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Landlords, don’t lose out on property values

Bring your portfolio up to minimum energy performance standards or face the consequences. This is what landlords have been told in advance of new regulations outlined in the Energy Act 2011 which are to be introduced in April 2018.

For many landlords the deadline for bringing their property up to scratch is now just one rent review away. As a recent report in Estates Gazette pointed out, the market must act quickly because once the new regime comes into force, it will become illegal to let a property with an energy performance rating of ‘E’ or lower. Energy performance specialist CO2 Estates estimates the bill to bring England and Wales’ poorly performing building stock up to standard could be up to £29bn (source: Estates Gazette, 25 April 2014 issue).

There is now anecdotal evidence to show that investors and occupiers are using low energy certificate ratings as a tool to reduce acquisition prices, with UK investors reporting that they routinely include requests for EPCs early in the transaction process as part of their standard due diligence (source: Institutional Investors Group on Climate Change)

According to the IIGCC, green building characteristics are making an impact on both the financial performance of property and market trends. One IIGCC member managed to reduce the acquisition of a large central London office block by 5% on late receipt of an F-rated energy certificate, while another reports a well-known lending bank forcing the landlord of an office building in London’s Covent Garden to mitigate a poor EPC rating as part of the purchase due diligence on debt negotiations. The IIGCC also comments in its recent report Protecting value in real estate, that “earlier than expected obsolescence can be seen within industrial specialist units, as energy performance certificate ratings ‘F’ and ‘G are a contributing factor to the strategic sale of industrial assets”

As yet there is no framework in place for government to enforce its commitment to minimum energy performance in commercial buildings and the detail of the proposals included in the Energy Act will be set out in secondary legislation.  The British Property Federation (BPF) comments that “the method and manner of introduction of minimum standards could have a marked effect upon when and how properties are upgraded and the underlying economics of property ownership”. As a result, it has lobbied government effectively over the timing of further clarification for the industry and further guidance is expected later this year.
In the meantime, it is clear that the market will be the deciding factor over marketability and value of poorly-rated assets. Landlords should be aware that there are serious financial benefits in retro-fitting premises with poor energy performance. They should now be taking action to make their portfolios compliant with the required standards as part of their planned maintenance schedules ahead of the 2018 deadline.

As part of the Energy Performance in Buildings Directive, all building owners are required to carry out certain mandatory energy audits, in particular to air conditioning systems. This is a service Watts provides on a regular basis for clients and the company has considerable experience in this area. For more information contact Mark Rabbett, Director or Tony Churchill, Associate both based in Watts' London office on 0207 280 8000.

The Watts Bulletin is the technical companion to the Watts Pocket Handbook, the essential guide to property and construction, as used by professionals since 1983.

Watts Bulletin editor: Trevor Rushton.