Behind the frequent talk about climate change, energy and other ESG (environmental, social and governance) factors are the present and future demands on businesses of all sizes and sectors. We’ve seen that the property & construction sector is no exception.
What is the law for England and Wales at the moment?
It’s slightly different depending on the type of property you have. Your home or commercial premises, for example, don’t need to comply to a specific energy performance certificate (EPC) standard, but must declare its A-G rating at the point of sale (some commercial properties must also display their ratings too).
This leaves rented premises –where there are specific rules for EPC standards.
A requirement for an EPC is triggered by a letting, and the EPC is then valid for 10 years or until the building is re-let, whichever is the longest.
It is unlawful to let any property that falls below EPC E standard at present, without a valid exemption. This is for existing and new lettings for residential property, but only for new lettings on commercial units until April 2023 – after which point, all existing commercial lettings will also need to demonstrate an EPC E standard rating.
What is happening now?
At the time of writing, there was an Energy Whitepaper issued by the Government in December 2020, and a consultation that closed in June 2021 with some proposals for commercial property, and a further consultation that closed in January 2021 with proposals for residential property, that are now under consideration by the Government – but no concrete announcements as of yet.
The Energy Whitepaper stated a desire for “as many residential homes as possible” to achieve EPC Band C rating by 2035, but the detailed plans seemed to refer mainly to rental properties, and similarly referred to let commercial properties as another key area of focus. The Climate Change Committee have further recommended an EPC rating of C or above from 2028. For residential lettings, the consultation document referred to a certification rating of C or above as a requirement from 2025 for all new tenancies, and then all tenancies from 2028.
The consultation paper explains that the Government would like all let commercial property to achieve a minimum EPC B band by 2030 via three stages:
- April 2025 – landlords must submit a valid EPC
- April 2027 – unless the EPC is band C or above, landlords must obtain another EPC to show that the building has been improved to a band C or have achieved the best available taking a reasonable view as to cost.
- 2030 – EPC band B or above requirement for all commercial properties
Are there exemptions to these EPC requirements?
Yes there are:
- Listed or officially protected buildings where meeting the minimum energy performance requirements would unacceptably alter the building
- Temporary buildings (won’t be used for longer than two years)
- Buildings used as places of worship or for other religious activities
- Industrial sites, workshops or non-residential agricultural buildings that don’t use much energy
- A detached building with a total floor space under 50 square metres
- Buildings due to be demolished by the seller or landlord with all the relevant planning and conservation consents
How do the EPC exemptions play into broader environmental goals?
As advisers to UK property and construction businesses, our view is that for anything other than short-term projects, these exemptions simply delay the inevitable.
The UK has tough targets to meet under the 2016 Paris Agreement: cutting the UK’s emissions by 68% by 2030. The Government has met the targets so far by tackling power stations behind the scenes; the next stage is to look at the domestic and business markets.
The trajectory is to guide UK property along a path of higher energy efficiencies and EPC ratings.
What are the consequences of not considering energy efficiency in property & construction projects?
As with so many areas, considering the long term is key: if your company plans any works without futureproofing, it becomes much more expensive to add on later.
As well as increasing your costs, going for the minimum approach now will significantly restrict your options for responding to future requirements, unless as part of a phased approach to works.
What are the other concerns?
The next most prevalent concern will be around the energy crisis and rising bills stemming from inefficient buildings. This in turn will influence tenants’ decisions: would they prefer to rent the A+ new development that will halve their energy bills compared to the older E rated development? And what would they wish to spend on rents for one building vs another?
In the face of recession, many businesses and individuals will be looking to reduce all unnecessary spend. Market-leading rents will not only be based on look and location, but also on energy efficiency.
Then we will have to look to the more regulated sectors: the lenders and insurers whose institutional investors are requiring net zero pledges and greener investments. It will become harder and harder for lenders to offer favourable lending to support lower EPC investments, and indeed for insurance companies to support such investments.
What effect will this have on property valuations?
Over time, reduced interest from lenders and tenants will require the UK valuation market to change its traditional approach by factoring a property’s carbon footprint and energy efficiencies into its property valuation models, not to mention the additional retrofit costs to bring the building up to speed. Where owners are not acting on the front foot, it’s easy to see how some UK properties could be devalued over a short period of time, creating obsolete or stranded assets.
Some might claim that there isn’t a value-based argument at the moment for long-term energy-efficient planning in property works, because none of our existing valuation models consider energy efficiency as a formal measure of a property’s value. That would be an extremely short-term view of the market, given where we know we need to get to.
How to fund this?
The Government doesn’t have many answers here – in some cases, costs can be passed on, either in part, or in full, to tenants in exchange for lower energy bills. There is no immediate payback, other than the more intangible value of futureproofing your investment base.
What action should property owners and developers take now?
- The first stage is to fact-find. Understand where your properties sit on the EPC scale, and the costs of retrofit and scale of works to get to, say, EPC A. Work out your carbon footprint per square metre, and use that as a measure.
- Next, formulate a plan to either sell assets now that look unattractive to retain, or plan towards hitting net zero by phasing works to ensure a minimum of meeting the Government requirements, while creating headroom to improve further as budget and legal requirements dictate.
- Talk to your building and maintenance contractors to understand what their knowledge and understanding is to help you get there – do they really have a plan, or are they hedging their bets?
- Look at your new acquisitions through this lens, so that you can plan new builds differently.
- Collaborate. While there aren’t any readymade solutions at the moment, there are lots of pockets of knowledge across the sector. Some of the key players from other sectors with significant climate-related challenges are seeing cross-sector collaboration as a key strategy to identify solutions. Because of how fragmented the property & construction sector is compared to other sectors, a collaborative approach is going to be absolutely key.
How we can help
Our expertise in advising across the property & construction sector, combined with our understanding of ESG factors and our network of sector contacts, make us the ideal advisers for business owners and landlords who want to keep environmental concerns at the forefront as they plan for the future.
To find out more, please contact us for a chat.