The Energy Efficiency in Buildings Regulations 2015 require landlords to secure an EPC certificate with an E rating or higher in order to issue a new lease for a property from 1st April 2018. Beyond this, there is an additional requirement to secure such an EPC for properties with existing leases by April 2023. With only two years to go until the legislation takes effect, the pressure to be compliant is mounting. Current estimations suggest that up to 40% of the commercial rented property stock will become unlettable by 2018 if no action is taken. This will have a significant effect on the private rented sector in England but currently little action is being taken to address this. Whilst there may appear to be sufficient time to make changes that will improve the EPC rating of affected properties, much work is needed for property investors to secure the asset value of their portfolios.
Since the Energy Efficiency in Buildings Regulations were announced, banks and financiers have changed their stance with regard to loans for the purchase of properties with some now refusing applications where the EPC rating is currently considered to be at risk. This is particularly the case where EPCs were undertaken prior to 2011 when a new grading system was introduced. Despite some older certificates still being valid, lenders are demanding new EPCs are completed regardless of the rating. Some of the largest banks have declined mortgages where the EPC rating is as high as a D with one major finance house refusing mortgages on commercial buildings where the EPC is a C or lower. This is in part due to the planned amendments to Part L of the Building Regulations (Conservation of fuel and power) in 2017 which generally leads to an update to the EPC assessment software which, from experience of previous amendments, negatively affects the ratings.
In addition to the financial pressure, tenants are also more demanding. Many multi-national companies are requiring radical improvements from landlords in order to lease buildings. One major household brand is insisting an EPC rating of C or above before it will take a lease on any premises.
As EPCs measure the fabric of the building, where improvements are required, it is likely that fit out work will need to be undertaken to achieve this. Work must start now to identify, plan, budget for and fit energy efficient equipment that will guarantee compliance by the deadline. Properties most at risk are those built in the 1980s or 1990s with aging air conditioning units and, as is commonly the case, sealed windows. With a lack of natural ventilation, the reliance on grid electricity for heating, cooling and lighting is frequently catastrophic to the outcome of an EPC assessment. Upgrading inefficient air conditioning with more advanced technologies can immediately lift a G rated EPC to a C.
With estimations that up to 40% the commercial rented property stock will become unlettable by 2018, landlords must act now or face significant devaluation of portfolios – the effects of which are being felt now. Property values are being impacted as the Royal Society of Chartered Surveyors (RICS) requires that energy efficiency and sustainability measures are taken into consideration when valuations are calculated. RICS has also advised that a surveyor can refuse to carry out a valuation where there is no current EPC in place.
It is therefore vital that those in the managed property sector acts now to secure the financial viability of the buildings within their instruction and to protect the interests of the investors – many of which will be too far removed from the management of their portfolios to drive the action required. It is an essential role of FMs and Building Managers to stay ahead of the game and ensure that any capital investment planned to replace or improve the building fabric is not carried out in isolation but is driven from a robust and targeted capital investment plan that is guaranteed to succeed.
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