The future is not some place we are going, but one we are creating.

John Schaar, Legitimacy in the Modern State (1981)

Introduction

On the 1st April 2018, the pricing and value of lettable real estate changed forever. As of this date, it is now illegal to let buildings on new leases with the lowest two energy efficiency ratings (Energy Performance Certificate - EPC) of “F” and “G” and the price of such properties in the market place has begun to fall accordingly. In simple terms, such properties will need to be retrofitted to achieve a legal rating (A - E) and the cost of such works is being deducted from potential sale prices. This legislation is known as Minimum Energy Efficiency Standards (MEES) and, at the moment, applies to all investment buildings, domestic or non-domestic for all new lettings.

Although the legislation, The Energy Act, proposing this change had been on the books since 2011, the market seemed to ignore all implications until the deadline date passed. It is only now that awareness of the legislation has started to impact negatively on bids and prices in the open market. But, this is just the start as there is a schedule to extend these regulations to continuing lettings in 2020 and 2023 for domestic buildings and non-domestic buildings respectively. Full details of the legislation can be found in the RICS Insight Paper (RICS, 2018[1]).

But the simple truth is that this is a major intervention in the UK property marketplace. Not since 1971, when the then conservative government introduced a rent freeze to try to counter high inflation, has there been state interference in the free market. This is a bold step and one that, I am sure, that the current government didn’t take lightly. The original hope was that the introduction of EPCs (in 2007/2008 for domestic and commercial property respectively) would be a “carrot” to entice the market to demand higher efficiency buildings as it would mean lower energy bills and, for a time as worldwide energy prices increased, there was a possibility of this strategy working. But, as oil and gas prices fell in the late naughties, that catalyst opportunity was lost. A “stick” was now needed and the MEES regulations were born.

So why the need? In many people’s eyes, it is to save the planet. In 2016, the UK signed up to the "Paris Agreement" (building on the 1997 “Kyoto Protocol” on Climate Change) to reduce our carbon emissions to 80% of our 1990 levels by 2050 to try halt, or at least limit reduce, the warming of the earth. As property carbon emissions are estimated at 50% of the overall UK total, addressing energy efficiency in buildings is essential to meeting this target.

And there lies the rub. The exclusion of “F” and “G” ratings is just the start. Some forecasted targets suggest that “E” ratings will have to be excluded by 2025, “D” by 2030, and “C” by 2040. Leaving ALL property as “A” rated by 2050. It is possible but it is ambitious. And this legislation doesn’t, as yet, apply to owner occupied properties.

Whilst I personally support this initiative as a sensible aspiration, many commentators question the importance of a small nation like the UK, which contributes less than 1% to the global CO2 emissions, imposing such draconian measures. Not least for all the intended and unintended consequences that it will bring. Initially it will impact negatively (a “brown discount”) on the values of energy inefficient properties but, over time, occupiers will start seeing lower energy bills as efficiency increases and the value of such properties will begin to increase (green premium) as the market reverts to pricing running costs as part of the overall occupation costs. There is value in the green.