Buildings to become more energy saving?

The incentive to make buildings more energy-saving has been stifled by valuation techniques and the way the UK leasing market operates. However, there has been a seismic change in fund and asset management strategy within the larger UK property funds and real estate investment trusts (REITs). Managers are beginning to take energy efficiency very seriously in particular, a building’s energy performance certificate (EPC).

This is largely a result of the Energy Act 2011, and its requirement for minimum energy efficiency standards known in the property market as MEPs ( minimum energy performance standards) – which are tied to a building’s EPC. In July this year, the government released its consultation on the implementation of the legislation and its energy efficiency regulations of the non-domestic private rented sector in England and Wales. The consultation has re-affirrmed the likelihood of an MEPs threshold of an E-rated EPC. The proposal is that rental properties that require an EPC under the EU Energy Performance of Buildings Directive will also be subject to MEPs . From 1 April 2018, all new lettingswould be subject to minimum standards, and from 1 April 2023 a regulatory backstop would apply meaning all let properties must comply with legislation.

The Act introduces a mechanism for identifying qualifying energy conservation measures known as the Golden Rule and mandates their installation. The Golden Rule is that repayments for improvements, including any interest charges, must be the same or less than the expected energy bill savings in the first year.

Properties rated F or G that are captured by the legislation will need to undergo a due process linked to this rule. If, afterwards, they remain F or G rated, only then may they be let.

If a property cannot be let, rental income will be lost until it is compliant. Because of the way rent reviews and lease renewals operate, there is also a risk of reduced rent if an E+ rated EPC is the result of an occupier’s fi t out, rather than the landlords’. The Energy Act 2011, therefore, introduces a market dynamic with the potential to affect value and/or the amount of finance secured against an asset – be this directly, or indirectly through utility bills.