Henley study reveals impact of new energy standards on property sector

10 March 2020

Henley study reveals impact of new energy standards on property sector

A pilot study by Henley Business School academics which explores the impact of the new Minimum Energy Efficiency Standards (MEES) reveals that whilst the property sector has welcomed their introduction as a step in the right direction, little evidence was found of preparedness for the planned future ‘ramping up’ of standards needed in order to deliver on the government’s zero carbon commitments.

The MEES regulations are widely viewed as an important initiative aimed at reducing carbon emissions from buildings which in turn contribute to meeting overall national reduction targets. Described by the National Energy Foundation as “the single most significant piece of legislation to affect our existing building stock in a generation”, it is estimated by a European Think Tank that only 3% of building stock is constructed or improved to the highest energy standards.

The MEES regulations came into force in April 2018 as part of a phased approach and are due for full implementation by 2023. Fines for non-compliance are significant – up to £150,000 for the commercial sector and up to £5,000 for the domestic sector.

The study

The study which was carried out in 2019 was funded by the Reading Real Estate Foundation, and saw researchers conduct in-depth interviews with a number of property advisors, valuers, asset managers, lawyers and building specialists from across the property sector in order to explore the initial market response to the new legislation in terms of values, valuation practice, asset management and leasing practice.

The research showed that at the one-year mark, while the sector was working to comply with the new standards, there was very little connection being made in the market between the regulatory framework and the ramping up of government policy in respect of de-carbonisation.

Key findings

A key finding in the study suggested that there was a disconnect between the sector’s acknowledgement of the rapid and real change needed to deliver a zero-carbon economy and the market response of short-term compliance. The findings showed that a ‘business as usual’ approach to property asset management on valuation still prevailed which was ‘incompatible’ with the government’s longer-term ambition.

In June 2019 the government announced that as part of its climate change measures it had decided to increase its ambition from an 80% reduction in carbon by 2050 to a zero-carbon position by the same date.

Professor Sarah Sayce, Professor of Sustainable Real Estate at Henley Business School, said:

“Delivery against these objectives is challenging for the sector. It requires motivations to improve, and the availability of sustainable finance, professional expertise and trusted, proven technical solutions. There is no doubt that it will require large scale investment by both public and private sectors. Enhancing new build standards is comparatively straightforward compared with the challenge of investing in upgrading the existing stock which by most estimates contribute some 40% of carbon emissions”.
“What makes things more challenging is that the parameters that the sector was working hard to meet have now changed. There is a risk that if the government push forward with their zero-carbon ambition there is a potential for major property market disruption which has not yet been fully foreseen or anticipated, except by leading investors.”

Other key findings from the study include:

  • MEES regulations are proving to be effective as an awareness raising tool; it is also seeing some buildings brought into compliance but mainly through minor work not deep retrofits.
  • Overall MEES compliance is considered ‘too easy’ which encourages minimal action – sometimes even changing the light bulbs or commissioning a new EPC is enough to satisfy the regulations. Such an approach is thought unlikely to engender large-scale market transformation and upgrading of buildings.
  • Several respondents consider that the Energy Performance Certificate (EPC) is not an appropriate metric for MEES as it does not measure carbon emissions or energy efficiency in terms of consumption; they would prefer a system based on actual building performance rather than an asset rating.
  • There are significant penalties for non-compliance yet there is a current lack of enforcement which could risk effectiveness of regulations if owners know they are unlikely to be penalised.
  • Market values are beginning to respond to MEES by the marking down of non-compliant buildings. If MEES regulations are tightened, negative impacts on values could lead to non-compliant stock becoming stranded; this could have undesired economic and social consequences.
  • MEES has become embedded in the due diligence process for valuation though reporting practice varies. But other concerns such as Brexit and defective cladding systems were seen as bigger risks to value.

The study concludes that in order to make a meaningful contribution to carbon reduction targets MEES will need to be set at a level that leads to significant upgrades in buildings and has a scope that will capture the majority of stock – not just those that are let.

It also suggests a need for education and further investigation as to how such connection between climate crisis and property management can be made.

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