‘Commercial landlords need to address poor energy ratings’ says property expert

The Energy Act 2011 means that landlords will no longer be able to legally let commercial and residential property which has poor energy efficiency ratings. Michael Fawcett, Senior Surveyor in DTZ’s Project & Building Consultancy team in Bristol, looks at steps commercial property owners with poor energy performance need to consider to ensure their properties retain value and remain marketable:

“Although the Energy Act 2011 does not come into force until 1 April 2018, landlords, investors and occupiers need to act swiftly to determine whether their properties will meet the required standard and, if necessary, take remedial action to maintain value. It is worthwhile noting that this date is a long-stop date and the legislation could be enforced sooner.

“DTZ Research recently highlighted that the continued lack of new development in the commercial property market over the next three to five years will lead to an increase in demand for existing property, leaving those which do not comply with legislation in the Energy Act being potentially ‘obsolete’ until improvements are made.

“Dependant on the type of property interests you hold, the impact of the forthcoming requirements may vary. If your property is of an industrial nature, then the impact will be less severe as warehouses are typically unheated when compared to office space or other commercial uses such as retail. Also, the extent of your property interests will be a key factor when looking at the cost of carrying out improvements.

“The first question to ask is why does a property have a poor EPC rating? Whilst the obvious view is that the day-to-day running of a property requires a high level of energy consumption, the reasoning behind this may not be overly clear. High energy consumption may be due to factors such as poor quality lighting or inefficient heating installations. The age and construction of the building may also result in poor thermal properties or infiltration (air leakage).

“The second question to consider is what improvements need to be made to address the deficiencies in a building’s energy performance. Initially, the requirement to prepare an EPC will give some indication as to the level of energy consumption and, as a result, identify high level measures which if implemented could improve the performance of a property and in turn increase the overall rating.

“For property owners, be it a small portfolio or a multi-million pound fund, your initial concerns are expected to be focused around the financing of any improvements needed. As an occupier, there will be an equal concern surrounding any obligation to pay towards improvements, for example, through service charge arrangements. Either way, to bring a property with a poor energy efficiency rating up to an acceptable level will most likely incur significant costs.

“To assist with this, the Energy Act includes provisions for the new ‘Green Deal’, a financial mechanism designed to eliminate the requirement to forward fund the costs of improvements, by offsetting costs against the savings made on the energy bill. What differentiates this from a traditional finance agreement is the repayment remains with the property, not with the owner and therefore transfers with the property interest.

“The implications of the Act are complex because there is the need to understand where the energy performance issues exist, what is needed to address these issues, and how the mechanism for repayment through the Green Deal will work.

“Whatever your interest in property, as with all changes in legislation, a timely and well planned approach adopting the correct professional advice is key to ensuring compliance before embarking on any ‘green crusade’.”