Environmental concerns have a significant impact on rental property

Just as residential owners are considering the costs of bringing older properties into line with the proposed new standard – most likely EPC ‘C’ band required by December 2025 – so too are commercial owners.

See: Mandatory EPC Band “C” by 2025, confusing

Covid friendly

Those with investments in offices and retail, as well as some industrial buildings, must also pay the substantial additional costs involved in making their buildings Covid-friendly.

In the meantime, these prospects will have a negative impact on the valuation of the properties requiring this additional work, costs which will inevitably be taken into account in any purchase decision when buyers make their calculations.

A new study* by international environmental consultants Deepki shows how environmental sustainability in buildings can have a dramatic effect on their value.

Valuation issues, commercial property

Deepki claims to be the only company in the world to offer a fully powered environmental, social and governance (ESG) data intelligence platform to help commercial real estate investors, owners and managers improve ESG performance of their real estate assets, and therefore to increase their value. .

Recent research from Deepki reveals that the majority of respondents predict that commercial real estate assets will depreciate by more than 20% when they have poor ESG credentials. Around 66% of institutional commercial property investors and property professionals in the UK say they have seen both the capital and rental value of their portfolios decline due to poor sustainability performance.

This, coupled with the hit that office and retail properties have taken as a result of Covid-19, and their effect on values ​​has been quite dramatic. For example, rental values ​​for some high street retail units have fallen by more than 50% over the past two years.

More than three-quarters of respondents to Deepki surveys predict that the capital value and rental income of their real estate assets will depreciate by more than 20% on their ESG performance alone, highlighting the growing importance of sustainability in commercial real estate UK.

A high carbon footprint

The research also draws attention to the scale of the ESG challenge facing commercial property in the UK. About 12% of landlords surveyed said that 5-10% of their building stock had low energy efficiency or a high carbon footprint. A further 21% and 42% said this was the case for 10-15% and 15-20% of their assets, respectively.

Actions are taken to address poor ESG performance

Here is a list of actions survey respondents said they are likely to take to address the poor ESG performance of their property portfolios in the future:

• 72% said they would actively work with the property management team to make improvements

• 61% said they would invest in improving energy efficiency

• 45% said they would work with a third party to develop an ESG strategy and measure performance against KPIs

• 28% said they would demolish and rebuild failing assets

• 10% said they would sell their assets

Katie Whipp, Head of Deepki UK, said:

“ESG performance is now fundamental to the financial performance of assets in the UK commercial property sector, affecting both equity value and rental income. Investors and property owners recognize that they will see the value of their assets decline s “They don’t make the transition to net zero. However, this path is often complex and requires data intelligence, analysis, and expertise to take the appropriate action.”

Deepki says its scalable SaaS platform enables clients to collect ESG data, gain comprehensive insight into their portfolio’s ESG performance, build journeys, assess their performance and report to key stakeholders, thus facilitating their transition to net zero. The platform is supported by carbon and ESG experts who partner with clients for data collection and analysis, through to ESG strategy definition and implementation.

The RICS Red Book and Sustainability

RICS now indicates that with effect from 31 January 2022, specific sustainability best practice reporting requirements have been included in the Red Book.

“To further the practical application of these standards, we will publish a new guidance note on sustainability and ESG in commercial property valuation and strategic advice.

“The updated guidance provides practical and globally relevant principles for implementing the sustainability and ESG requirements required by the Red Book.”

According to RICS, this new global guidance note:

  • Place RICS professionals at the forefront of market trends and meet client demand for sustainability and ESG reporting in strategic assessment and advice.
  • To provide a practical framework for meeting ESG reporting requirements in professional valuation advice.
  • Empower our professionals to deliver practical valuation advice that informs sustainable and socially responsible investing.

*Research conducted by Pureprofile with 100 institutional commercial real estate investors and commercial real estate professionals as of October 2021. Read the full report, here.

About Wanda G. Warren

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