U.K. properties that fail to meet new energy efficiency regulations that came into effect April 1 will likely be the target of major investors keen to exploit the discounts available on these assets, which they will aim to refurbish to boost their value, according to local industry analysts.
The Minimum Energy Efficiency Standards prohibit landlords from signing or renewing leases for properties that require an energy performance certificate, or EPC, and are rated as an F or G. Properties that do not hold an E or higher EPC rating — or have an exemption based on specific criteria — must be upgraded before a new lease can be signed.
Leases signed before the April 1 deadline will not be affected until April 1, 2023, when MEES will be extended to cover all leases, including existing leases, but only if the property is required to have an EPC.
"I'm aware of investment houses creating funds that are targeting F- and G-rated properties," Andres Guzman, associate director of sustainability at Colliers International, said in an interview.
"If you are a purchaser who sees an asset that you feel could be quite easily brought up to standard, and you've done your research around the EPC ratings on those assets, there's good opportunities there to ensure a good return," said Brad Johnson, associate, energy, infrastructure and sustainability at Cushman & Wakefield.
At the end of 2017, 16.7% of commercial properties in England were rated F or G, with another 16.7% rated E, according to a note by J.P. Morgan Cazenove, citing figures from the U.K.'s Ministry of Housing, Communities and Local Government. In the City of London, 18% of commercial real estate falls below an EPC rating of E. Based on the amount of capital expenditure required to upgrade the ratings of some buildings, J.P. Morgan Cazenove said that this could present a source of acquisition opportunities for listed property companies.
The impact of the MEES regulations on the U.K. property market has also caught the attention of banks and other financiers concerned about their exposure to properties whose value or rental income might be impacted, according to the analysts.
"Financial providers are starting to take an interest in the valuation process," said Johnson. "It's not just our direct investor clients who are asking questions about this. It's actually the people who are financing them, their clients directly and those in charge of pension funds [that] are kind of keeping an eye on what the risks are on the portfolios," he added.
The number of EPCs lodged in the first quarter of 2018 for nondomestic properties rose by 26% year over year, according to a report by the U.K.'s Ministry of Housing, Communities and Local Government. For the 12 months ended March 2018, the number of EPCs lodged for nondomestic properties increased 16% to 80,000.
