April 2018 looms large for the UK real estate industry as on this date, it is against the law to let or sell properties with Energy Performance Certificate (EPC) ratings below E.
The Minimum Energy Efficiency standards (MEES) will soon be in force. And, it’s likely a sizeable swathe of the market will, unaware or unmoved, get caught out when agents and lawyers tell them they can’t market, let or sub-let F and G rated property assets.
But, let’s face it, MEES has been on the horizon for some time via the enabling Energy Act 2011, so there is no excuse for non-compliance. Before letting F and G rated properties, owners will need to assess and implement suitable energy efficiency improvements (even if the EPC rating is not improved) up to the point where the exemption rules come into effect. Owners, who let out properties that do not comply with MEES, will face fines of up to £150,000.
It’s advisable to treat early EPCs, which expire soon after the MEES kick in, and apparently adequate ratings, with profound suspicion. The EPC model has tightened significantly over the years and energy performance standards have risen sharply in line with Building Regulations in 2010 and 2013 requirements. New EPC’s will, in the vast number of cases, give a significantly lower rating than EPC’s carried out before the upturn in energy performance standards.
Meaningful pre-acquisition due diligence is picking up on properties likely to achieve low EPC ratings, and this gives significant opportunity for price chipping. According to research by CO2 Estates, MEES could affect values ranging from a sum, slightly in excess of the cost of relevant energy efficiency improvements, to one considerably in excess of that. This could lead to a reduction of over 10% in the building’s capital value.
The impending MEES milestone could well see distressed assets flooding the investment market. This could create a sub-market for savvy investors to pitch for easily upgraded assets at depressed prices. To return the properties to market, these investors will need an enhanced level of pre-acquisition due diligence to model viable energy efficiency improvements to get them to the optimum rating.
While a plethora of untested questions over effects on rent reviews, tenant alterations and dilapidations liabilities remain, there is a cloud of uncertainty around the effects on future values. Smart investors are looking now at how to address F and G rated stock ahead of the change, prioritising assets up for disposal, approaching lease expiries and break opportunities. In the case of older EPC’s, even C, D and E rated properties should be under review.
Owners should be looking now at strategic maintenance programmes, recovering improvement costs wherever possible through service charges. Investors taking this approach will see huge value in holistic programming of building fabric, plant maintenance and renewals wherever leases allow.
In 2023, the MEES go a stage further with requirements carved into existing leases. But fortunately, by then, no doubt we will have all learned lessons from 2018.
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