FUND LAUNCHED IN THE UK

HOLISTIC LANDLORD AND TENANT ENGAGEMENT KEY TO VALUE ADD
March 2011

Licensed Content

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

FIGURES & REFERENCES

FUND TARGETS VALUE ADDING

CARBON RETROFITS

Figure 1. Typical Characteristics Of A Low

Carbon Building

Structural Trends Drive The Business Case

For Green Refurbishment

ORGANIZATIONS MENTIONED

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

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

2011 Verdantix Ltd. All Rights Reserved. Verdantix, Green Quadrant, Total Portfolio and Critical Moments are
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VERDANTIX LOW CARBON REAL ESTATE FUND LAUNCHED IN THE UK

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.

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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.

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VERDANTIX LOW CARBON REAL ESTATE FUND LAUNCHED IN THE UK

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.

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VERDANTIX LOW CARBON REAL ESTATE FUND LAUNCHED IN THE UK

Figure 1. Typical Characteristics Of A Low Carbon Building

Good Floor To Ceiling Heights

Low Carbon Technology

Good Day Light Flows

High Efficiency Lighting

High Thermal Mass

High Efficiency Plant

Natural Ventilation

Lighting Controls

Orientation

Heat Recovery
Passive Building
Measures

Occupational
Behaviour

Regular
Feedback

Switching Off
Unwanted Load

Occupation Matching Plant

Operating Periods

Active Building
Measures

Measurement,
Management And
Reporting

Simple Reporting
Good Maintenance
Detailed Measurement
Of Energy Consumption
And Occupancy

Source: Verdantix, Threadneedle Low Carbon Workplace Trust

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.

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