Putting a Value on Energy Efficiency

Posted by Glenny on 6th September 2021 -

The need to factor in energy efficiency as a determining factor in property valuation is going to become increasingly important over the coming years, potentially impacting future property values and the lenders' security. We are already seeing an increasing trend amongst larger institutional investors seeking higher BREEAM ratings on new opportunities, with “excellent” fast becoming the benchmark.

As valuers, we currently quote the EPC rating in our reports, identifying if a property doesn’t have an EPC or if the EPC is non-compliant. We also consider the costs to implement improvements and take this into account when we do valuations. Buyers have access to the same information, and by the dynamic of the open market, the value differential of energy efficient buildings compared with those less efficient is beginning to be in evidence.

Lending criteria based on EPC ratings may add further weight to this evolving trend, however, our immediate thought is the reliability of EPCs, particularly those more than five years old. When we are reporting on EPCs below an E rating, we often recommend that a new EPC is commissioned which may confirm the accuracy of the original EPC or provide an update following improvements in the building since the original EPC was commissioned.

This possible challenge might be diluted as we move forward and old EPCs are updated but investigating the accuracy of an EPC on a wider scale may open a can of worms resulting in the need for reforms for the way energy performance is assessed and certificated in the future. Greater confidence in the validity and accuracy of EPCs will evolve, but at the current time, the reliability of EPCs is sometimes questionable.

More significant changes are anticipated in 2025 when the government plans to phase in a boiler ban to support the UK’s efforts to achieve net-zero carbon emissions by 2050.  It is believed that this plan includes a strategy to ban gas boilers from all new build homes from 2025 (although this might be moved out to 2030). Maybe at this stage affordability calculations will come into their own, especially where obsolete boilers will require replacement by the buyer.

We wonder whether lenders in the commercial sector will also begin to consider more carefully the energy efficiency of buildings as part of their lending criteria, not just if a building is simply “compliant” but also for those buildings that only just make the “compliant” range as energy efficiency tolerance levels are tightened over the next decade.

In the commercial investment sector, for instance, tenants and investors are not only increasingly looking at their buildings energy efficiency as part of an overall occupational running cost, which is being reflected in rental values, but also the total environmental impact which we anticipate will directly impact on the capital value of the investment.

For further or advice, please do not hesitate to contact our team.