Housebuilders

  • Accessing new development opportunities

Property Landowners

  • Protecting Housing Value

Minimum Energy Efficiency Standard (MEES)

  • 2020 - Ban on letting property where the EPC rating is less than E

  • 2030 - Ban on letting where the EPC rating is less than B

RICS Red Book
 

  • Minimum Energy Efficiency Standards directly impact:

  • Market Value

  • Investment Value

As defined in the RICS Red Book:

Market value – The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion.’

 

Investment value – The value of an asset to the owner or a prospective owner for individual investment or operational objectives … (May also be known as worth.)

Minimum Energy Efficiency Standard (MEES)

Compliant and likely to remain so

It is unlikely that MEES will have any impact on value but for any revaluation monitor to assess the impact of potential future changes in regulations.

Some regulatory change risk

Non-compliant but costs to achieve compliance are very low

Investigate whether non-compliance is a result of an early/unreliable EPC rating. If works are minimal and could be undertaken without disruption to occupation, make cost deduction or consider slight yield adjustment as the property is likely to remain at risk of subsequent changes in MEES.

Likely regulatory change risk

Domestic and non-compliant but upgrade costs to comply are deemed to be capable of being met within the Green Deal or other third-party funded scheme

Despite the ‘no cost to the landlord’ principle in the current regulations, there is likely to be an adverse effect on value, even if the investor can fund the works through a grant or other incentive scheme. The amount of reduction in value will depend on the local market and whether other comparable but MEES-compliant stock is available to buy or rent. Further, there is a risk that the ‘no cost’ principle will be changed.

Probable substantial adverse effect on market and investment value

Non-domestic and non-compliant but upgrade costs to comply are deemed to meet ‘test of reasonableness’

There is a probable negative impact on both market and investment value; this could be substantial depending on the costs and location. The valuer should consider not just the cost of the work, for which specialist advice should be sought, but potential loss of income during the works. They should consider any possibility of an extended void period.

Adverse effect on market and investment value likely

Non-compliant and will likely remain so even after all ‘allowable works’ completed

The valuer should fully investigate whether the property cannot be brought into compliance and should check the Exemptions Register. The valuer should also consider whether meeting the test of reasonableness is likely to change at the end of a temporary exemption period. If the property cannot now comply, it may continue to be let but the valuer should bear in mind that it could be unattractive to both tenants and investors alike and this could result in lower rental values and higher yields. The valuer should investigate whether the property might be attractive to an owner-occupier and whether redevelopment or ‘deep’ refurbishment provides a higher market value.

Substantial adverse effect on market and investment value

Disposal or deep refurbishment recommended

Incapable of being brought into compliance due to nature of the construction and will remain continuously exempt because no works would qualify

These are so-called ‘hard to treat’ properties. Where they are situated in areas of comparatively low rental values and high yields and they are typical of local stock, the impact on value may be small, but it is important that the valuer establishes that the exemption will continue. However. some properties, notably residential, may be highly desirable for owner-occupation despite being sub-standard in energy terms. The valuer should consider this but may also consider whether redevelopment would be a realistic prospect.

Substantial adverse effect on market and investment value

Redevelopment recommended

Market Lending

Lenders are interested not just in property values but in the risks associated with the loans they make. This is a separate matter to the assessment of risk that will be built into a market valuation by the valuer.

 

However, banks are increasingly instructing valuers to provide comments on the valuations they commission. The lender may wish to be advised not only as to the market value today but also of the risks that will impact value over the lifetime of the loan.

 

Currently banks are not normally asking specifically about energy efficiency and MEES. However, going forward, it is likely that MEES will be a risk that lenders will wish to evaluate in formulating their lending policies; they may then adjust their mortgage offer based on their perceived risks. If finance for the purchase of sub-standard properties becomes more difficult or more expensive to obtain, this could negatively impact on the value

Lending valuation risk

Citations

RICS (2019), RICS Valuation, RICS

www.rics.org/uk/upholding-professional-standards/sector-standards/valuation/red-book/red-book-uk/

BEIS (2020), Domestic private rented property: minimum energy efficiency standard - landlord guidance, BEIS [Domestic private rented property: minimum energy efficiency standard - landlord guidance - GOV.UK](https://www.gov.uk/guidance/domestic-private-rented-property-minimum-energy-efficiency-standard-landlord-guidance)