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Do your buildings meet the Minimum Energy Efficiency Standards (MEES)?

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)

  1. Review how you store your data
  2. Identify any gaps in the data and any assets at risk
  3. Consider the use of software, such as SIERA
  4. Use CIBSE accredited assessors
  5. Ask your assessor to review the existing EPC for accuracy
  6. If you need a new EPC, ask for an indicative certificate
  7. Review point 6 in the context of the lease
  8. Consider ways to recapture capital costs through energy savings
  9. Retain future access to the energy model used to prepare the EPC
  10. 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.


Our expertise

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


To ensure your buildings remain lettable after the 1st of April 2018. Please don’t hesitate to get in touch with our experts.

Download our BIM: SAM brochure for all the information in a handy PDF and see our BIM:SAM approach in action.

Three Signs Real Estate Must Move to a More Sustainable Model

1. Governments are putting sustainability into law and regulations continue to tighten.


The response of the international community to Donald Trump’s decision to withdraw from the 2015 Paris agreement demonstrates that we (most of the rest of the world) have long since reached our ‘tobacco’ moment and acknowledged that climate change is real and we must respond with changes in our current models and behaviour. Examples of this include India’s and China’s current outperformance of the Paris goals, California’s and China’s agreement to continue working on climate change, and the UK Minimum Energy Efficiency Standards (MEES).

Commercial Real Estate can account for up to 50% of C02 emissions globally, and 88% of potable water consumption in the US. An industry that has such significant impacts on C02 emissions and energy consumption will continue to get scrutinized more and more as governments implement further environmental legislation.

[clickToTweet tweet=”Commercial Real Estate can account for up to 50% of C02 emissions globally” quote=”Commercial Real Estate can account for up to 50% of C02 emissions globally. An industry that has such significant impacts will continue to get scrutinised as governments implement further environmental legislation.”]

An example of this is the UK’s Minimum Energy Efficiency Standard (MEES) which comes into effect in 2018, whereby properties with an F or G rating are unable to be let. Amazingly one third of landlords surveyed by Property Week earlier this year were unaware of these new requirements.

Our EDGE team can develop a strategy for you to ensure you are prepared for MEES and de-risk your property portfolio.

Businesses have also responded in ways that exceeded my expectations (call me a pessimist) such as Apple’s commitment to the Paris agreement and ‘green bond’ environmental push, US auto industry’s commitment to Paris, and an impressive range of real estate investors have reaffirmed their commitments to match or exceed the Paris agreement’s goals. The NHS and several UK companies will no longer occupy properties with an EPC rating of a C or less, further emphasising the focus businesses and government are putting on their environmental responsibilities.

Further evidence of the increasing importance of sustainability within Real Estate can be seen through the exceptional growth of real estate sustainability benchmarks over the last decade such as GRESB, BREEAM, LEED and WELL.

Take away: Governments are committing to a sustainable future and are tightening regulations on energy efficiency and sustainability. A paradigm shift has happened where leading businesses are moving to ‘conscious capitalism’ where their contribution to society is considered and profitability is no longer the only goal, regardless of the consequences. The evidence to demonstrate that consumers will shirk environmentally friendly properties may be anecdotal for now, but I believe that soon we will have enough evidence to establish this as a growing trend within the real estate industry.

Real Estate investors and asset managers must recognise these shifts and make changes in the management of their portfolios. Those who stand still in sustainability will be moving backwards, and will see the value or their properties decrease and their economic/environmental risks increase.

EVORA can advise you on the best strategy to future proof your portfolio and minimise risks. Use our SIERA software to get in-depth insights into the environmental performance of your properties.

 

2. Space as a Service is the new way of working


The millennial generation has come of age and has joined the work force, and it isn’t working like the generations before it. This is the generation of Uber, Airbnb, and BorrowMyDoggy, and it will be sharing office space as well.

There is research that estimates that around half the UK workforce can work remotely, and around 40% of the UK workforce will soon be freelancers. Leases of 20-25 years are now the exception instead of the norm, with tenants putting a greater emphasis on flexibility. This has coincided with a boom in flexible office providers who are taking advantage of technologies which enable this new way of working. That this workstyle has caught on is demonstrated by the fact that WeWork was the largest new occupier of space in the USA in 2016, and British Land has also ventured into the flexible workspace section with its new Storey co-working offering in London.

Research by Knight Frank and the Instant Group shows that this market has grown by 16% in 2015-2016 and 18% in 2016/2017 in the UK. This combined with WeWork’s estimated valuation of $16bn demonstrates that Space as a Service is an evolution within real estate opposed to a fad.

The increased demand for flexibility from tenants represents a challenge for landlords as short-let properties generally underperform against long term lets. As explained in a recent Property Week article:

“While rental values have grown faster on shorter-let properties in the central London office market, where the demand for flexibility has increased significantly, shorter-let assets had delivered a cumulative return of 91% over the past nine years compared with 113% for longer-let properties.”

Take away: The ‘Uberisation’ of space means traditional landlords must move with the times and technology. There is a shift where they need to move from their existing model to becoming service providers of space. As an all-inclusive provider (rents, rates & services) the landlord will no longer be constrained by the ‘landlord-tenant dilemma’ of improvements and any energy efficiencies will help the profitability of their properties. Their self-interest will drive them to make their properties as energy efficient as possible.

Our EVORA EDGE technical engineering team can help ensure you improve the energy efficiency of your properties and maximise the lifetime returns of your assets.

 

3. The rise of Science Based and Carbon Neutral Targets


Real estate developers and companies with large property portfolios are committing to Science Based Targets (SBT) and recognising that sustainability is no longer just a Marketing and PR exercise, and that their environmental impact must be measured.

For those that don’t know, a SBT is a carbon emission target that is defined as ‘science-based’ because it is in alignment with the 2oC target set by the 2016 Paris Agreement. It involves companies assigning themselves a target in line with their proportional contribution to global emissions. This requires short and long-term planning when considering expansion plans in the context of carbon reduction commitments.

A range of business have made commitments from manufacturing, energy, industrial, telecommunications, to retail. Examples include Coco-Cola, Eneco, Sony, and Wal-Mart. In the UK real estate sector, companies setting themselves SBTs include Land Securities and British Land. So far it’s a small number, but I am convinced that this number significantly increase over the next 12-24 months.

[clickToTweet tweet=”Companies are committing to #SBTs and recognising their environmental impact must be measured” quote=”Real estate developers and companies with large property portfolios are committing to Science Based Targets (SBT) and recognising that their environmental impact must be measured.”]

Take away: Real estate does not live in a bubble. Leading blue-chip companies are setting themselves SBTs and most of them will have significant property portfolios. As mentioned earlier, if commercial real estate is estimated to account for up to 50% of global carbon emissions you can be assured that these companies are looking at the performance of their property portfolio and how they can improve the performance. For landlords that want to continue to have competitive properties that attract blue chip business (which often draw in more businesses) then they need to consider the environmental performance of their assets.

Contact EVORA to see how we can help you set Science Based Targets for your property portfolio and become an industry leader in sustainability


These are just three signs that real estate must move to a more sustainable model, to discuss this more in-depth, contact a member of the team.


 

Minimum Energy Efficiency Standards (MEES) Regulations: How they will impact flexible workspace from April 2018

Scroll down for our MEES Management 10-Point Strategy


What I’m about to write will come as a great shock to many operators in the serviced and managed office industries: you may not be able to sign up clients for more than 6 months as of April next year. This is less than a year away!


Why is the flexible workspace market at risk?

As of April 1 2018 landlords are no longer able to lease out commercial office space in buildings with an F or G EPC rating unless a time-limited exemption applies, which must be registered on an Exemptions Register.

Many serviced and managed office providers thought that they were exempt from this rule as they are not the primary landlord, however this regulation applies to any tenancy agreement over 6 months and this can include sub-leases and agreements sometimes referred to by serviced operators as licenses (we’d recommend that you speak to your solicitors to determine if your “license” really is a license or a lease/tenancy). This creates something of a challenge for the serviced workspace sector. But they are not the only ones who are not aware of the legislation: in a recent survey by Property Week magazine, 32% of all respondents did not know what MEES was and how it would impact their business.

[clickToTweet tweet=”In a recent @PropertyWeek survey, 32% of respondents still didn’t know what #MEES was…” quote=”In a recent PropertyWeek survey, 32% of respondents still didn’t know what MEES was and how it would impact their business.”]

MEES represents a significant risk to companies looking to sub-let space, because they may be treated as a landlord and as a result must undergo the same process of due diligence as the superior landlord.


What about the rest of the market?

Outside of the serviced office sector, occupiers of all types of non-domestic property may struggle to sublet sub-standard space without undertaking improvement work, the benefit of which may ultimately revert to the superior landlord. And while assignments are not captured until 2023, sub-standard properties may become stigmatised by their poor EPC rating making this type of transaction difficult. Indeed, there are already occupiers, such as Government and large corporates that will not lease sub-standard space. As an example, EVORA was recently engaged to develop an EPC improvement strategy by a fund landlord that needed to obtain a C EPC rating to secure a Government department. This requirement for a C rated property goes far beyond the requirements of MEES, highlighting the growing importance of EPCs as a benchmark for predicted energy efficiency.

Landlords with E (or even in some cases D) rated properties may still be at risk because the EPC calculation is dynamic. The calculation methodology is linked to Part L of Building Regulations which deals with the conservation of fuel and power in new properties. Part L, like most of Building Regulations, is updated on a periodic basis and the minimum energy efficiency targets in Part L have to-date been strengthened with each successive iteration. This has impacted the EPC rating, and in particular the changes adopted in 2010 affected EPC ratings from 1 April 2011 onwards (the date on which EPC software was updated). In plain English, what this means is that an E rated property before 1 April 2011 if reassessed today is likely to be an F or G rated asset if nothing in the building has changed. This means that planned preventative maintenance and improvements will need to factor in these regulations.

[clickToTweet tweet=”Landlords beware: even your D or E rated properties may still be at risk from #MEES…” quote=”Landlords beware: even your D or E rated properties may still be at risk from MEES regulations…”]

Failure to comply with the regulations will result in fines of between £5,000 and £150,000. The enforcement authority may also impose a publication penalty. This means that the enforcement authority will publish some details of the landlord’s breach on a publicly accessible part of an Exemptions Register.


What actions can you take?

Here is The EVORA 10-point Strategy for Managing MEES (an image version is available at the bottom of this post):

  1. For landlords with multiple assets, such as funds or workspace providers, review how you store your data. This should be digitalised and in a central and accessible location
  2. Identify where there are gaps in the data (missing EPCs etc.) and identify those assets that are at risk by virtue of their (EPC) rating, capital or rental value and/or a lease or transactional event
  3. Consider the use of software such as EVORA’s highly versatile, market-leading platform, SIERA
  4. Use or involve CIBSE (Chartered Institution of Building Services Engineers) accredited assessors, or assessors that work for a recognised and reputable engineering practice – preferably with additional professional qualifications (such as those recognised by the Engineering Council)
  5. Have your professional EPC assessor review the existing certificate for accuracy and relevance
  6. If it is necessary to prepare a new EPC, ask for an indicative (draft) certificate. The assessor may be able to deliver an improved rating by using better quality data and/or by having better knowledge of building services. However, if the asset remains at risk from MEES, then commission a strategy to improve the building to include capital costs, energy savings and, where appropriate, life cycle costs
  7. Review point 6 in the context of the lease(s) and the fund or asset management strategy
  8. Consider ways to recuperate capital costs through energy savings or asset management driven opportunities
  9. Ensure you retain future access to the energy model used to prepare the EPC and utilise it for energy and asset management purposes, including MEES management. After all, you paid for it!
  10. Finally, to ensure that you’re getting the best result from your EPC-driven improvements, review how operational performance can be monitored to determine if the predicted energy savings align with the operational realities. Again, SIERA can assist with this, thanks to its intuitive and easy-to-use monitoring and targeting capabilities

[clickToTweet tweet=”Here is the @evoraglobal 10-point Strategy for Managing #MEES Regulations…” quote=”Here is The EVORA 10-point Strategy for Managing MEES Regulations…”]


Final Thoughts

This all sounds very onerous, but in fact MEES should be regarded as an opportunity.

For occupiers

MEES is obviously an opportunity to save money through reduced energy bills and resultant CO2 emissions, and energy efficient buildings are more likely to help deliver a productive working environment.

There are also opportunities for occupiers to use MEES to mitigate rental increases after 1 April 2018 as a result of rent reviews and lease renewals. And it may be the case that occupiers can use MEES to reduce or remove any liability towards dilapidations.

For landlords

MEES is a great opportunity to engage with tenants, but if that were not incentive enough – MEES will become increasingly synonymous with building value and building resilience. Improve your EPC rating and you reduce your risk, and this could influence yields and even, in time, headline rents.

Energy savings could provide an opportunity to look at alternative methods of financing, using the value (£) of the energy saved to redeem finance. This could provide a cost-effective method of improving your estate.

Finally, for those looking to buy or sell sub-standard properties, MEES introduces an opportunity to discuss the price!


As CIBSE accredited assessors, we are perfectly positioned to support you with EPCs and MEES compliance. Please don’t hesitate to get in touch.


EVORA MEES 10-Point Strategy

The Power of Data Visualisation in Profiling MEES Risks and Opportunities

My colleague Ed Gabbitas recently wrote a blog post titled ‘Why MEES is Changing Behaviour Two Years Ahead of the Compliance Date’. In that post, Ed highlighted some of the challenges around the accuracy and variable quality of some EPCs as well as some broader implications for the sector. In light of the potential adverse impact that MEES could have on some key value drivers, it is imperative that property owners have a clear fund or portfolio view of their EPC risks.

The obvious starting point is to understand where the gaps are. Fortunately, many organisations have started this process already by looking at the extent of EPCs most at risk across their funds / portfolios. A prerequisite to carrying out this analysis is having a single, central database that stores all of the key information in a consistent format.

Those companies that have participated in GRESB will know well that to be able to easily answer the questions relating to extent of portfolio coverage relies on all the key parameters such as EPC scores and an accurate record of associated floor area covered being stored in a consistent format to easily get an aggregated view. If this is stored in a multitude of tenancy schedule spreadsheets it can be an extremely time-consuming process in ensuring that the fund picture is accurate. For voluntary reporting such as GRESB, the effect of getting it wrong might be a dent in scores. However, in the context of MEES, the risks are potentially much more significant – i.e. the inability to let space and therefore negatively impact on income streams.

This is something that we have been able to help a number of clients with through the use of SIERA – our proprietary sustainability management software – to reduce manual intervention and improve the efficiency of storing EPC information in a systematic manner so that information is not overlooked.

Assuming that you have all your EPC information in one place the next step is to prioritise actions for managing the potential risks. This may include identifying which EPCs should be re-modelled for example or identifying particular units or properties for improvement to ensure they are MEES compliant. Regardless of what specific actions are taken, an efficient means of profiling EPCs will help make the task easier.

In the case of one of our clients we profiled the assets of a fund to identify the lettable space most at risk of MEES; the units in the example below represented around 69% of rental income and 51% of total lettable area at a particular asset, which ‘could’ have been un-lettable from April 2018 unless action was taken. We carried out an extensive EPC re-modelling exercise to produce new EPCs.

The Power of Data Visualisation in Profiling MEES Risks and Opportunities - Image 1

The before and after scenarios are markedly different, showing a really good result. This example is just one improvement case study amongst a fund of where we had profiled many EPCs using the powerful visualisation tools in SIERA. For example with SIERA’s EPC profiling module, you can edit key visualisations of EPCs against ERV and lease expiry to dial in on particular sets of assets/units and create reports. Both our consultants and clients have benefitted massively from the efficiency of being able to very easily profile against key parameters to customise analyses to inform decision making.

Simplified sample EPC Profile Analysis from SIERA:

The Power of Data Visualisation in Profiling MEES Risks and Opportunities - Image 2

EPC rating by lease expiry.

 

The Power of Data Visualisation in Profiling MEES Risks and Opportunities - Image 3

Rental income by EPC rating.

To speak to our experts about MEES, SIERA, or any other topics, please don’t hesitate to get in touch.


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Scotland’s Approach to Building Energy Efficiency

This post originally appeared here on the UKGBC blog, to which we are regular contributors.


 

Scotland’s ‘competitor’ to the much publicised Minimum Energy Efficiency Standards (MEES), due to be introduced in England and Wales in 2018, has been finalised and will be introduced next month. The approach is markedly different to the plans in place for the rest of the UK.

The scheme in summary

In Scotland, building owners who plan to sell or lease space will need to comply with the new regulations for units over 1,000 square metres in size, from 1 September 2016[1].  An energy performance certificate (EPC) is required, as usual.  However, an Action Plan must also be established to identify energy saving opportunities.  Action Plans can be issued by qualified Section 63 Advisors (many EPC assessors are in the process of gaining this additional accreditation) who use approved software to calculate improvements.  The software has been developed to consider the feasibility of seven improvement opportunities.

  • Draught-stripping windows and doors
  • Upgrading lighting controls
  • Adding central timer controls to the heating system
  • Insulating hot water storage
  • Improving lighting
  • Improving insulation
  • Replacing boilers if existing units are older than 15 years

Following completion of the Action Plan the owner can then decide to implement the relevant measures or produce an operational energy rating in the form of a Display Energy Certificate (and maintain this on an annual basis). Owners have 12 months to decide which approach to take and have a further 3.5 years to implement improvements if progression of the Action Plan is chosen as the approach.

Exemptions

It is also important to note that buildings constructed in accordance with a building warrant applied for on or after 4 March 2002 are exempt (for now)[2] – although there is a likelihood that this date will change over time to bring more assets into the scheme.  In many cases, exemption due to date of construction will be clear.  However, this rule has already raised questions.

For example, will a recently refurbished unit located in a building constructed prior to 2002 be exempt?

Consideration will need to be made on a case-by-case basis. The software used to generate EPCs and Action Plans will identify whether the unit meets the exemption criteria or not. As a result, the first part of the process, the EPC assessment, will need to be completed before the requirement for an Action Plan can be confirmed.

The Challenges

The approach, at first glance, seems practical.

Seven sensible improvement measures have been identified that, if feasible, need to be considered for implementation, and the bar has been set at the relatively low level of 2002 building warrant standards.  However, practical challenges remain.

Take the following scenario:

An owner wants to let an old (pre 2002) and large (over 1,000 square metre) office building on a Full Repairing and Insuring (FRI) basis.  The EPC and subsequent Action Plan will be produced.  To continue to comply, the owner will need to produce either a Display Energy Certificate or progress the implementation of the Action Plan.  However, lease structures for most FRI buildings will prevent compliance (as the owner will not have access to data and will not be able to implement improvements). 

To ensure compliance, owners of such buildings will need to ensure lease clauses are in place that require single-let FRI tenants to provide energy performance data to owners, as a minimum.

As a priority, landlords should review their portfolios and develop compliance plans to prevent problems in future.

[1] Units under 1,000 square metres will still need to produce an EPC, but will not be required to progress further.

[2] Transactions that are exempt from requiring an EPC are also exempt from additional action plan requirements.


If you have any questions, please don’t hesitate to get in touch.


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CRC and the Energy Efficiency Legislative Landscape: The Road Ahead

The deadline for Phase 2, Year 2 of the Carbon Reduction Commitment (CRC) Scheme is tomorrow! Here at EVORA, we are helping our clients to submit their CRC annual reports by tomorrow’s deadline. However, there are many challenges to come.

What’s happening with the energy efficiency legislative landscape?

It has been announced that the Department of Energy and Climate Change will close and energy will be incorporated into a new Department for Business, Energy and Industrial Strategy. This has raised many questions, one of which is: Does this Governmental move indicate a reduced focus on energy efficiency, or a move towards true integration of energy for the benefit of all?

For now, we have to consider CRC, which itself is due to be scrapped after the end of Phase 2 (the 2018/19 year). Incidentally, revenue generated by CRC will be replaced by an increase in the climate change levy.

I can understand the scrapping of CRC. It sits within a disjointed and confused legislative landscape made up of many elements, including the Climate Change Levy (CCL), the Energy Savings Opportunity Scheme (ESOS) and mandatory GHG reporting, with more to come in the form of Minimum Energy Efficiency Standards (MEES). The Government has promised a simpler energy policy focused on delivering change.

We will have to wait and see how this pans out.

How can business manage its way through compliance requirements and drive improvement?

At EVORA, we recommend that consideration is given to the development of a systems approach to energy and environmental management as a convenient and effective way to achieving performance improvement and minimising risks. Our Director, Paul Sutcliffe, recommended in his recent UK-GBC article that further consideration is given to the roll out of ISO 50001 systems.

If you have any further questions, please do not hesitate to get in touch for more information.


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Why MEES is Changing Behaviour Two Years Ahead of the Compliance Date

The Minimum Energy Efficiency Standards (MEES) regulations will make it unlawful from April 2018 to let buildings in England and Wales which do not achieve a minimum Energy Performance Certificate (EPC) rating of E. This will initially apply to new lettings and renewals only, but from 2023 will apply to all existing leases as well.

John Alker, Director of Policy and Communications at the UKGBC stated that MEES is “The single most significant piece of legislation to affect our existing building stock in a generation”. I would certainly agree with this on a number of levels.

 

But doesn’t MEES have its flaws?

YES!

Firstly, the minimum standard is based on an EPC rating but as we know, EPCs are renowned for their lack of correlation to actual energy performance and that, as a commoditised service, quality diminished significantly putting into question the accuracy and usefulness of many EPCs.  Note that the Government is aware of this issue and has entered into a consultation process designed to improve quality assurance of EPC assessments.

Secondly, EPC calculations are linked to building regulations, so as regulations get tougher, so does the ability to achieve a decent rating making MEES a moving target. Many have suggested that EPCs produced pre 2011, if re-modelled now, could be up to two ratings lower. If correct, this could potentially see in excess of 30% of building stock, at risk to 2018 regulations.

However, this is not what we are experiencing, primarily due to the poor quality of many existing EPCs. As an example, EVORA recently re-evaluated shopping centre units with an EPC ratings E – G, where the rental value of these units exceeded 75% of the total ERV of the scheme. The original EPCs were of poor quality, as shown through the use of defaults. By completing accurate EPCs, EVORA was able to secure at least a D rating and therefore mitigating MEES risks for the next 10 years.

It is also not yet clear what the future trajectory will be for the minimum standard, although it is possible that this will be raised come 2023. This makes refurbishment planning challenging for landlords, who generally work on ten year cycles.

Finally, there are a number of exemptions, not least the requirement to have the consent all of tenants, which is surely a get out of jail free card for any landlord.

MEES and Behavioural Change

Despite these flaws and challenges we are seeing a significant change in behaviour well in advance of the 2018 compliance date. This shouldn’t be a surprise. MEES has the real potential to adversely impact many key value drivers including occupancy, rental growth, liquidity, cost of finance and yield on sale.

 

Greater Rigour Required

As such, it is focusing minds to ensure EPCs are carried out professionally and with rigour, whilst taking steps to understand portfolio risk supported by an appropriate strategy to mitigate.

As an example, more sophisticated energy modelling is being undertaken using Dynamic Simulation software packages to ensure the accuracy of EPCs and to better understand the opportunities to improve both energy performance and the EPC rating. We are currently supporting Hines on a major refurbishment in Canary Wharf, providing energy simulation modelling to ensure the design intent improves both the energy efficiency of the building as well as the EPC rating.

 

Understanding your MEES Risk

In addition, we are regularly using sophisticated sustainability management software such as SIERA on behalf of our clients, to analyse EPC ratings, lease events and ERVs together to understand and profile MEES risk.

 

SIERA Infographic 1 JPG

 

Collaboration is going to be Essential

Ironically, rather than being a get out of jail free card, lack of consent by the occupiers, possibly due to business interruption issues, could impact on asset management plans to improve the overall EPC rating to ensure future marketability and to prevent possible price chipping on sale. This is also an issue for FRI assets where there is no legal right to gain access, but improvements may be necessary to achieve a minimum rating, prior to lease expiry to enable the property to be marketed to minimise the risk of void periods. These issues will drive the need for greater collaboration between landlord and tenant.

 

Improvement vs repairing obligations and what about dilapidations…?

Collaboration will also be key if the landlord intends to replace M&E equipment with more energy efficient kit, ahead of the end of its useful life, and is seeking the tenants to share in the costs or to recover fully through the service charge. The cost benefits to the tenants will need to be clearly articulated to get their engagement.

Staying on the theme of replacing kit, this is likely to have an impact on dilapidations where the landlord may require more energy efficient equipment to meet MEES regulations but the issue of improvement vs repairing obligations will arise. Again, collaboration and forward discussions will be key.

 

New lease terms?

New lease terms (notice my omission of ‘green’ which generally makes tenants and letting agents run a mile) could become the norm, specifically to bar alterations that adversely affect an EPC rating. But policing such terms will be a challenge.  Does this, for example, mean that every planned tenant fit-out or even minor alteration, has to be fully modelled to assess the impact on the EPC rating – possibly.

There are many other issues and challenges associated with the impending MEES legislation and whilst it is far from perfect it offers an opportunity to improve the energy efficiency and resilience of your assets and engage in long term communication and collaboration with your tenants. Surely that can’t be a bad thing!

 

How can EVORA support you?

EVORA can support you in understanding the upcoming MEES regulations, help you profile your MEES risk using our sustainability management software, SIERA and provide professional support in delivering and improving the EPC ratings for your assets.

EVORA is participating in a select group to provide industry guidance to DECC on the future of MEES regulations.

 

For further information or guidance on MEES please contact Ed Gabbitas: egabbitas@evoraglobal.com or 07557 529 106

 


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Legal Update: Scotland’s Energy Efficiency Programme

Changes to Scottish Energy Performance in Building Regulations

Publicity surrounding the introduction of Minimum Energy Efficiency Standards (MEES), which set a minimum EPC rating of E for leasing of properties from April 2018, has increased significantly in recent months, and rightly so. However, the Scottish Government has chosen to implement a different approach to drive energy performance improvement in buildings.

The Scottish Government has released guidance on the practical implementation of Section 63 of the Climate Change (Scotland) Act 2009 relating to the energy performance of existing non-domestic buildings.

The regulations, which come into force on 1 September 2016, require the production of a building specific energy Action Plan on the majority of buildings offered for sale or lease, which exceed 1000m².

The Action Plan, which is based on the output of Energy Performance Certificate (EPC) assessments, must be prepared by an approved Section 63 Advisor. Existing EPC assessors will need to complete further training and development to become approved advisors.

The Action Plan will identify appropriate measures to reduce energy consumption. Official guidance also indicates that the area threshold (currently 1000m2) is likely to drop over time. Following completion of the Action Plan, building owners will be responsible for either the reporting of annual energy use (in the form of a Display Energy Certificates (DEC) in England and Wales) or the implementation of physical improvement measures within a 3.5 year period.

Our EPC assessment team is already working to ensure it can provide Section 63 Advisor support.

Click the image to download this article as a handy one-page flyer.

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For further information on regulations and requirements please contact Paul Sutcliffe: psutcliffe@evoraglobal.com or 07557 529 104.

Further information is available on – http://www.gov.scot/section63


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Property Firms Vulnerable to MEES Regulations

Only 57% of property firms have assessed the impacts of the upcoming Minimum Energy Efficiency Standards (MEES) on their portfolios, according to new research conducted by Bilfinger GVA.

The MEES regulations, due to come into force in April 2018, will make it unlawful to let or sublet properties in England & Wales with the two lowest Energy Performance Certificate (EPC) ratings of F and G, posing potential risks to landlords and occupiers alike.

The research also found that 98% of firms believe MEES will lead to increased capital expenditure, while 93% think that it will have an impact on pricing. With such a large proportion of firms who have yet to consider MEES at all, the report will likely act as an alarm bell to the sector, which is otherwise highly engaged with the wider sustainability agenda.

With just under two years to go until the regulations come into effect, fund managers can be well-prepared by assessing their portfolios and addressing risk now. When it comes to acquiring a new property, firms should take a more rigorous approach to the due diligence of the building’s existing EPC, checking its underlying accuracy and quality.

EVORA is perfectly positioned to help commercial real estate firms to understand the risks associated with MEES and to support them in the collation and analysis of their EPC data. Our environmental management software, SIERA, can hold EPCs for an entire portfolio and cleverly model the data to profile MEES risks against rentable income and lease expiry dates.

If you have any questions or concerns regarding MEES, please contact our experts today, who will be happy to advise you on the best course of action.


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The Impact of MEES for Commercial Real Estate Lending

The Impact of MEES for Commercial Real Estate Lending

The Better Buildings Partnership consider the transformational impact of emerging real estate sustainability risks.

View the full report here.