The Impact of Energy Performance Certificates on the Rental and Capital Values of Commercial Property Assets: Some Preliminary Evidence from the UK Franz Fuerst and Pat McAllister

Research Question For UK commercial real estate assets, does EPC rating have a significant effect on –Appraised Market Value? –Appraised Market Rent? –Equivalent Yield?

Previous Research US - LEED and Energy Star certification –Miller, Spivey and Florance (2008) –Eichholtz, Kok and Quigley (2010) –Wiley, Benefield and Johnson (2010) –Fuerst and McAllister (2011) –Fisher and Pivo (2009) –Jaffee, Stanton and Wallace (2010) Asia – various eco-labels –Yoshida and Sugiura (2011) – Japan –Deng, Li and Quigley (2011) - Singapore Europe - EPC –Brounen and Kok (2011), –Kok and Jennen (2011)

Data Data provided by IPD. –Dependent variables - Market Rent, Market Value, Equivalent Yield –Independent variables EPC rating (and BREEAM rating) PAS segment UK region Capital expenditure (average in previous three years) Weighted tenant credit risk score Weighted unexpired lease term Vacancy rate Number of tenants Rentable space Year of construction

Summary Data RetailOfficeIndustrial N Mean age (years) Three year mean capex (psm)£ £ £ Mean rentable area (sq. m.) Mean Market Rent (psm)£ £ £ Mean equivalent yield (%) 7.45%8.97%9.78% Mean no. of tenants Mean weighted unexpired lease term (years) Mean weighted credit risk score Mean vacancy rate (%)

Results – Without Controls

Standard OLS Hedonic model

Conclusions and Further Work Plausible findings for age, unexpired lease term, vacancy rates and tenant credit score variables. Little evidence from appraisers’ estimates to suggest that Market Values and Market Rents are affected by EPC rating. Evidence is mixed with regard to effects on equivalent yield – but the majority of evidence suggest no effect. For EPC ratings, many of the coefficient signs are as expected. Is the sample large enough to identify small scale effects?

More data needed