JLL - Creating more value with fewer resources in real estate

February 21, 2018

When performance matters most

by Marit van Rheenen, Associate Director, Upstream Sustainability Services, JLL

With thanks to EG, who first published this article in February 2018

The recent Chinese ban on the import of foreign plastic waste was a game changer for the UK - we have now lost the repurposing destination for nearly two thirds of our plastic. Shortly after the Chinese ban, Theresa May announced she wanted to eliminate all avoidable plastic waste within 25 years and retailer Iceland committed to eliminating plastic packaging for its own brand products. After decades of political focus on energy efficiency, our agenda is now extending to cover the wider issue of resource efficiency. A much needed shift as we have consumed more materials in the last 50 years than ever before in history, with devastating consequences for our environment. The focus on resource use marks the start of our transition to a ‘circular economy’.

At its simplest, the ‘circular economy’ is a systematic approach to the design of processes, products and services to help us manage resources effectively and ultimately eliminate waste. It helps us understand that the ‘service life’ a product has with its current user does not equal the ‘technical lifespan’ of the materials it contains. Take your mobile phone, it contains precious metals that are quickly nearing depletion. It is designed to last only until a newer model is released and it largely ends up in landfill because the business case for recycling is challenging. The service life and technical lifespan are in complete disconnect, resources are simply ‘used’, rather than ‘used up’.

Knowing that the UK construction industry is the largest consumer of natural resources (400 million tonnes/year) and the biggest producer of waste (a third of all UK waste), with disappointing recycling rates; how does the concept of a circular economy translate into the built environment?

The circular economy is not just about recycling, it is more akin to the commonly known ‘reduce-reuse-recycle’ approach:

1.     Reduction is about minimising demand, prioritising the total cost of ownership, understanding embodied materials and adaptability and disassembly. Solutions include digitalising services, standardised dimensions that allow for functional changes in the building, using reversible connections (e.g. screws instead of welding), selecting materials that will cause minimal waste (like 3D printing) or simply choosing products with a higher recycled or biodegradable content.

2.     Reuse focusses on maximising the yield of the product in its current form. Solutions include refurbishment, sharing space to minimise hidden vacancies (comparable to AirBnB or WeWork), providing repair services on site, and seeking partnerships to ensure products are reused (e.g. repurposing platforms like Loop Hub or Premier Workplace Services).

3.      When the service life of a product in its current form comes to an end, recycling can unlock a new life for its component parts. Limited recycling infrastructure in the UK is currently negatively affecting the recycling rates for some materials. Working together with specialised marketplaces can greatly improve this whilst generating additional revenue. Take back schemes such as that of Desso floor tiles or MDF Recovery Ltd can even ensure ‘closed loop recycling’, when the product goes back to the manufacturer to be recycled into the same product again.

One of the game changers accelerating the transition to a circular economy in real estate is the shift from traditional ownership to a leasing model for products and services. Through this approach, manufacturers retain greater control over their products and the embodied energy and materials, thus enabling better maintenance, reconditioning and recovery. The model incentivises manufacturers to look at the embodied materials as a resource for future production. Customers benefit too, as they only pay for the service they require, and manufacturers have a greater interest in fulfilling performance expectations and extending the service life. In the built environment this brings a welcome focus on the in-use (environmental) performance of the building.

Performance models for property are gaining momentum. Several developers are piloting leasing models for building materials. The development of ’Park 20|20’ in Hoofddorp, The Netherlands is based on a business model that views buildings as ‘material depot’, aiming to reverse the material cycle. All the buildings in the business park have material passports and are constructed from resources suitable for closed loop recycling where possible. Provision of third party financing was taken into account as the project recognised that liquidity is essential for suppliers and contractors, limiting their ability to pre-finance ‘pay per use’ leasing models.

Examples of the shift towards a performance economy are more abundant in the operational stage of a building, since the shorter service life of non-structural elements makes leasing models more comprehensible. For example, Philips has piloted a ‘pay per lux’ lighting model on several projects, including the National Union of Students in London. This is delivered via a service agreement where the light fittings stay in ownership of Philips, maintenance is provided, take back of the materials is included, and the electricity bill is paid by Philips. The shift in ownership has resulted in systems that lasts 75% longer than conventional alternatives and has achieved energy reductions of up to 50%. Companies like Steelcase Solutions and BMA lease out their chairs enabling users to pay for ‘sitting hours’. Singapore-based air-conditioning company Kaer provides an indoor climate on a fixed pay-as-you-use rate, leading to cost reductions for the building owner of up to 70%, whilst greater margins incentivise Kaer to half the energy consumption.

As we find ourselves transitioning to a circular economy, legal and financial challenges are still abundant. What does an investor invest in if not the ownership of brick & mortar? How do developers, property owners, financial institutions and waste contractors adapt to a changing business model? How do you structure the intellectual property rights, standards and warranties for reused components? What kind of safeguards would be needed to make sure suppliers will be around to honour a 20-year service contract?

If we can answer these questions and create a truly circular economy, we will be able to realise more value for stakeholders whilst using fewer resources. Sustainable economic growth decoupled from resource consumption is without doubt the future we should aim for.

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