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Regulations Likely to Impact Capital Values

RICS Registered Valuer Robin Wells considers the valuation implications of MEES regulations.

The Minimum Energy Efficiency Standards (MEES) first became effective in April 2018 when it became illegal to let residential and commercial properties with an EPC rating of F or G. Properties with EPC ratings of F & G must be improved to a rating of E or above before they can be legally let. However, it is still lawful to occupy or sell properties which do not comply with minimum MEES regulations although capital values are likely to be adversely affected to an increasing level over time as these regulations increase. Values of properties with EPC ratings of D or E are also likely to become adversely affected as the standards become more stringent and building regulations / EPC banding levels increase.

The MEES regulations will be phased in to apply to existing domestic lettings on residential property from 1st April 2020 and existing commercial lettings on non-domestic property from 1st April 2023. This will have implications for property management and valuation. The risks associated with non-compliance are generally proportional to the size and specification of the building together with the cost and complexity of making improvements to obtain compliance. For example, small industrial unit or house / flat with a may well have a low EPC rating due to the type of lighting or heating and it is relatively straight-forward and inexpensive to undertake works to meet minimum compliance (i.e. installation of a new central heating boiler with thermostatic controls and some energy efficient light bulbs). However, a large 1970s office block in central London with a high proportion of glazing and dated heating / air-conditioning systems would require significant investment and a low EPC rating would have a large impact on value, marketability and suitability for loan security purposes. There are also likely to be implications about accommodating the existing tenant during retrofitting / improvement works and statutory compensation for non-continuation of an existing tenant plus loss of rent / void periods if the property is let. EPC assessments often include recommendations and improvements to achieve an indicated potential better rating together with the associated cost savings of a more efficient building.

In the case of an investment property which is let to commercial tenants, a non-compliant EPC assessment may have implications of dilapidations claims at the end of the tenancy where the tenant can put forward an argument that there is no point undertaking a schedule of repairs, decoration, reinstatement to comply with the obligations of the lease because the property would remain unlettable and the tenants works rendered valueless as a result of MEES regulations. Tenants may also be tempted to obtain or threaten to obtain an EPC assessment in an older building which has not been assessed and is not likely to meet MEES regulations to try to avoid a dilapidations claim or carrying out any yielding up work at the end of a lease. Complying with minimum EPC banding has become more stringent since EPC assessments were first introduced over 10 years ago.

Valuers should be aware of these implications and should asses the level of risk posed by MEES and consider the extent to which Market Rent, yield and possible rental growth will be affected in non-compliant buildings as well as those which have a low compliant rating. MEES is not yet applicable to sales of property but the implications of non-compliance are increasing, particularly as energy efficiency and environmental awareness becomes ever more important.

Robin Wells BSc (Hons) MRICS, RICS Registered Valuer