Are the latest minimum energy performance standards punitive & worth holding off on?

Property week reported in their last edition of May that "a leading London agent was advised on an office sale in Milton Keynes. The agent subsequently procured an Energy Performance Certificate (EPC) for the building in question. Unfortunately for the owner, the registered assessor came back with an "F" rating, meaning that from Spring 2018 under the MEES regime the owner of the building would be unable to sign up tenants."

Considering what's involved in an EPC and that an F rating wouldn't mean that the building was un-fit for purpose or necessarily old and in need of investment and refurbishment the new legislation comes painfully to the sector. What's potentially worse is that those holding the oldest stock aren't necessarily sitting on a stockpile of reserves. Any landlord with low occupancy maybe facing a very difficult equation? Or do they need to refurbish anyway to increase their occupancy? It's potentially not as simple as this....the gap between standards in the private rental sector & some other growth sectors has widened more recently. Take PBS and PRS (Purpose building student and private rental sector) where both are built more like hotels than as student digs or bedsits for first time employee's and post grads. In fact that gap is considerable between the old and the new and it could feel like it's all come at once for a number of landlords. Consider the rapid increase in these sectors, the increase in demands for the higher quality serviced let, and the requirement to meet minimum EPC standards.....normally a refurb could be used to update a property and bring it inline with the market but shy of knocking down some of these buildings and starting again their only attraction would be the low rental they attract. Sure, the whole sub-prime market built in the 1980's and before will need to invest into refurbishment to achieve the minimum EPC standards but bumping up rentals too far to cover these costs will be detrimental to occupancy.

Some of these businesses may hang in the balance and increasing rentals may destroy any available consumer surplus? Going back to the Milton Keynes example the cost quoted to bring the building up to standard was £800,000 but the surprising part of this story is what happened next. The client opted to get a second EPC and this came back with a 'D' rating- allowing the space to be leased post 2018 without any investment. Which EPC was right? & perhaps for those landlords considering investment how many EPC's should you get in order to try and come out the other side with the result you want?

With the MEES back-bone now being undermined this new legislation is likely to face a lot of scrutiny. For starters, a building that cannot attract a rent is worthless so doing nothing perhaps isn't a choice for buildings with EPC's already in place and tenants in situ post 2018.

Research conducted by Bilfinger GVA found that 43% of landlords are yet to assess their portfolio's exposure to MEES risk & JLL (in their own study) found that circa 20% of commercial properties in the UK are F or G rated, rising to 35% when you include the E rating.

Having done the EPC assessor training myself in 2012 I have to agree that it's not a bad course but isn't hard to pass. The training company I used almost laughed at the idea of any of us on the course failing....with infinite re-tests and an open book exam.

EPC software is inconsistent & too flexible; you can basically play around with a building until you achieve the EPC rating you require.....think about being paid £1,200 to do an assessment and the risk of fraud when you could help a landlord avoid refurb costs of £300,000? That could be a best case scenario when considering assessors offering EPC's at £30 and doing these using google earth.

The 1st April 2018 is looming & don't forget it only ramps up through 2020 and 2023 to capture more properties. One positive is that holding a valid EPC that is accurate and sits below an F rating will add value to your assets/portfolio. So credible firms delivering accurate EPC's, that would stand up in court, should be attractive partnerships for property owners looking to add value to their asset book. Some banks like RBS are restricting their lending against properties with EPC's performed by firms outside of their white-list.

So the jury's out. Get a cheap EPC and duck and dive under the legislation and you may just get away with it. But hold that asset for too long and if you don't nip and tuck it's energy credentials into shape you could wake up to a nasty surprise. One thing that is for sure is avoid investing into energy performance standards & see your property value plummet.

If you require any help with electing a credible EPC assessor drop me a line. I know of the good, the bad, and the ugly and can make sure they sit on the required white-lists.