The results of a recent survey of commercial property lenders in the UK suggests a widespread lack of awareness of the potential implications of the Energy Act 2011 amongst this group.
Over half of the respondents to the survey, undertaken by global property consultant Cushman & Wakefield in conjunction with the Association of Property Lenders (APL) and the Royal Institution of Chartered Surveyors (RICS), admitted that they had ‘no’ or ‘only limited’ awareness of the implications of the Energy Act 2011, either in terms of new lending or for their existing loan portfolios.
The Energy Act 2011 is one of the UK government’s tools for reaching its carbon reduction target of 80% by 2050 and amongst others includes a requirement to introduce regulations that will, from April 2018, make it unlawful to rent out business premises, or private residential properties, that do not reach a minimum energy performance standard, widely anticipated to be an Energy Performance Certificate (EPC) ‘E’ rating..
Although the Regulations (known as Minimum Energy Performance Standards or MEPS) have yet to be issued, the process for drafting has commenced and the issue has been widely discussed in the industry. Many landlords have also started to make preparations as the MEPS are expected to impact the value and liquidity of affected assets well in advance of the Regulations formally kicking in.
The Cushman & Wakefield survey suggests however that, many real estate lenders have yet to get to grips with the effects that the MEPS may have in terms of either new lending or existing lending portfolios.
The results suggest that those lenders that have a good awareness quickly grasp that the Regulations will affect them and it would appear that awareness of the issue then generally translates into action. Of approximately half of the respondents who advised that they are aware of the implications of the Energy Act, 70% take steps to review the Certificates and examine the potential cost of improving a poor rating before finalizing a decision on lending.
Of the remaining 30% who said they understood the implications, 9% said that they would reject outright the opportunity to lend if the EPC assessment fell beneath a certain level, whilst 21% said they would proceed without further investigation or enquiries, having formed their own view. These findings suggest that lenders have diverging views on how to value the risks associated with the Regulations and the importance this should take in loan decisions. The lack of clarity around the final form of the Regulations may help to explain this.
Concerns about the consistency and quality of EPCs have already received significant attention in the industry dialogue as many question whether EPCs provide a sound basis for the MEPS. When lenders were asked about the quality of the EPC rating, 70% were aware of issues such as the age of the EPC being material to its quality. However, their enquiries do not appear to extend to the party prepared the EPC with 66% of respondents saying that they do not review who prepared the EPC, or consider it relevant, seemingly because there is limited awareness as to who can produce best advice.
When asked about the importance of EPCs for new loans, the survey showed that the majority of the lenders who responded (72%) feel that their existing loan documentation places adequate responsibility on the Borrower to maintain the quality of the security and that the need to have an EPC with acceptable rating is already covered by this requirement. Accordingly, the lenders interviewed are confident that the LTV ratios do not need to be adversely affected by a property’s EPC rating.
When asked about monitoring ongoing value of their assets, 64% of respondents said they either have, or will have, procedures in place to monitor the risk to ongoing value. Surprisingly, 36% do not consider it relevant and this includes 12% of those interviewed who believe they understand the legislation.
Andy Miles, Partner at Cushman & Wakefield said: “It is crucial that lenders examine where their existing portfolios are at risk and fully consider the consequences for new loans and the pricing of risk. In many cases there will be some quite simple and cost effective steps that can be taken to raise the level of the EPC; however, this will not be known unless a review is undertaken.”
Neil Odom-Haslett, Head of Commercial Real Estate Lending at Standard Life Investments and a Board member of the APL said: “We thank Cushman & Wakefield for raising and addressing this issue with our membership. Our members still have time to work with their Borrowers in ensuring a correct, and consensual, strategy is followed, but it is important that they take action sooner rather than later.”
Ben Elder, RICS Global Director of Valuation & E.Q.S said: “This is an important area for the profession and it is clear further investigation is required in which the RICS would participate.”