Is the CRE industry prepared for the sustainability changes ahead?

With less than two years until the UK’s new Minimum Energy Efficiency Standards (MEES) come into effect, it’s becoming abundantly clear that the country’s real estate industry is far from prepared for these new regulations and the impact they could have on the value of domestic portfolios.

Beginning April 1, 2018, landlords will no longer be able to issue new leases or renewals on properties with an Energy Performance Certificate (EPC) rating below E (F and G rated properties).  And by 2023, all existing commercial property leases will be affected by MEES. From a cash flow perspective, these assets will be effectively worthless and according to a Jones Lang LaSalle (JLL) study, this could affect nearly 20 per cent of commercial properties in the UK.

A recent report from GVA Bilfinger entitled Green to Gold, found 43 per cent of fund and portfolio managers surveyed had yet to access their portfolios’ risk profile with regards to the 2018 MEES changes. Additionally, the report shows that the importance this group places on sustainability has not changed much since these new regulations were announced two years ago. Though a large majority have a sustainability strategy or policy in place, reporting on the cost or benefit of analysis is somewhat governed by the information held within the investment appraisals. Two-thirds of respondents said they do not assign specific costs and that they believe both valuers and investment agents fail to adequately reflect the issues.

“Preparing for MEES now is essential,” says Jessica Pilz, Environmental and Sustainability Risk Manager at RBS. “This goes beyond simply assessing portfolios for risk, but implementing proactive portfolio-wide strategies to de-risk assets. This extends to individual assets where early engagement with our customers and advisors is key.”

To prepare for the upcoming changes, EPC improvement measures need to be integrated into existing asset management processes, such as pre-planned maintenance schedules, and establishing EPC commissioning criteria. Once this due diligence is complete, adequate systems should be employed to track EPC ratings against properties and portfolios to allow the various stakeholders to assess risk and build visibility and accountability into an ongoing sustainability strategy. Preparations for 2018 MEES changes will be especially difficult for those in the industry who have been late to adopt technology for asset and portfolio level reporting solutions designed to support new regulations such as this.

To avoid exposure, when the new MEES come into effect, the industry needs greater transparency and accountability in the management of assets and portfolios to assess whether current practices will enable them to be ready for April 1, 2018.