The Impact of Sustainability Metrics on Financial Performance in Corporate Real Estate

Date: 18th February 2014

Part 7 – EPC ratings and other ratings

Since EPC ratings measure effective energy efficiency for a building, and since different types of buildings have various energy needs, some researchers prefer to split their analysis by building types reports RICS (2010). The most common split for non-residential buildings appears to be: offices, industrial, shop and warehouse. This allows for the analysis of various power intensity levels to be analysed separately and acknowledges that different groups of investors might have different preferences for energy efficiency. While a warehouse owner might see little benefit from investing into sustainability projects, an office space investor could potentially reap significant benefits from higher energy efficiency and increased air quality.

Fuerst et al. (2011) point out that communal areas pose significant problems in the use of EPC ratings by analysis and academics. This is due to the fact that certain buildings might have various sections of them used by different groups for a wider variety of activities. A large space could be used partially by a small production space, an office and a small shop at the lowered floors. This means that each will have its own energy consumption and specific energy use. However, with the way communal areas such as hallways, receptions, etc. are designed, their energy use will be fluctuating and outside any of the 3 groups effectively. This means that such a building will have an EPC rating which is most likely inconsistent with any category of building (industrial/office/shopping space). Furthermore, the authors note that it is very hard to measure the impact of one specific element, such as the EPC rating, on the overall price of a real estate asset due to the uniqueness of each building. As there are very few buildings in high proximity of each other which are designed in the exact same fashion and built in the exact same way, it is easy to imagine that each asset’s value is significantly different from other similar ones. The article also points out that sometimes EPC ratings are highly linked to building material quality, and thus any effect on prices might come from the former. This is especially true for heat retention systems, where high quality materials can be used to build a building’s walls to better manage heat. Such materials could have a much longer lifespan and could also prove to be considerably more resistant, meaning that the overall building quality could be enhanced significantly. In areas with high risk of natural disasters (tornadoes, earthquakes, etc.) these features would be value much higher than any energy efficiency feature they would also provide, meaning that their impact on prices could be falsely attributed to the wrong attribute.

RICS (2010) considers the US LEED certificate to be considerably more biased towards energy use than the UK BREEAM, by as much as 50%. Meaning a building with very high energy efficiency but lower air quality or few climate preservation systems would obtain a considerably better LEED rating than BREEAM, or might not even receive BREEAM acknowledgement at all.

LaSalle (2013) brings into discussion the relative ineffectiveness of EPC in estimating real energy performance. Their analysis of several hundred buildings shows that actual energy performance is very little related to a building’s certification, noting that it actually varies considerably from simple design intent. The report paints a worrying picture for analysis, showing that certain E-rated very large office buildings can outperform very similar C-rated buildings by over 65%. However, the authors fail to report on a series of issues: have any of the buildings suffered any drastic changes to their interior design or have any significant improvements done since their last EPC appraisal? And do all the buildings house the exact same (or very similar) type of tenants, in the sense that their effective energy needs and consumption are comparable? Without the answer to such questions one is left wondering on the effective power of this report. Nevertheless, even taking into consideration such problems, the results presented are considerably spread out to warrant further investigation in these issues. At the very least, LaSalle (2013) reminds everyone that the problem of determining actual energy efficiency is still highly complex and difficult to quantify.

Finlay (2010) notes that reputational value is highly important in real estate; this usually translates through negative events on the downward side and very good architectural design or a unique location on the positive side. As such, any positive reputational element, such as a “green” label, can increase a building’s monetary value. The author also points out that stricter energy rating labels carry an exponentially higher benefit that those with less rigorous evaluation systems and less tight requirements. This is a possible reason behind the development of the increasing number of ratings and the expansion of each label into various sub-groups.

Posted in: Latest News

Tags: CRE insight