Is there such a thing as a Green Energy Value Premium for UK commercial property?

If a building with certain attributes is in demand but in short supply it will command a premium. Occupiers are becoming more discerning when selecting ESG strategies and the energy environment they deem suitable for their business and employees. It is safe to say that within the office leasing market, those offices with excellent energy efficiency EPC ratings are capable of attracting a higher rental income and ultimately a higher investment value than those offices which ignore the importance of energy efficiency. Therefore a green energy value premium emerges due to the choices occupiers are making.

Many fund and asset managers are starting to appreciate that securing high energy efficiency EPC ratings now will enhance future portfolio returns. A full appreciation of energy efficiency therefore becomes an important part of a building’s design when it comes to repurposing or retrofitting.

With the recent sharp rise in energy prices, the links between greener energy efficient buildings and better investor returns are emerging at a faster rate than anticipated. There is a strong risk of buildings which are inefficient in terms of their energy performance becoming stranded, struggling to attract suitable occupiers and in turn losing value. This sequence of events is likely to see many refurbishment and energy performance retrofitting programmes brought forward as building owners look to retrofit at the earliest opportunity in order to entice potential occupiers.

The second factor now having an impact on value and arguably generating a green energy value premium is legislation. The introduction of the Minimum Energy Efficiency Standards (MEES) in 2018 is now starting to play a part in property valuations which adds further weight to the argument to refurbish and retrofit at the earliest opportunity.

As of 1 April 2023, MEES require that all existing commercial property, let or on the market to be let, will require a minimum EPC rating of E. Many building owners will be forced into carrying out works and re-testing to evidence a valid EPC rating of E or above. EPMaxx can assist with this process of retrofitting and re-testing to ensure compliance with legislation and that target EPC ratings are met in the most cost efficient way.

Prudent building owners should also have one eye on the intended legislation that is currently at White Paper consultation stage, which if put in place will require all commercial property to secure a minimum EPC rating of C in 2027 and B in 2030. We are working with building owners to assess their property’s energy efficiency shortcomings and use approved software to model packages of retrofit improvements with the aim of providing the most economic and effective pathways to reach the required EPC ratings.

The current legislation is ensuring that certain levels of energy efficiency are met across all commercial property stock. With deadlines in place and defined standards, the legislation allows property valuers to make an adjustment to the value of a property, typically the amount of capital expenditure that needs to be spent to meet the required levels.

This cost is quantifiable and valuers are comfortable with making the deduction if the property is sub standard. This creates a green energy value premium in favour of those properties that already meet the required levels.

In terms of improving energy efficiency across the UK commercial property stock, many would argue that MEES does not go far enough and that the Carbon Net Zero pledge is empty in the absence of a standard definition and an official formula for achieving it.

The lack of a definition is stifling commitment from some of the larger players in the commercial property market. If there was a certificate attainable for Carbon Net Zero, providing a clear pathway to achieve it, more key players in the market would get behind it. The value in having the certificate will suddenly become easier to assess as owners will be able to identify what needs to be done in order to achieve it.

It is evident that due to changing occupier demands and the tightening of legislation surrounding energy efficiency, there is a clear ever-increasing green energy value premium applicable to those properties with the very best energy efficiency credentials.

An EPC is certainly no longer just a bit of paper one needs in order to buy or let a property. Investors, property owners and occupiers, now more than ever, need to focus their attention on what is written on it and what action they need to take to comply with legislation. EPMaxx can help with the process from start to finish.