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One in five commercial properties at risk of devaluing because of energy legislation

The introduction of the Minimum Energy Efficiency Standard (MEES) in April 2018 will require properties to achieve a minimum ‘E’ rating and applies to new leases and renewals.

But a collaborative research paper has found that the MEES legislation could mean that those properties affected might become legally uninhabitable or see a significant drop in value.

The government has reported that almost one in five (19%) of commercial property in England and Wales is in danger of not complying with the upcoming MEES legislation. This means an estimated £165.49 billion of the UK commercial property market is at risk.

The research paper, produced by tech developer CO2 Estates, has calculated that the 19% of properties not complying could see the capital value reduced by as much as 10% with the impact on the total UK value estimated to be as much as £16.54 billion.
Calculation

So where does this figure of £16.54 billion come from?

Based on the Investment Property Forum report on size and structure of the UK property market, in 2015 it was estimated to be worth £871 billion.

The latest (2014) research figures from Landmark Information Group showed that 19% of Energy Performance Certificates (EPC) in England and Wales are currently F or G rated.

Therefore, an estimated £165.49 billion of total commercial property is not currently complying with MEES legislation.

Potential effects

The research paper highlights the potential effects of MEES on rent and capital values by examining the implications of the various related arguments valuers might raise at rent reviews or lease renewals value.

It is also a huge opportunity for commercial mortgage lenders to fund improvements in properties with an F or G rated EPC.

Comment

Pauline White, underwriting analyst at Zurich, said: “It is clear there is a lack of awareness surrounding the MEES legislation. Bilfinger GVA’s ‘Green to Gold’ report highlighted that almost half (43%) of property portfolio managers have not yet assessed their portfolio’s risk in relation to MEES.

“There is no doubt the MEES legislation will have an impact on commercial property portfolios. There will also be added confusion as there are different stances being taken by the Scottish Parliament and Westminster, which will only add complexity.”

Maureen Eisbrenner, managing director of CO2 Estates, said: “Landlords and tenants are being forced to reassess the energy performance of buildings because legislation has, for the first time, created a mechanism for monetising energy efficiency.”

The research paper was prepared by CO2 Estates director of engineering and asset management, Andrew Cooper, and head of product development, Dr Megan Strachan. It was peer reviewed by former director & head of research at PRUPIM (now M&G Real Estate) Dr Paul McNamara OBE, RICS fellow Ian Feltham, and chartered surveyor Sue Elwood.

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