Potential impact of new minimum performance standards for rental buildings in the UK

The UK is requiring landlords to have their buildings meet a minimum performance level as of 2018. While the initial reaction was muted, now the real estate industry is realising the implications. Aliya Ram and Kate Allen write a good article in the Financial Times about recent developments. Let’s hope the government is not pressured to lower the requirements.

 

Energy measures put UK office lettings under threat

A fifth of all British office buildings risk becoming unlettable within five years as a result of new energy efficiency measures that pose a threat to the value of property investors’ portfolios.

From April 2018, landlords will not be permitted to let out the least energy-efficient buildings, as measured using energy performance certificates.

EPCs measure the energy-saving capacity of properties, looking at criteria such as thermal insulation, lighting and electrics. The rankings run from A to G and around 20 per cent of offices fall into the F and G categories to which the new rules will apply, according to figures from the Department for Energy and Climate Change.

Buildings are the third-largest contributor to Britain’s carbon dioxide emissions after power generation and transport, accounting for 18 per cent of all UK emissions, according to the Carbon Trust.

Graeme Murray, head of sustainable engineering at property consultants CBRE, said the changes were already having an effect on property values. “You are already seeing EPC ratings being factored into transactions,” he said. “Informed investors and informed purchasers know.”

The rule was first announced as part of the 2011 Energy Act. A consultation on how it will be implemented recently closed and the government will announce detailed plans later this year.

Religious and agricultural buildings, smaller properties and listed heritage sites may be excluded from the rules, which might also be restricted to new tenancies for five years, before being rolled out to existing leases in 2023.

Mr Murray said lack of clarity from the government means the property market is not yet expressing the full impact of EPCs. “The full effects on property value may not be seen until next year.”

David Goatman, head of energy and sustainability at property consultant Knight Frank, said not all landlords were taking steps to address the legislation: “Bigger property owners with in-house compliance teams are coming to us, but smaller individual landlords might not even have assessed their assets yet, let alone quantified the potential impact on value.”

According to figures from the British Property Federation, about 80 per cent of British office buildings are more than a decade old.

The new rules will introduce incentives for property investors to think green, Patrick Brown, an assistant director at the BPF, said, adding they are currently “underincentivised”.

“There is nothing at the moment to make you want to buy a more energy-efficient building,” Mr Brown said.

David Paine, head of property investment at insurer Standard Life, said that when his team first started to consider the impact the rule would have, it originally affected around 10 per cent of the assets it held.

“But you can whittle that down pretty quickly,” he said. “We’ve been improving what we own and imposing conditions on what we buy. We wouldn’t rule out buying a non-compliant building but we would price in the cost of the work necessary to make it compliant.”

Just two of Standard Life’s current office investments are affected, he said.

The change will hit owners of poor-quality buildings, particularly smaller ones, rather than “institutional-grade [investment] assets”, Mr Paine added. “I think it will catch some people unaware.”

Even properties that meet the new standards now are likely to be targeted by a “ratcheting” of the rules in later years, Mr Goatman predicted, saying that government sustainability targets are likely to be a “moveable feast”.

Threadneedle’s property punt pays off

When fund manager Threadneedle spent £4m to buy Premier House in Twickenham, west London, in 2011 it did not look like a good bet, writes Kate Allen.

The shabby 1970s building on a busy road junction in a suburb of the capital cost £80 per sq ft.

“It’s cheap, but it’s cheap for a reason,” said Don Jordison, Threadneedle Property Investments managing director. “There are limitless amounts of obsolete, environmentally redundant office buildings. These are people’s headaches.”

After spending about £5m to refurbish the empty property, Threadneedle secured social landlord Thames Valley Housing Association as a tenant. The building is now valued at £13m.

Premier House was the first in a series of investments by the Low Carbon Workplace Fund, a joint venture between Threadneedle, construction company Stanhope and environmental advisers the Carbon Trust.

Threadneedle channels investors’ cash into buying up poor quality, ageing office stock, £120m to date, while Stanhope carries out an environmentally friendly refit, cutting energy costs by 50 per cent on average and the Carbon Trust monitors the building’s energy performance.

The end result? The building becomes appealing to tenants once more and is of institutional investment grade.

Since it began with Premier House three years ago, the fund has taken on seven more buildings, which after refurbishment are worth a total of £184m, generating total annual returns of 20 per cent.

“We have proved that this can be done cost effectively and that we can make money,” Mr Jordison said. “None of this was ever founded on altruism; it’s all profitable.”