The energy performance certificate needs to become a robust measure of value just like rent and the covenant, writes John Pike
The main factors affecting a property’s value have remained a constant over time: location, title and tenure, quality of building and, of course, covenant (whether as an investor buying that covenant or as occupier offering the security of covenant and thus demanding keen terms).
Into this mix has crept environmental legislation, initially focused on land contamination.
But assuming you discover them, contamination issues are relatively easy to factor into value by using the cost of remediation.
I see climate change as the next major factor to affect property values as a result of EU legislation to reduce greenhouse gas emissions by 20% by 2020 from 1990 levels. But are we really able to place a value on its impact? I don’t think so.
As a consequence of EU legislation, countries create and enforce their own regulations. So, for instance, in the UK we have greenhouse-gas reporting regulations whereby companies listed on the London Stock Exchange must, with effect from October 2013, report their carbon emissions. From 2018 it will be illegal for UK property with an energy performance certificate (EPC) rated below E to be rented out.
If legislation is the enforcer, then there are many voluntary sustainability performance measures that enable real estate companies and occupiers to understand and reduce the environmental impact of their buildings and portfolios. You cannot improve what you cannot measure, so clearly this is a critical area. GRI CRESS, EPRA, Better Building Partnership and INREV, for example, all provide sustainability-reporting recommendations.
Member organisations such as GRESB, ISA and GRA take this a step further, using data submitted by a company to assess and benchmark its sustainable performance. The kite mark of sustainability tends to be certificating bodies such as BREEAM, LEED, DGNB, HQE and others around the world.
This is all appropriate for a company’s annual corporate responsibility report, but it is not the hard evidence needed to prove that green buildings produce better yields, are more easily let to good quality covenants and produce a higher price to reflect the investment that goes into them. I personally feel that if sustainability is really to become mainstream, the aspect of value is now the one to focus on.
A report prepared by the World Green Building Council concluded that, whether from an asset-value or operating-cost basis, sustainable or green buildings will more easily attract tenants, command higher rents and thus sale and value prices. However, research in Europe showed that, while real estate investors overwhelmingly said they intended to invest more in green buildings, less than a quarter believed that clear evaluation criteria existed.
How do we establish a clear link between value and a building’s energy performance credentials? Sustainability might be slipping down the list of priorities as countries focus on debt reduction. But, with buildings contributing 40% of emissions, the property sector will remain a target for governments as they strive to meet emission target deadlines.
So the challenge is to make sustainability a core value driver. By its very nature, valuation evidence is retrospective. What did a comparable building let for? What was the net yield?
What is a building’s EPC?
The prosaic EPC has its critics. Jones Lang LaSalle in a recent report concluded that there is little correlation between a building’s design as measured by its EPC and its actual energy efficiency. The Buildings Performance Institute Europe (BPIE) produced a report analysing the status of EPCs across member states. It found wide differences in the implementation of EPCs from no requirement to strict practical enforcement. Not very useful if the EPC is to become a robust measure of value by which investors can compare properties between member states.
However, the BPIE report does recognise that the EPC has the potential to become a reliable source of information about the energy performance of a property. In the same way as rent or covenant, we need to be able to rely on its robustness and accuracy. That we cannot do this right now is not a reason not to advance the cause of the EPC and ensure a level playing field across member states. If the UK government is going to outlaw the leasing of buildings with F and G ratings, other EU countries may well follow. For the law to have credibility the EPC too has to have credibility. The challenge to the property industry is to work to make this measure as robust as all the other financial measures.
John Pike is managing director of the 40 Percent Symposium