Thousands of commercial properties could have an actual EPC rating lower than currently recorded
New data suggests even those buildings with a compliant 'E' rating may actually be in breach of new legislation entering into force in April
There are thousands of commercially rented properties in the UK that have poor enough energy efficiency ratings to put them at immediate risk of breaching new guidelines entering into force this April.
Research published last year on the UK property market warned that 17 per cent of commercial buildings in England and Wales have energy performance certificates (EPC) rated F or G.
Under the new Minimum Energy Efficiency Standards (MEES) rules, properties rated below an 'E' cannot be rented out to new tenants or have their existing tenancy contracts renewed. From April 2023, landlords must not continue to let any buildings which have an EPC rating of less than E unless the landlord registers an exemption.
But at least those landlords with EPCs of F or G logged on the Landmark database, where legal EPCs are held, know they have a problem. New data released last week from building energy simulation firm Arbnco suggests there could be thousands more property owners out there with commercial buildings that could breach the new guidelines but don't know it.
Arbnco simulated new EPC ratings for more than 3,600 buildings on its commercial property database, and found energy efficiency standards in nearly one in five commercial properties have dropped into a lower banding on re-simulation. More than a tenth fell into an 'F' or 'G' rating, many from a passable E or D rating previously, a fall that will render them "sub-standard" under MEES when it enters force in April 2018, Arbnco warned.
How can this happen?
EPC ratings for every building must be replaced every 10 years, but the software tool for calculating them - known as SBEM - is updated about every two years in line with new building regulations, explained Arbnco founder Simon West.
This means it effectively gets harder for buildings to maintain the same EPC standard over time, he tells BusinessGreen. "In simple terms, that means is it gets harder to get a good rating every time there is a new release," he says. This could cause property owners to run into problems not only when an EPC is up for renewal after 10 years, but if a property owner comes to retrofit or sell their property.
Extensive refurbishment of a building, sometimes required when there is a change in tenant, can trigger the need for a new EPC, and landlords should bear in mind that without factoring in some energy efficiency upgrades they could risk being downgraded to a lower rating - and lose their ability to rent the property altogether.
Meanwhile, landlords looking to sell should be prepared for buyers to run a re-simulation of a building's EPC using up-to-date software, especially now MEES is a factor. They will then use this information to "chip away" at the asking price, West predicts.
In total, Arbnco's data showed that 17 per cent of buildings in the portfolio experienced a drop in their EPC rating on re-simulation. Some 11 per cent dropped to an 'F' or 'G', with 14.8 per cent of properties overall now rated as 'F' or 'G' on the firm's platform. Extrapolated out to the entire UK commercial property market, Arbnco believes properties worth up to £130bn to the UK market could be at risk.
Most of the risk is mainly bourne by the "secondary market" said West - smaller landlords with lower value properties. "When you get to the secondary market, which is going to have older stock that is not so well maintained or managed, I personally think there is going to be a bigger increase in rate drops," he says.
That poses a risk for banks with clients which are commercial property owners. "Lots of their lendees will be small commercial property owners that have mortgages," West warns. "If come April they can't re-let the building because of MEES, and they need to spend to retrofit, they might not have the funds to do that. There is a real risk that asset won't generate an income and that they haven't got the financial support to see them through it. So that property could get repossessed, and that's a really big risk for the banks and the lenders."
But the introduction of MEES and the racheting of standards should also prompt a key question for more cash-rich landlords - how far should they go to upgrade their properties?
Caroline Hill, head of sustainability at property giant Landsec, told BusinessGreen recently that government could do more to provide certainty in this area. "The big question for landlords will be do you upgrade to just get a D or do you go for best in class?" she said. "But that is where the policy environment has a role to play. If the government was bold enough to release a timetable that said 'this year the minimum standard will be strengthened', then it would be easier for businesses to make the investment now."
Even without such a government timetable, updates to building regulation mean that those landlords with a 'D' or 'E' property cannot rest on their laurels. There may be only a relatively small wave of buildings that crop up in immediate breach of MEES guidelines later this year, but for many more properties it is only a matter of time before they will run into difficulty. Unless of course they take the environmentally and often financially sensible decision of upgrading their property to make it as energy efficient as possible.