Retail therapy. MEES: Implications for Retail Owners and Occupiers. Nick Hogg 26 February 2015

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1 Retail therapy MEES: Implications for Retail Owners and Occupiers Nick Hogg 26 February 2015

2 MEES in retail Implications for Retail Owners and Occupiers Can we be sure our EPCs are accurate? What might the effect be on transactions What can be done to prepare? What are the risks of inaction? What are the opportunities that lie in preparing? 2

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4 Accuracy of EPCs Can we be sure? A. Comparatively well understood in the market B. Indication of potential improvement Owners and occupiers should Obtain good quality EPCs from reputable companies Consider when the EPC was lodged? EPCs are not an operational rating? Quality & consistency 4

5 Accuracy of EPCs Can we be sure? 60 A B C D E F G

6 Accuracy of EPCs Can we be sure? Administrative refurbishment Before After Existing EPCs New EPCs [Data from Carbon Estates]

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8 The MEES cycle What might the effect be? Will tenant fit out works weaken EPC? Is a valid and reliable EPC in place? EPC must be provided in all marketing particulars Rental growth prospects? Depreciation rates? Asset management decisions? Effect on ability to let or sub-let? Maintenance cycle factor in MEES? 8 How will MEES affect rent negotiations?

9 Transactions What might the effect be? 01 INVESTMENT SALES What are potential buyers looking for? Capital growth / value creation? 02 LETTINGS Affect of lease length on timing and magnitude on future MEES risks? Are lease terms sufficiently clear and robust to mitigate MEES risks? 03 LEASE RENEWALS EPC rating calculated on shell conditions of unit? Enforcing dilapidations requirements potentially weaken EPC rating? (on certain types of retail / situations) 04 RENT REVIEWS Will an inability to let because of MEES depress rents? Will occupiers argue that the rental value of F- and G- rated spaces should be discounted? 9

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11 Assessing risks over time What can be done to prepare? 11

12 A DD snapshot on energy risks & opportunities What can be done to prepare? Example of Deloitte helping clients prioritise Unit A Unit B Unit C Unit D Unit E Unit F Unit G Unit H 12

13 What can be done to prepare? MEES and lease clauses Will MEES be transformational? Improvement measures to F and G will have to be part of the lease? LGP: all leases - tenant's fit out should not detrimentally affect the current EPC rating M&S & BBP green lease collaboration Green leases - resilient to legislative risks Key agreeing terms at lease negotiation Restrictions to Tenants freedom to make alterations? 13 Co-operation in production of an EPC [Sources: Sustainability Fit Out Guide for Tenants, Legal & General Property 2014 M&S & BBP UNVEIL GREEN LEASE COLLABORATION, betterbuildingspartnership.co.uk]

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15 What are the risks of inaction? Illiquidity Inability to let (England & Wales) Inability to let and freehold sale (Scotland) Avoidable operation al running costs Leases by 2023 heads of terms Efficiency of process Attractiveness to occupiers Impact on exit yields Trajectory? Political party manifestos 15

16 What are the risks of inaction? An example from an industrial transaction Deloitte Real Estate was instructed to undertake due diligence relating to an acquisition of an industrial estate: 75 properties; 65 tenants Asking price: 60m Competitive landscape Risks identified at c. 5m Price chipped by 5.5m

17 What are the opportunities in preparing? Value add! Build into refurbishment cycles and lease negotiations Policy intent! Cost-effective improvements Retail fit-out guides align with requirements of MEES 1. Perceptions of costs Versus reality 2. Factoring in resilience to Climate Change Breadth of business case impact of green on footfall? 17

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