A significant percentage of real estate assets in England and Wales are exposed to a valuation risk as a result of the introduction of Minimum Energy Efficiency Standards (MEES) under the Energy Act 2011.
MEES will be of concern to those responsible for managing existing debt and new lending. A system capable of identifying and managing risk (and maximising opportunities) will be needed by lending institutions if, as expected, the UK parliament approves the legislation before the election.
Introduction to MEES
The requirement for MEES means the largest landlords in the country are being forced to reassess the energy performance of buildings. Legislation has, for the first time, created a mechanism for valuing energy efficiency.
On 4 February 2015 DECC issued its response to its consultation on MEES and laid before parliament its recommendations: by 1 April 2018 landlords will have to undertake energy efficiency improvements as outlined in regulations. Energy efficiency will be defined by an Energy Performance Certificate (EPC), and qualifying improvements must be implemented.
From 1 April 2018 MEES will apply to new lettings and to lease renewals or lease extensions where there is an EPC. From 1 April 2023 it is to apply to all property. The possible effects on valuation differ depending on whether a lease is afforded security of tenure by the Landlord & Tenant Act of 1954 (part II) as amended. Where there is the case and there is an EPC, a property is affected as soon as parliament passes the legislation.
DECC has advised the minimum EPC rating will be an E. If a property has an EPC rating worse than an E then, before it can be let or when its lease is renewed or extended, the landlord will have to get an assessment carried out. Any works that pass one of the two viability tests must be implemented - even if the EPC rating does not subsequently improve.
This has the potential to impact on asset value, as the cost of compliance can be quantified by works identified by an assessor. In addition, it is not only the direct costs of works which needs to be considered but also the indirect costs. It is not always possible to undertake improvements without disruption, especially so in multiple-let buildings. An asset manager may have to start to schedule improvements around the leasing cycle instead of the maintenance cycle and this may have implications in terms of service charge recovery.
How can we help?
CO2 Estates offers an innovative, unique and cost-effective software solution to allow institutions, funds and REITs to manage risk and capitalise on opportunities as a result of MEES.
Our software has been developed over two years working in collaboration with some of the world’s largest REITS. As a result we have developed a solution capable of working at scale to deliver corporate real estate benchmarking, improvement analysis and energy-led retrofit strategies to help maximise the financial performance of large property portfolios
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An Introduction to CO2 Estates modelling software
1.
2. An Introduction to CO2 Estates
CO2 Estates Ltd
The Team and Advisory Board…
We consist of a team of experts in building science, engineering, software development and business management, and an advisory
board, including:
• Dr. Paul McNamara - former Director and Head of Research at PRUPIM (M&G Real Estate)
• Ian Marchant - former CEO of SSE from 2002 until he left the position as of 30 June 2013 (Investor)
• Dr. Katy Janda - interdisciplinary scholar and a senior researcher at the Energy Research Centre (Oxford, UK)
• Fred Siegele - former exec VP/general counsel of Advanced Delivery & Chemical Systems Inc. (Austin, TX)
Working with…
We are an early-stage technology company delivering software-driven solutions to enable the
continuous improvement of energy performance and management of risk across large, dynamic
property portfolios.
3. Retail therapy
CO2 Estates Ltd
• Challenges surrounding energy efficiency, specific to the retail sector exist:
- Regular physical changes to retail assets
- Divide between Landlord and Tenant domain is well defined
- The approach to assessment and modelling of stripped out units can place the Landlord unnecessarily at risk
- Initial fit-out by a new Tenant can result in variable energy efficiency levels within the context of MEES
5. Energy efficiency assessment and modelling
Data quality
Modelling inputs Quality assurance
• Assessor competency
• Assessment instruction
• Top down guidance
• Auditing standards
• Big data benefits
• Transparency
CO2 Estates Ltd
Dilapidations
New
Letting
Fitting Out
Management
Periodic
Reviews
Existing
Letting
6. Energy efficiency assessment and modelling
CO2 Estates Ltd
Dilapidations
New
Letting
Fitting Out
Management
Periodic
Reviews
Existing
Letting
Assessor
competency
Assessment
instruction
Top down guidance
• Specific retail scenario guidance
• Assessment of shell and core
• Ad hoc assessor selection
• Urgent instruction
• Strategy dissemination
• Assumptions
• Mentality to assessment
• Retrofit recommendations
7. Energy efficiency assessment and modelling
CO2 Estates Ltd
Do I have an EPC?
EPC is instructed
ahead of marketing
New letting Tenant fits-out
Energy assessor delivers
EPC
• Disjointed approach
• Worst case assumptions can place landlord in risk
• Best case assumptions can place the tenant in risk
• How is the middle ground defined when there isn’t an incoming tenant and proposed fit-out to assume?
• How can we ensure the energy model is representative of the new tenant fit-out?
Top down guidance
8. Energy efficiency assessment and modelling
CO2 Estates Ltd
Assessor
competency
“…assessors say failures have related to trivial errors
which either made no difference at all to the rating, or
made just one or two points difference, with no
change to the band.”
9. Energy efficiency assessment and modelling
Data quality
Modelling inputs Quality assurance
• Assessor competency
• Assessment instruction
• Top down guidance
• Auditing standards
• Big data benefits
• Transparency
CO2 Estates Ltd
Dilapidations
New
Letting
Fitting Out
Management
Periodic
Reviews
Existing
Letting
10. Energy efficiency assessment and modelling
CO2 Estates Ltd
Quality assurance
Automated quality
audits
Pre-defined data
evidence hierarchy
League of assessors
A tiered QA process, with
quality audits on 100% of
energy models using
technology to identify
default inputs.
Referencing a pool of big
data to identify anomalies.
Pre-defined data file
submissions to support
cross-checking between
digital site notes and
models.
Grading of assessors
based upon the outcome
of the QA process.
To enable quality
assessors to differentiate
themselves.
13. Collaborate or control?
CO2 Estates Ltd
0
25
50
75
100
125
150
175
CFL Template
Lighting Scenario
Part L2B 2013
Lighting Scenario
Large Retail Park Unit
0
25
50
75
100
125
150
175
CFL Template
Lighting and HVAC
Scenario
Part L2B 2013
Lighting and
Compliance Guide
HVAC Scenario
Small High Street Unit
0
25
50
75
100
125
150
175
CFL Template
Lighting and HVAC
Scenario Compliance Guide
HVAC Scenario
Part L2B 2013
Lighting and
Compliance Guide
HVAC Scenario
Medium Retail Park Unit
0
25
50
75
100
125
150
175
CFL Template
Lighting and HVAC
Scenario
Part L2B 2013
Lighting and
Compliance Guide
HVAC Scenario
Small Shopping Centre Unit
Non-Dom Compliance
Guide 2013 Lighting
CFL Template
Lighting
CFL Template
Lighting and NDCG
2013 HVAC
NDCG 2013
Lighting and HVAC
CFL Template
Lighting and NDCG
2013 HVAC
NDCG 2013
Lighting and HVAC
CFL Template
Lighting and NDCG
2013 HVAC
NDCG 2013
Lighting and HVAC
Part L2B 2006
Lighting
Part L2B 2006
Lighting &
HVAC
Part L2B 2006
Lighting &
HVAC
Part L2B 2006
Lighting &
HVAC
14. Collaborate or control?
Dilapidations
New
Letting
Fitting Out
Management
Periodic
Reviews
Existing
Letting
CO2 Estates Ltd
• SBEM version impact analysis:
8,000 building energy models simulated in approx. 8 hours by Carbon Estates
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
Projected area-weighted change
(2018)
Projected change between major versions
(2018)
Change between major versions
17. Strategic dilapidations
Dilapidations
New
Letting
Fitting Out
Management
Periodic
Reviews
Existing
Letting
CO2 Estates Ltd
• Strategic energy-led fit-out and re-fit
• Optimisation of investment strategies for mutual Landlord and Tenant benefit
Lighting
Retrofit
EPC
index
EPC index diff Cost
Simple payback
(yrs)
Mutual LL & T
benefit
Unit A
Whole 93.36
-1.26
£43,500.00 22.81 N
FoH only 94.62 £11,284.80 6.52 Y
Unit B
Whole 63.43
-28.54
£8,629.20 20.60 N
FoH only 91.97 £3,261.00 8.49 N
Unit C
Whole 68.85
-11.73
£1,620.00 2.66 Y
FoH only 80.57 £1,326.00 2.20 N
18. Carbon Estates Software - Decision-support for energy-led retrofit
CO2 Estates Ltd
• Energy-led improvement is a multi-criteria
decision-making process that requires support.
• Carbon Estates’ automated retrofit strategies:
‒ Out of risk
‒ Cost-effective out of risk
‒ Minimum inconvenience
• Automated cross-referencing between energy
performance and asset management data sets
and schedules
19. Opportunity for ‘Change from Within’…
CO2 Estates Ltd
Data
Management
Collaboration between Landlord and Tenant teams
Overcoming landlord and tenant divide
Opportunity for performance gap analysis
Transparency at periodic reviews
Continuous, informed risk management
Strategic energy-led investment