Are your assets at risk as a result of the Minimum Energy Efficiency Standards (MEES) regulations which came into force on the 1st of April 2018?
In a previous blog post titled “MEES regulations: How they will impact flexible workspace from April 2018” written by my colleague Russ Avery, he gave a 10-point strategy on how you can manage MEES risks.
The regulation means that landlords cannot let, extend or renew a lease for F and G rated properties unless an exemption applies. One such (temporary) exemption is that the EPC rating cannot be improved through measures that pay for themselves within a 7-year period.
E rated properties may still be at risk from MEES regulations!
Landlords and their professional advisors should also be aware that there was a fundamental change to the EPC calculation methodology effective April 2011.
[clickToTweet tweet=”This means that assets which had their EPCs prepared prior to this date could be at risk even if they were E rated” quote=”This means that assets which had their EPCs prepared prior to this date could be at risk even if they were E rated”]
This means that assets which had their EPCs prepared prior to this date could be at risk even if they were E rated. We can identify these assets after reviewing your existing EPC’s and help establish improvement programmes to improve your rating.
What implications will this regulation have on your assets?
MEES regulations will need to be factored into the day-to-day asset management of commercial real estate. We consider below some implications of the regulations.
Transactional value: We have first-hand evidence as a company that poor EPC ratings affect transactional values. We know of transactions where hundreds of thousands of pounds have been ‘chipped’ off the agreed purchase price once the due diligence processes established incorrect EPC certificates were in place.
Valuation: Both yields estimated rental values (ERVs) are ‘at risk’ because of MEES. Research indicates that the effect of disregards at a rent review and under a 1954 Act lease renewal on ERVs could impact capital values by more than the cost of relevant improvements.
There is an assumption by some professionals in the market that MEES will hit secondary and tertiary assets more than prime real estate. This may be incorrect due to the way in which commercial property is typically valued. In its simplest form, capital values are determined largely by the rental value of the premises, either actual or potential. A valuer looks at this income and applies an appropriate ‘all risks yield’ to reflect the security and term of income, and any potential for future growth. This is represented by the simple formula: NI x YP = CV, where NI in net income, YP is years purchase, and CV is capital value.
The cost of the installation (or disregard) of building services is reasonably uniform subject to locational adjustment factors. Technologically speaking, a heat pump installed in London will be the same as a heat pump installed in Hull, and cost is affected by labour rather than the technology itself. A prime yield might be 5%, where as a secondary yield might be 10%. A £1.00 reduction in rental value as a result of MEES will therefore affect capital values by £20.00 on the prime investment (100/5 = 20 YP) and by £10.00 on the secondary investment (100/10 = 10 YP).
Dilapidations: The effect of Section 18 Valuations and supersession generally have the potential to render tenant repairs useless because of MEES. If precedent is established for this, then the dilapidations market could be significantly impacted by MEES. We see this as a potentially market disruptive issue for property. Read more about dilapidations here.
How to manage MEES (our previous 10 step guide)
- Review how you store your data
- Identify any gaps in the data and any assets at risk
- Consider the use of software, such as SIERA
- Use CIBSE accredited assessors
- Ask your assessor to review the existing EPC for accuracy
- If you need a new EPC, ask for an indicative certificate
- Review point 6 in the context of the lease
- Consider ways to recapture capital costs through energy savings
- Retain future access to the energy model used to prepare the EPC
- Review how operational performance can be monitored – and even linked to the EPC model
EVORA EDGE can support you in all cases as we employ competent CIBSE qualified level 5 EPC assessors.
EVORA can identify and manage MEES derived risk by developing an asset management strategy at the fund and portfolio levels.
Our technical engineering division EVORA EDGE is experienced in using our revolutionary BIM:SAM– Building information modelling for Strategic asset management to manage MEES risks, engineering and energy efficiency, resource efficiency and capital cost planning.
Building Information modelling (BIM) can be used for high-level MEES risk assessments and act as a ‘digital passport’ for your building, recording data and information of the building and its services.
The BIM can be integrated into our SIERA software to create a powerful monitoring and targeting (M&T) toolset.
BIM: SAM merges real intelligence and innovation with strategic asset management.
“By using a dynamic BIM model, alongside monitoring and targeting through our SIERA software, we can bring real intelligence and innovation within the strategic asset management approach.”
Neil Dady, Director, EVORA EDGE