Environmental concerns have big impact on rental property ownership

Just as residential landlords are contemplating the costs of bringing older properties up to the proposed new standard – very likely EPC band “C” required by December 2025 – so too are commercial landlords.

See: Compulsory EPC band “C” by 2025 causing confusion

Covid friendly

Those with office and retail investments, and some industrial buildings, also face having to pay out the substantial additional costs involved in making their buildings Covid friendly.

These prospects will in the meantime have a negative impact on the valuation of those properties needing this additional work, costs which will inevitably be factored into any purchase decision when buyers do their sums.

New research* conducted by international environmental consultants Deepki shows how environmental sustainability in buildings can have a dramatic affect on their value.

Valuation concerns, commercial property

Deepki claims to be the only company in the world offering a fully populated Environmental, Social, and Governance (ESG) data intelligence platform to help commercial real estate investors, owners and managers improve the ESG performance of their real estate assets, and therefore enhance value.

Deepki’s recent research finds the majority of respondents predicting that commercial real estate assets will depreciate by over 20% when they have poor ESG credentials. Around 66% of UK institutional commercial real estate investors and property professionals say they have seen a decrease in both the capital and rental value of their portfolios due to poor sustainability performance.

This, coupled with the hit that office and retail property has sustained as a result of Covid-19, and their effect on values has been quite dramatic. For example, rental values on some high street retail units have fallen by over 50% in the last year or two.

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

A high carbon footprint

The research also draws attention to the scale of the ESG challenge facing UK commercial real estate. Around 12% of those owners questioned reported that 5% to 10% of their real estate portfolio has poor energy efficiency or a high carbon footprint. A further 21% and 42% said that this was the case for 10-15% and 15-20% of their assets respectively.

Action being taken to address poor ESG performance

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

• 72% said that they would actively engage 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 within the UK commercial real estate sector, affecting both capital value and rental income. Real estate investors and owners recognise that they will see the value of their assets decline if they do not make the transition to net zero. However, this path is often complex and requires data intelligence, analysis and the expertise to take the appropriate action.”

Deepki says its scalable SaaS platform enables clients to collect ESG data, get a comprehensive overview of their portfolio’s ESG performance, establish pathways, assess their performance and report to key stakeholders, facilitating their transition to net zero. The platform is supported by carbon and ESG experts who partner with clients across data collection and analysis, through to ESG strategy definition and implementation.

The RICS Red Book and sustainability

RICS now say that effective from 31 January 2022, specific good practice reporting requirements on sustainability have be included as part of the Red Book.

“To further deliver the practical application of these standards we will be launching a new guidance note Sustainability and ESG in commercial property valuation and strategic advice.

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

This new global Guidance Note will, RICS says:

• Put RICS professionals at the forefront of market trends and deliver on client demand for sustainability and ESG reporting in valuation and strategic advice.
• Provide a practical framework for delivering on ESG reporting requirements in professional valuation advice.
• Empower our professionals to give practical valuation advice informing sustainable, socially responsible investments.

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

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