With the impending introduction of Minimum Energy Efficiency Standards (MEES) in April 2018, both commercial real estate owners and lenders alike are preparing themselves by establishing internal processes that identify and manage the associated risks.
These risks have been highlighted in many industry articles and papers, and namely centre around ‘sub-standard’ properties having their value impacted by:
- Reduced lettability;
- Increased voids; and
- Additional capital required to bring the property up to standard.
As a result, many organisations are taking a proactive approach in reviewing their property portfolios for Energy Performance Certificate (EPC) ratings by value, identifying gaps where ratings are unknown, running new assessments and establishing where EPC expiry dates align to major lease events. See an excellent example in our Aberdeen Asset Management case study.
Impacts of a poor-quality EPC
As a result of ‘MEES risks’, the underlying EPC of a property has suddenly become an important indicator in any new investment decision, and therefore their accuracy and quality is critical. Incorrect assessments can now have very real impact on the perceived value of a property, as well as the time it takes for an acquisition of lending decision to take place.
Understanding and assessing the quality of EPC you are reviewing is an increasing area of concern for many of our members, especially if it’s one which has not been undertaken by your own organisation.
To help provide some clarity on the matter, Graeme Murray, Head of Sustainable Engineering at CBRE, joined our latest CRE Lending Working Group meeting to share his thoughts on the matter and highlighted some of the simple things property owners and lenders should be considering.
Below are some of the key takeaway points.
Simple spot checks
The following are quick and simple questions that you should ask to help raise any immediate red flags with regards to the quality of an EPC:
- Does the EPC match the EPC on the national register? It sounds basic I know, but the first check is to assess whether the EPC you are reviewing actually matches the official EPC that's lodged on the national register.
- Does the information on the EPC match up property level details? It's important to cross check basic property level data to that on the EPC to ensure they match. Two of the biggest impact areas are:
- Floor area: to confirm the EPC relates to the whole property and not just one section (e.g. one floor).
- Main heating fuel: incorrect selection can have a significant impact on the overall EPC rating.
- How old is the EPC? Building Regulations and EPC calculation methodology changed in April 2011 therefore EPCs prior to 2011 will not be an accurate reflection of an up to date assessment.
- Has a major refurbishment or fit-out been undertake since the EPC was issued? Naturally, major works taking place after the EPC was lodged, could potentially have a positive or an adverse impact on the rating if the property was to be reassessed.
- Has appropriate modelling software been used? For the purposes of producing an EPC certificate, commercial buildings are divided into three levels: Level 3, Level 4 and Level 5. The level which a property falls under will be determined by the sophistication and complexity of the building envelope, installed HVAC systems and services. EPCs for small to medium sized buildings (Levels 3 and 4) can use a Simplified Building Energy Model (SBEM) whilst Level 5 buildings require the more comprehensive Dynamic Simulation Model. It is important to check on the certificate which software package was used to create the certificate and confirm its appropriateness for the property in question.
- When does the EPC expire? Whilst not related to EPC quality, EPCs expiring close to April 2018 and 2023 could present significant MEES risks depending on the timings of future lease events and your investment strategy for the property.
Getting into the detail
If any of the questions above raise concerns you may also wish to engage a specialist to take a more detailed critique of the EPC, carry out a new EPC assessment and determine whether any further information which comes to light will have a material impact on your investment decision.
Specific areas you may wish to explore further include:
- The level of PI provided by the assessor.
- The number of ‘default values’ used which assume worst-case scenarios for performance.
- The use of correct weather/ location data.
- Whether an appropriate fabric performance level has been applied.
- The systems selected and efficiencies used are accurate.
Procuring new EPCs
Not only is it important to review existing EPCs for any new real estate transaction, to reduce the risk of future EPCs impacting on property value, it's equally important to consider setting minimum requirements when instructing a new assessment to be undertaken.
The following points were discussed as a good starting point:
- Providing the Assessor with sufficiently detailed brief to understand work involved.
- Ensuring appropriate modelling software is used.
- Ensuring appropriate PI insurance is in place for the nature of the property.
- Requiring the Assessor provides all underlying modelling files use (.nct file) which can be used for future assessments and integration.
- Ensuring the qualified Assessor is the one who carries out the on-site property inspection.
- If a “sub-standard” EPC rating is identified, request for detailed explanation prior to the certificate being lodged.
- If “sub-standard” EPC rating is identified request the Assessor to provide professional advice as to how the rating can be improved in a cost-effective way.