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BREXIT….what next for UK Real Estate Environmental Due Diligence?

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BREXIT….what next for UK Real Estate Environmental Due Diligence?

Following the recent referendum result for the UK to leave the European Union (EU), Energised Environments (EE) has been thinking about the potential implications for our clients from a real estate environmental due diligence perspective. Aside from the macro investment perspective, we have provided our view on what the real estate market needs to think about during this period of turmoil and uncertainty from an environmental perspective. With any increased uncertainty, it is important to ensure a robust and thorough Due Diligence exercise is carried out, to prevent any unknown environmental liabilities arising during ownership and /or on divestment. The focus of the piece is for existing assets and not redevelopment where additional environmental legislation would be applicable.

Real Estate Environmental Due Diligence Process
The current environmental due diligence process is focused on a number of key aspects, mostly relating to historically derived liabilities such as ‘Contaminated Land’ which is traditionally thought to be the most significant environmental liability risk to real estate investment, whilst also touching on other topics such as energy (e.g. EPCs, air conditioning), radon, coal mining, and flooding.
Contaminated Land
The Contaminated Land Regulations applied in the UK are not derived from EU law. It is therefore considered unlikely that any future changes to EU derived environmental law will have an impact on the current due diligence process with regards to contaminated land. Some other areas are based on EU law that have been transposed into UK regulations, and will continue to apply in the UK, unless the regulation is revoked. For example, the Environmental Liability Directive is EU derived, but has been transposed into UK law as the Environmental Damage (Prevention and Remediation) Regulations 2009 and the Environmental Liability (Scotland) Regulations. This will therefore still apply.

Energy
Key pieces of legislation applying to energy consumers and in particular real estate, relate to Energy Performance Certificates (EPCs), Energy Savings Opportunity Scheme (ESOS) and Carbon Reduction Commitment (CRC). The requirement for EPCs is derived from the Energy Performance in Buildings Directive, which is EU legislation, but has been transposed into UK law through the Energy Performance of Building (England and Wales) Regulations 2012 (as amended) and Energy Performance of Buildings (Scotland) Regulations 2008 (as amended). ESOS has its roots in the EU Energy Efficiency Directive, but again has been transposed into UK law by the ESOS Regulations 2014. No doubt, much of this will at some point be reviewed, but that does not necessarily mean revoked or removed and we would expect this to be part of the government’s commitment to its Better Regulation programme. It is also worth noting that much of the UK energy legislation relating to demand reduction has its roots in the government’s climate change targets and the associated Climate Change Act 2008. The UK government has continued to state that Brexit will not impact its ambitions to maintain its role at the forefront of climate change actions in the world. Our view is that the real estate sector will need to continue to focus on improving the energy efficiency of its assets. Brexit may also lead to future energy price pressures, hence making this even more important.

Flooding
Current flood legislation associated with real estate is linked into the development and planning process. UK planning legislation is generally UK derived however, the environmental protection elements associated with this area do have links into EU law such as the EU Floods Directive and the Water Framework Directive. The likely associated impacts from changes to flood legislation to existing assets is likely to be limited, the question remains as to whether the same level of investment will still be available to invest into flood protection and prevention infrastructure given other future demands. With the potential for tighter spending controls, understanding flood risk is perhaps even more imperative.

The Future…
Environmental legislation that we experience in the UK has largely been driven by EU directives over the previous decades. The outlook for environmental legislation is unknown, but presently we would expect little or no material change. Consideration of historic liability and flood risks as part of the environmental due diligence process has become standard in today’s market and will continue to be a key aspect of any real estate due diligence process, but energy efficiency is likely to become more critical.
We believe that with potential future changes to Energy Efficiency legislation, more attention will need to be given to energy risks as part of our environmental due diligence process. For example when purchasing a portfolio of care homes the energy efficiency risk could outweigh the contaminated land risks. It’s feasible to collect simple data as part of the due diligence process to help quantify the energy efficiency risk. EE would propose that this is done as part of the standard due diligence process. Improvements in energy efficiency could also help make assets look more attractive and retain value which can only be of benefit during these uncharted times.

Further information         

We would be delighted to come and talk to you about how we can assist you with a wide variety of your challenges and opportunities for your real estate investments. To review our case studies, please visit our website at www.energisedenvironments.com or please contact Energised Environments.

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