New energy efficiency laws will apply to thousands of landlords but will they hit the already beleaguered high streets of Britain?
If you are involved in the buy-to-let sector, chances are you have heard a fair amount in recent weeks about Minimum Energy Efficiency Standards.
Mees came into force on 1 April. Simply put, landlords will only be able to rent out properties that achieve a minimum EPC rating of E.
Who knows why they chose April Fools’ Day to launch it but, for landlords acquiring new rental properties, this is no joke. The penalties for non-compliance after three months are 10 per cent of the rentable value of the property, rising to 20 per cent after July. All rental properties will be encompassed by the regulations by 2021. At an absolute minimum, landlords may be spending over £100 for certification but those properties that fall into F and G will also incur capital costs for upgrading.
So why am I talking about this in a Commercial Watch column? Because it applies not only to the residential sector but also to commercial lettings, with the same standards. That means clients with commercial rental portfolios may well be looking to bring their existing properties up to scratch over the next three years, or to do renovation work as part of acquiring new sites.
Remedial actions that can affect EPC ratings by up to 15 points each include:
- Loft or roof insulation: just as with residential, reducing the amount of heat that rises and exits through the roof is among the most effective changes
- Cavity wall insulation: again, like residential, reducing heat loss through the walls
- Glazing: upping to double or even triple glazing
- Lighting: reviewing layouts of lighting and lighting design, to reduce the number of lights needed to illuminate a given space
- Air conditioned zoning: adding internal walls or other barriers around areas that are air conditioned, to stop them being warmed by non-air conditioned parts of the building, and
- Renewable energy: switching to a green energy supplier and/or installing renewable energy sources like solar panels or small wind turbines.
While some of these can be straightforward, costs could quickly escalate for larger properties. That means commercial landlords are likely to be looking for ways to raise capital to make such modifications.
For those with good deals on their main commercial mortgage, it is worth knowing the alternative financing options available to them to release equity in their portfolios, such as taking a second charge on their commercial property. It also means lenders will have to scrutinise EPC ratings when underwriting, since non-compliance would imply no future rental income.
Indeed, lenders like Interbay are already issuing changes to their underwriting processes, with minimum E-grades for residential properties, and commercial properties under E only by referral.
For new purchases of below-grade commercial premises, alternative financing such as commercial bridging, to cover upgrade works before refinancing onto a regular commercial mortgage, shows how specialist lending can play a role as landlords adapt to Mees.
Mees compliance is just the latest challenge for commercial landlords. This comes against a backdrop of significant retrenchment in major sectors for commercial rental.
The retail sector has been taking a pounding from online and we have seen some high-profile implosions in recent weeks, such as Maplin and Toys ‘R’ Us. Moreover, the restructuring and severe estate pruning of several chains, including Jamie’s Italian, Byron, Prezzo, Carluccio’s and Café Rouge, reinforces the malaise.
Inevitably, this will challenge occupancy rates and put downward pressure on rents. Refinancing their commercial mortgages to take advantage of continued benign interest rates may be a helpful step brokers can take to support their commercial landlord clients.
Nevertheless, it is far from doom and gloom. When we look at the full picture, across all types of commercial premises and including owner-occupier, trading businesses, the commercial sector has held up well.
HM Revenue & Customs data shows 2017 was 2.5 per cent up on 2016, at 127,990 non-residential property transactions. Although this is a slower rate than the 5 to 8 per cent seen in each of the previous three years, it is encouraging that there is some resilience in the market.
With UK property remaining an attractive area for investors, there are likely to be opportunities in commercial property over the coming year – Mees or no Mees.
Brokers aware of the flexibility that specialist lenders can bring will be able to help these investors capitalise as the opportunities arise, keeping this positive momentum in the commercial sector.
Lucy Barrett is managing director of Vantage Finance