Rules for non-domestic landlords around a property’s energy efficiency are changing. As from April 1, 2023, it is now an offence to continue to let or rent out a commercial property if it does not have an Energy Performance Certificate (EPC) rating of at least an E unless there is a valid exemption.
Here George Jerram and Rory Finnan examine the impact of these upcoming energy efficiency regulations for commercial properties and what’s being done to ensure compliance.
An evolving efficiency legislative agenda
The minimum energy efficiency standards (MEES) regulations were introduced in March 2015 following the Energy Act 2011. Its aim is to improve the energy efficiency of leasehold real estate as part of the UK’s overall decarbonisation efforts to reach Net Zero by 2050.
The rules require commercial properties, including urban logistics units, to have an EPC rating (A-G). An EPC is valid for 10 years and is generated following an inspection, with certificates and reports lodged on the government’s register.
After April 1 this year, commercial properties need a rating of at least an E, otherwise landlords will be restricted from leasing or selling assets and will be at risk of significant financial penalties.
However, there are exemptions. For example, if a tenant will not grant access to allow a landlord to carry out the repair works, and the property remains non-compliant, an exemption can be granted.
More stringent compliance targets are also on the horizon. By 2027, commercial properties will need to improve to a minimum C rating before and by 2030 will need a minimum B rating.
The future targets will require landlords to be more proactive and work more closely with tenants as they improve property efficiency to ensure that the 2027 and 2030 targets are met.
The immediate impact
Occupiers will benefit from increased energy efficiency, which during the current period of comparatively high fuel and heating costs will come as a welcome bonus.
The main risk burden is with landlords. Those who aren’t proactive enough to prioritise improvements face the risk of a combination of financial penalties, including fines, loss of rent revenue and increased capital expenditure costs.
If landlords are not able to improve the property to enhance the EPC rating they will need to be proactive and secure an exemption to prevent receipt of a fine.
The ‘green premium’ vs the ‘brown discount’
The new regulations are already having a knock on effect on investment values – properties are beginning to attract a ‘green premium’ or ‘brown discount’ label.
The green premium is driven by the increasing requirement from real estate owners to be investing in environmentally sustainable real estate. It applies to properties that already have high EPC ratings, especially those well above immediate and future MEES compliance levels.
These are also becoming increasingly attractive to occupiers and can command higher rental values and, hence, investment values. Investors should pay more for an investment with an EPC of A than they would for the same building if it was rated E. This is the ‘green premium’.
For properties that are not compliant, buyers and investors will be looking to factor in the capital expenditure costs of making the properties compliant and then deduct this from the price they are prepared to pay for an investment. This is the ‘brown discount’ in action.
Achieving compliance with Chancerygate assets
At Chancerygate, we are working towards immediately achieving EPC B ratings for existing properties within our portfolios.
This will meet both immediate MEES targets and the 2030 requirements while also putting them in a more suitable place if more ambitious legislation is drafted. All our new developments achieve at least EPC A.
Taking this approach with assets will ensure their value is preserved and they are highly attractive to occupiers looking for a green, energy efficient product.
Examples of what we are doing to achieve this include removing fossil fuel burning equipment, increasing natural light levels, replacing boilers with air source heat pumps, installing solar panels and using advanced insulating materials.
Chancerygate’s asset management team manages in excess of £385m of assets across more than five million sq ft of commercial space in over 480 units. To learn more about our asset management work, click here.
To find out more about our urban logistics assets portfolio, call Rory Finnan on DL: 020 7657 1859, M: 07974 005 753 or E: rfinnan@chancerygate.com or George Jerram on DL: 020 7657 1854 , M: 07817 475 371 or E: gjerram@chancerygate.com
