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Energy legislation puts commercial properties at risk of devaluing

According to a research paper by tech developer CO2 Estates, as much as £16.54bn could be wiped off the value of the UK’s commercial property portfolio due to upcoming energy legislation.

For the first time ever, a collaborative research paper has outlined the impact of the upcoming Minimum Energy Efficiency Standards (MEES) legislation. It has revealed that that the capital value of commercial property could be reduced by up to 10%. The report is unique in that for the first time arbitrators and solicitors have quantified the risk using a realistic building lease case study.

The UK Government reported that 19% of all commercial property in England & Wales is in danger of not complying with the upcoming MEES legislation. This means that an estimated £165.49bn of the UK commercial property market is at risk.

The CO2 Estates research paper has found 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 £16.54bn.

The news will come as a stark warning to the property industry as properties affected could become legally uninhabitable or see a significant change in their value.

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.

The paper 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. 

Pauline White, underwriting analyst at Zurich said: “I support collaborative research and I will watch with interest to see the outcome the energy legislation will have on the industry. 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.

She added: “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. Any research which highlights the need to act now and gives practical guidance on how to prepare for this issue is very welcome.”

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 highlighted the potential for valuers to develop highly polarised arguments in rent negotiations depending on whether they are appointed by the landlord or tenant.

Maureen Eisbrenner explained how the research paper could inform those discussions: “Our detailed case study suggests the possible effect of MEES regulations on value ranges from a sum slightly in excess of the cost of relevant energy efficiency improvements, to one considerably in excess of the cost of relevant energy efficiency improvements. Overall this could lead to a reduction of over 10% in the building’s capital value, which in the property world, could well be a significant sum.”

The Minimum Energy Efficiency Standard will require properties to achieve a minimum ‘E’ rating and will apply to new leases and renewals from April 2018.

The Carbon Estates platform will be opened up to the consultant / EPC Assessor market from April 2017.

The full research paper can be downloaded here:

22 December 2016


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