SPECIAL FEATURE: Scotland’s energy time-bomb

Sometimes the effects of even the best-intentioned property legislation only become apparent many years down the line and, despite the intervening period, they still have the capacity to take property owners by surprise.

Such an effect is bubbling away in the background of Energy Performance Certificate (EPC) regulations, with new developments in the offing – developments which could have a notable long-term effect on the commercial property market.

EPCs have been on the go for six years and are now part of the scenery in commercial transactions. They have been reviewed, tightened up, tweaked and are slowly beginning to be recognised as making a contribution in forcing property owners and occupiers to start thinking about energy efficiency.

The Scottish Government has made much of the need for property professionals to embrace the principles behind EPCs – but what we are about to witness is the first employment of the regulatory ‘big’ stick.

Embedded in the Climate Change (Scotland) Act 2009, are provisions which require the Scottish Government to regulate for the assessment and improvement of the energy efficiency of commercial buildings. The decision to have to adopt this earlier and broader legislation in contrast to the enabling legislation contained within the Energy Act is notable.

Also worth of note is the approach likely to be adopted in England. A property is likely to be deemed energy inefficient, south of the border, if it does not achieve Band E in the EPC. In Scotland a different tack has been taken. Reading between the lines, properties which fail to attain energy efficiency standards in line with 2002 building regulations will be deemed to require to be improved through the implementation of Energy Action Plans. Essentially, these EAPs will force property owners to carry out the energy efficiency recommendations contained within the EPC.

There certain exemptions: initially, buildings of less than 1000 sq m would not be required to be assessed and improved, though EPCs would still be required however for sale or lettings; buildings that currently meet energy standards equivalent those introduced by the 2002 Building Regulations would be exempt – they are deemed to be efficient; and buildings which have already been improved via Green Deal would be exempt.

The regulations, timetable for a June 2016 introduction, have not been fully drafted and published by the Scottish Government and, consequently, there remains some uncertainty as to how things will work in practice. An EPC will still be required at the point of marketing, for sale or let, but owners will also be required to prepare or have prepared for them the action plan which will identify a target and set out how that target will be achieved. At this point the improvements can be undertaken in full over a period of 3 and a half years, or deferred during which time annual records of actual energy use will be taken.

Within a short space of time – parliamentary approval in Autumn 2015 and implementation in June 2016 – the Government plans to introduce Energy Action Plans (EAPs) for commercial premises.

We can surmise that implementation of the regulations will have an immediate impact on the property sector and the property owners and occupiers who operate in that sector. And while the regulations will initially affect larger buildings only, it is unimaginable that the breadth of property falling within the scope of the proposed regulations will not be increased, given the Scottish Government’s overarching aim to dramatically decrease the country’s carbon emissions.

Much of the commercial stock in Scotland was constructed prior to 2002 and as such will currently fall short of the energy efficiency standards required under the 2002 Building Regulations.

Consider a 1970s or even 1980’s office building, for instance, constructed in dated building materials with poor or non-existent insulation, single glazing and obsolete heating plant. In many cases, it simply would not be financially viable to spend the capital required to bring the building up to the new regulatory standards.

This, in turn, could mean that many properties readily become unmarketable. Owners will not be allowed to put them on the market without an unrealistic capital outlay. Unless a sitting tenant renews the lease; and why would they?; the income stream from the investment could abruptly terminate.

Of course, banks and lenders, in their current aversion to undue risk, might take a dim view of such a situation and steer themselves away from less energy efficient assets being offered as loan security. Is there a real threat that lending could be refused or revaluations be requested to take the altered income scenario into account. The property owner could be forced to sell – and where would the willing buyers be found for such millstones?

Energy prices, despite recent dips in the price of oil, are inevitably only going to travel in one direction in the future as carbon based resources are used and, from a tenant’s point of view, an energy efficient building becomes more and more attractive, providing a better environment for the business and its staff.

It has been muted in various corners that this is likely to lead to a two-tier market, with higher rents for energy compliant properties and falling rents – and likely eventual sale – for buildings which can’t, for valid reasons, be brought up to scratch.

A good pointer to future trends is what the big players are currently doing in the energy efficiency arena. Major businesses are rapidly putting energy efficiency programmes in place, from solar panels on the roof to electric vehicles. IKEA has declared a goal of energy independence by 2020, Sainsbury’s have installed over 100,000 solar panels across its supermarket estate.

This is more than just ticking the corporate social responsibility box. With utilities ranking 2nd after manpower costs for many businesses – it is driven by the cash imperative and the attractive future of sustainably creating the energy used in the business.

But there are many smaller businesses who are perhaps sleepwalking into, if not a disaster, at least an unwelcome and perhaps unsustainable capital outlay to keep their properties productive and lettable.

With some of the earliest EPCs coming up for renewal in less than 4 years and the new regulations imposing improvement to buildings due next summer, this is an issue which is very nearly upon us and property owners need to be very aware of the not inconsiderable implications.

Taking a generous view, the likely effect over the longer period will be to improve the national commercial property stock and help work towards the goal of properly husbanding diminishing energy resources.

But property investors should be taking professional advice now to make sure that their assets do not fall under the wheels of the juggernaut of progress.

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