Assessing the impact of the intensifying UK minimum energy efficiency standards (MEES) on regional office rental values

Abstract

ABSTRACTSince the introduction of the UK Minimum Energy Efficiency Standards (MEES) in April 2018, commercial buildings with a substandard Energy Performance Certificate (EPC) rating may be deemed untenable, depreciate in value and become obsolete. This paper aims to establish the value of the EPC in UK commercial buildings utilizing the hedonic pricing model and how the intensifying MEES might affect these values. The findings can then inform investors and developers in the Real Estate Development (RED) industry of the risks associated with low energy-performing assets. The missing link between environmental performance and property value is the consideration of the local market’s response to sustainability. Subsequently, this paper focusses on market location and environmental performance as the key regression variables. Data has been collated on 5444 commercial office buildings across the 12 UK regions, sourced from CoStar UK and the Ministry of Housing, Communities and Local Government Non-Domestic Energy Performance Register. The regression results indicate the first statistically significant findings relating to the EPC and office rental values. Interaction variables between the EPC and regional location also reveal that the value for energy performance is perhaps weakest in Yorkshire and the Humber and the East Midlands. However, both findings should be treated with caution, where the variables’ coefficients are insignificant relative to all other regression variables. The magnitude of the separate regional variables indicates potential implications for North East and South East office landlords and tenants, particularly where these regions demonstrate some of the lowest and highest levels of building quality respectively and thus, potentially lower and higher levels of energy performance. Developers and investors who own substandard EPC-rated offices in the RED industry might also benefit from renovation premiums and simultaneously protect themselves against the intensifying MEES, if they renovate their building to a sufficient EPC grade.