15 Jan 23 by Rebecca Cook
Valuation Impact of MEES on Commercial Property
Since 2018 and the introduction of the Minimum Energy Efficiency Standards (MEES), commercial properties have required an Energy Performance Certificate (EPC) evidencing a minimum band of E prior to the grant of a new lease. From 1 April 2023 this requirement will apply to all leases, meaning it will be unlawful to continue to let a commercial property with an EPC band below E, unless the landlord registers an exemption.
MEES aims to encourage owners/landlords to improve the energy efficiency of their properties. While Building Regulations ensure new properties meet current standards, the aim of MEES is to tackle the UK’s older buildings. Many landlords have used the lead-in time to the 2023 deadline wisely, checking and enhancing EPC bandings in readiness. For those who haven’t, what will be the impact on the value of a property considered sub-standard?
Notably amongst the most recent changes to RICS Valuation – Global Standards, commonly known as the “Red Book”, was the inclusion of Environmental, Social and Governance (ESG) defined as ‘‘the criteria that together establish the framework for assessing the impact of the sustainability and ethical practices of a company on its financial performance and operations. ESG comprises three pillars: environmental, social and governance, all of which collectively contribute to effective performance, with positive benefits for the wider markets, society and world as a whole” under the International Valuation Standards (IVS). ESG is intrinsically linked to MEES and the revisions to the Red Book require valuers to collect appropriate data and consider any sustainability and ESG factors that could affect a valuation. These include potential future cost liabilities to meet regulatory and investor requirements.
Buildings with an EPC band of F or G cannot be lawfully let without a registered exemption. It therefore follows those buildings will have a Market Rent of nil. As regards market and investment values, there is currently little market evidence to suggest there has been a significant impact, as small improvements, such as the installation of low energy LED lighting, can often provide a cost-effective means of improving an EPC banding.
The Government has set a target for the UK being net-zero by 2050. As such, MEES are expected to tighten further in 2030 requiring a minimum band B, with an interim milestone of band C in 2027. With the more significant jump in banding, properties, particularly older buildings, may require a higher level of capital expenditure to improve the rating. Domestic gas prices are understood to have reached an all-time high, and electricity prices have risen substantially over the last 12 months. As a result, tenants are already starting to indicate a greater regard to energy efficiency, with new, greener developments being in demand. For those buildings considered sub-standard, the combination of expenditure, interim risk to or loss of income, combined with lower levels of tenant demand, is likely to be of greater consideration to investors and potentially impact a property’s investment value going forward. MEES is also likely to be a greater consideration for lenders in the future, with the threat of reduction in value of their security; a landlord borrowers’ repayments are typically linked to their ability to let a property, which could be impacted due to loss of rental income and additional capital expenditure costs.
1 April 2023 is a deadline the commercial property market cannot ignore and landlords with occupied properties with F or G rated EPCs are encouraged to seek advice from an appropriately qualified energy assessor.
Vickery Holman have a dedicated team of Chartered Valuation Surveyors who have the knowledge and expertise to advise on the value of a range of property types including the valuation impact of MEES. If you require advice on the value of a property for any purpose, please contact a member of the valuation team.