People who invest in property via a pension, for example in a SIPP, could see their returns severely dented as a result of a new energy rule.
The Minimum Energy Efficiency Standard (MEES), which came into effect in England and Wales in April, requires all buildings within its scope (listed buildings, for example, are excluded) to hold an Energy Performance Certificate (EPC) rating of between A and E.
Properties falling in the sub-standard F or G rating are illegal to rent out, and new leases can’t be created, renewed or changed as a result. The rules will apply to existing domestic tenancies from April 2020, and non-domestic leases from April 2023.
According to estimates from the Department for Business, Energy & Industrial Strategy (BEIS), there are around 200,000 non-domestic and 280,000 domestic properties in the UK with an EPC rating of F or G.
Why pension property investors are affected
The impact of the rules are well documented for buy-to-let landlords who face a penalty of up to £5,000 for breaches, but many indirect property investors may also face financial implications.
If you hold commercial property or residential property (though this isn’t a tax-efficient move) in a SIPP (self-invested personal pension), returns could be dented if the landlord/owner doesn’t take action to meet the minimum E rating. This could mean it’s difficult to re-let or sell your property.
Other potential issues include:
Difficulty extending the lease
Additional costs to gain a valid EPC
Expensive to bring the property up to the minimum standard
Financial penalties (capped at £150,000 for non-dom properties, enforced by the Local Weights & Measures Authorities) may have to be met from the pension scheme.
The most important point for property investors to note is that if you hold commercial property in a SIPP, you as the end investor are likely to be named as the legal owner/landlord of the property which means you could bear the brunt of the costs, ultimately denting your returns.
What the individual SIPP providers say
Dentons Pension Management, which has around 2,500 commercial properties on its books, 10% of which fell below standard last year, confirms the end investor is the landlord.
Martin Tilley, director of technical services at Dentons, says: “If a lease is up for renewal soon, remedial action must be taken. The problem faced by investors is that the property won’t be able to be re-let and so money will need to be spent to bring it up to the required level, which will come out of pension savings.”
Suffolk Life, part of Curtis Banks Group, one of the largest commercial landlords with over 6,000 properties on its SIPP book, has around 16.5% of commercial properties which are F or G rated.
Suffolk Life says it is considered the landlord in some cases, but the end investor may also be a joint owner or landlord in other cases. Either way, it says the end investor would be impacted by any costs of refurbishment to bring the commercial property up to the minimum standard.
Jessica List, pension technical manager at Curtis Banks, says: “If a property isn’t brought up to a minimum E rating we can’t grant a new lease or renew a lease. A property with an F or G rating may also attract a lower value if the investor wishes to sell it.”
Barnett Waddingham has over 1,200 commercial properties in the UK and less than 20% are currently rated the sub-standard F or G rating.
James Jones-Tinsley, self-invested pensions technical specialist at Barnett Waddingham, confirms the trustee (s) of the SIPP are the landlord.
“For our Flexible SIPP, we are the only trustee. For our Bespoke SIPP, the member is also a trustee and so the member and ourselves are co-landlords of the property,” he says.
He adds that members should speak to their usual client manager in the first instance, and obtain an EPC where required, and then inform them of the energy rating.
Mattioli Woods has around 1,100 commercial properties on its books but can’t confirm how many fall below standard as it is currently “collecting data for EPC ratings”.
Lianne Harrison, section manager at Mattioli Woods, says the pension scheme, which includes the individual member trustees and the professional trustee, is the owner/landlord.
“The landlord is ultimately responsible for bringing properties up to the minimum E standard, and for our pension schemes, this means working with individual members so the work required is completed,” she says.
She adds: “For any property purchases/sales and new leases/lease renewals, we require an EPC to be prepared if there isn’t already one in place. The member trustee chooses an EPC provider, and the cost is settled by the pension scheme. If any work is required to improve the efficiency of the property, the member trustee would arrange this and, again, the cost would fall to the pension scheme.”
As such, SIPP pension holders who invest in commercial property should ensure the properties meet the minimum requirements. If not done already, the SIPP needs to commission a report to look at and assess the building to meet the standards.
What about commercial and residential property fund investors?
Investors can access bricks and mortar via commercial (and to a lesser extent, residential) property funds, but here, unlike SIPP property investors, the impact is negligible as the cost of refurbishment would have already been priced into the cost of shares or the funds themselves.
As an example, Aviva UK Property owns 26 assets in the UK, making up 128 units. 98.5% have an EPC of E or higher but two have G ratings (these have an exposure of 0.0013% of rental value). Aviva is the landlord, so the fund will pay refurbishment costs. Aviva says these are “built into our valuation methodology across all properties and therefore we do not believe investors will be negatively impacted as a result of MEES”.
However, fines for breaches can come out of the fund, which would affect investors as money would be taken from generated income, according to Aberdeen Standard Life UK Real Estate. But again, the actual cost to individual investors would be minimal.
Are property peer to peer and equity crowdfunding investors affected?
Property P2P allows investors to build a portfolio of loans, each is secured against a property, targeting a regular rate of interest, usually 4-5%.
As you’re investing in a P2P lending product, you’re lending money to a borrower where their property acts as security in case they fail to repay. As such, the investor is not the owner or landlord so there’s no impact for investors.
Property equity crowdfunding allows investors to buy shares in individual properties, along with other investors. Typically, the properties are owned by a special purpose vehicle (SPV), which is a UK Limited Company. This is because you can’t have more than four people listed on Land Registry for ownership. As such, the properties aren’t owned by the end investor, and even if any properties did fall below the minimum E rating, this would be factored into the cost and returns for investors.