Climate goals are forging a closer relationship between ECPs and property valuations for lenders

The COP26 summit marked a pivotal moment in delivering on the global climate agenda, and the UK government — the first major economy to put into law its objective to achieve net zero carbon emissions by 2050 — is leading the charge by calling for greater sustainability measures across society.

This is hugely relevant to real estate as, in the UK, the built environment sector is responsible for approximately 40% of the total carbon footprint. 

Energy Performance Certificates (EPCs) are becoming an increasingly vital component of the valuation process that lenders rely on. We’re seeing momentum with the institutional investor community factoring in ESG benchmarks more and more into decision-making as a way to diversify portfolios and lower their risk profile — and the same considerations apply to commercial financing decisions. 

The trend has been accelerated by the pandemic, which has shone a light on the urgency of redressing the climate crisis. KPMG revealed  that 54% of real estate industry participants surveyed are planning to focus their portfolio strategy more towards ESG, with 83% reporting higher demand from tenants for environmentally-friendly buildings. Energy efficiency will only grow in its importance to the performance of the market over the next few years.

Energy efficiency at the heart of valuations and lending

The government has set out its goal for as many homes as possible to achieve EPC band C by 2035 while, for non-residential properties, it aims to reach the EPC B target by 2030. Additional sweeping changes to cut emissions include offering up to £5,000 to households to replace gas boilers with low-carbon alternatives — part of the government’s larger drive to ban gas boilers for new properties  — which could come into effect as soon as 2025. 

A key role of a valuation is to identify whether a property is EPC compliant and conduct as accurate an assessment as possible, especially as a clear value disparity is evident between EPC-compliant buildings and those that are less energy efficient. 

Consequently, lenders and intermediaries in the commercial finance market, which have typically been removed from direct contact with the assets, now have no choice but to be more closely involved with delivering on EPC standards. A potential challenge is the sometimes-questionable accuracy of EPC ratings that are over five years old. However, in the case of those rated below ‘E’, a valuer can recommend commissioning an updated EPC review to provide lenders with greater reassurance and confidence in the validity of the assessment. 

Beyond COP26, I see the market prioritising incorporating EPC and other ESG credentials into lending criteria more strongly than ever to ensure lenders’ security, assess occupational running costs, and drive positive environmental impact — all of which will directly affect investments’ capital value.

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