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Hillbreak comments on Building Regulations & Fire Safety review

December 19, 2017/in Insights /by Miles Keeping

Following the tragedy at Grenfell Tower on 14 June 2017, a review of Building Regulations & Fire Safety (separate from The Grenfell Tower Inquiry) is underway and led by Dame Judith Hackitt. Her interim report stresses the need for “a new intelligent system of regulation and enforcement for high-rise and complex buildings which will encourage everyone to do the right thing and will hold to account those who try to cut corners.”

The interim report goes on to say: “Everyone’s focus must be on doing the right things because it is their responsibility as part of a system which provides buildings that are safe and sustainable for those who will live in and use them for many decades.”

Although we can expect regulations to change (“the current regulatory system for ensuring fire safety in high-rise and complex buildings is not fit for purpose”), everyone involved throughout project lifecycles – design, specification, construction, use, management and refurbishment – will need to be accountable for decisions and actions. The interim report identifies the following “direction of travel” and the full report is likely therefore to address the following key issues:

Regulation and guidance

The rules for ensuring high-rise and other complex buildings are built safe and remain safe should be more risk-based and proportionate. Those responsible for high-risk and complex buildings should be held to account to a higher degree.
The sector to specify solutions which meet the government’s functional standards.
Regulations and guidance must be simplified and unambiguous.

Roles and responsibilities

Primary responsibility for ensuring that buildings are fit for purpose must rest with identified senior individuals who commission, design and build the project.
Roles and responsibilities across the whole life cycle of a building must be clearer.

Competence

There is a need to raise levels of competence and establish formal accreditation of those engaged in the fire prevention aspects of the design, construction, inspection and maintenance of high-rise residential and complex buildings.

Process, compliance and enforcement

There needs to be a golden thread for high rise residential and complex buildings so that the original design intent, and any subsequent changes or refurbishment, are recorded and properly reviewed, along with regular reviews of overall building integrity.
There is a need for stronger and more effective enforcement activity, backed up with sufficiently powerful sanctions for the few who do not follow the rules.

Residents’ voice and raising concerns

Residents need to be reassured that an effective system is in place to maintain safety in their homes.
There must be a clear, quick and effective route for residents’ concerns to be addressed.

Quality assurance and products

Products must be properly tested and certified and there is a need to ensure oversight of the quality of installation work.
Marketing of products must be clear and easy to interpret.

Calling for action across the industry and government to ensure a change in culture, it is proposed that a summit of industry leaders and experts will be held early in 2018 to discuss how to take the work forward.

Hillbreak comment

We welcome the Dame Judith Hackitt’s Interim Report. It is far beyond time that regulatory regimes pertaining to buildings and their safety were reviewed. Amidst this review, we hope that there is a focus on improving overall building quality which follows a “safety first” approach. First and foremost, it is imperative that those living in and using high rise buildings now are safely preserved from inherent defects in buildings and are assured that this is the case. Thereafter, we must ensure that future occupiers of buildings can be equally confident.

It is noteworthy that this Interim Report comes at a time when general standards in the construction industry are again found to be woeful. The National Housebuilders Federation recently suggested 98% of those who had bought new homes reported defects to their builder within a few months of moving in, with 41% reporting more than 10 problems.

We further hope that those who would do away with Building Regulations, as previously called for by the Conservative party’s Quality of Life Group (who proposed in 2009 to abolish Building Regulations because they were considered to be “very prescriptive standards, which tell you how to do things”), realise the importance of prescriptive standards which help to save lives in the short and longer terms. Further, the inspection and enforcement aspects of the regulatory regime simply must be better resourced – and this should not mean developers and product suppliers self-certifying their own schemes.

The Interim Report also thankfully stresses the need for individuals to take responsibility for their part in buildings’ procurement and management. Our built environment has been very significantly changed over the last few decades and will do so again over the short, medium and long terms. Taking responsibility for the quality of this as Dame Judith requires may come at a cost. But this will always be less than that cost we saw being paid in June at Grenfell Tower.

Potential £10bn rental bombshell just twelve months away

April 14, 2017/in News /by Jon Lovell

London – Friday 14 April 2017

Potential £10bn rental bombshell just twelve months away in buildings failing green standards

Research on the impact of new green standards has estimated the value of failing commercial property in England and Wales could be as much as £10bn in annual rents.

The estimate is based on data included in a major new report by global advisory, broking and solutions company Willis Towers Watson, which calls for radical policy measures to green the UK’s building stock.

Willis Towers Watson – Real Estate Climate Risk Report 2017

The report, to which Hillbreak was a principal contributor, contains research by big data firm DealX showing that nearly a fifth of commercial properties in England and Wales are currently failing the Minimum energy efficiency standards (MEES) due to come into force from April next year.

The research has found over 115,000 commercial buildings – 17.5 percent of those rated – in England and Wales have Energy Performance Certificates (EPC) rated F or G. Landlords will be forbidden from re-letting commercial buildings with EPCs below E from next April.

Analysis of the figures by property consultancy Daniel Watney LLP based on the EPC data and the new business rates valuations estimates that the equivalent annual rental value of F or G-rated commercial buildings could be as much as £10bn. Figures released by the Investment Property Forum last year estimated the annual 2015 value of UK commercial property rents to be £55bn.

The Willis Towers Watson Real Estate Climate Risk Report brings together major listed firms and high street names including British Land, Land Securities, Lendlease, NatWest and the John Lewis Partnership to examine how to best bring property up to standard and help the UK meet the targets enshrined in the Paris Agreement, the world’s

The listed firms say that while they can leverage their economies of scale and the latest technology to achieve substantial energy efficiency gains, the key challenge will be to get smaller businesses to green their buildings.

Recommendations in the report for greening real estate include:

Government funding for a mass retrofitting programme
Ratcheting up the minimum energy efficiency standard to an EPC D rating by 2020
The industry-wide adoption of Display Energy Certificates
Potentially combining DECs with science-based targets in future legislation to drive ongoing emissions reductions

The report also details the potential harm to real estate if action is not taken to limit climate risk, proposing tougher stress testing and increased translation of climate risk to balance sheets. Many firms are not adequately insured against extreme weather events, as seen in the wake of the UK’s 2015/16 winter floods, which caused £600m in uninsured damage.

Paul Chetwynd-Talbot, managing director of the real estate practice at Willis Towers Watson, said:

“Buildings create 40% of carbon emissions and the fact than one in five properties are falling short of standards is worrying. Investors – many of whom are pension funds – increasingly recognise the risks associated with climate change. But we need to see more affirmative action from Government to help retrofit older buildings and drive forward take up of renewable energy.”

Miles Keeping, co-founder and director of sustainability consultancy Hillbreak, said:

“It is of course impossible to identify the precise value of the total rents at risk due to MEES. But relying on rateable value data gives us a very tangible sense of the money landlords are putting at risk if they do not attend to their EPC-related risks appropriately and very soon.”

Martin Siegert, co-director of the Grantham Institute for Climate Change and the Environment at Imperial College London, said:

“The need to decarbonise our economy is critical. It is going to be a profound change: the developed world will need to have no net carbon emissions by 2050. Ending emissions from our electricity system, manufacturing, transport and supply chains will be challenging enough for our larger companies, but we will need all of our smaller companies to achieve this too.”

Sarah Cary, head of sustainable places at British Land, said:

“Retrofitting old buildings on a mass scale requires a far more complex solution than simple tax incentives to replace boilers or windows. Retrofitting should be set as a priority for a national infrastructure programme.

“The benefits would be twofold: it would be a boon for job creation, and it would work wonders in helping reach energy goals.”

Paul King, managing director of sustainability at Lendlease Europe, said:

“We need to make sustainability easier for everyone to engage with – both in terms of consumers and companies. An industry-wide agreement to have LCD screens on the front of every building showing real-time energy use would be more than welcome. Just as with the example of energy labelling on white goods, while it may not directly cause many consumers to switch from one business to another, the incentive to a CEO to avoid having a negative label compared with a competitor could generate real results in driving businesses to retrofit their buildings.”

Caroline Hill, head of sustainability at Land Securities, said:

“Changes in technology and the ability to access growing pools of data have allowed us to set increasingly ambitious commitments to reduce both energy intensity and emissions by 40% per square metre by 2030. If more leading businesses agreed to using 100% renewable power, this could provoke a serious step-change in how society approaches the challenges we face.

“Giving property owners a hard stop deadline to improve buildings or lose the right to rent them out has clearly had some positive effect. Ratcheting MEES so all buildings must be at least D grade by 2020 would provide the impetus for inefficient buildings to get the investment they need.”

Andrew McAllan, managing director of Oxford Properties Group and chairman of the Canadian Green Building Council, said:

“Most ‘Tier 1’ companies – those with the greatest capital reserves and profits – are by and large already taking the necessary action on making their buildings greener and making more efficient use of energy. It’s that next level down of ‘Tier 2’ companies that need engaging and support. Mandatory reporting of energy consumption would be useful: what gets measured gets managed.

“The best sustainability strategies are built on a foundation of good data, and there are ways of bringing in these measures without making them onerous for smaller businesses. Once you have that compulsory recording in place, smaller businesses then see the easy efficiencies they can make on their utility costs. Combined with something like carbon pricing to add impetus to the need to invest in more efficient installations, that is how we can effect the change we need.”

Richard Garner, head of commercial agency at property consultancy Daniel Watney LLP, said:

“As our research into the value of England and Wales’ F and G rated buildings shows, many investors in commercial property face a ticking timebomb with their properties being potentially unlettable from April next year – this is particularly the case in the office hotspots of Westminster, Kensington and the City, which have commercial space with a collective annual rental estimate of nearly £800m currently not up to standard.

All the evidence demonstrates that adding sustainable features to offices adds value and drives worker productivity and satisfaction, advantages that will serve landlords well over the long term.”

Jon Lovell, co-founder and director at sustainability consultancy Hillbreak, said:

“It is important that that the government clarifies some of the glaring gaps in the confusing regulations. Many large fund managers and REITs are on top of them, but we have a real concern for the long tail of smaller landlords, businesses and family trusts, who own a disproportionate amount of F&G rated properties and will suffer if they don’t get their acts together very quickly.”

— ENDS —

Contributors to the Willis Towers Watson Real Estate Climate Risk Report 2017 included Hillbreak, British Land, Land Securities, Lend Lease, Oxford Properties, John Lewis Partnership, Nattiest, Hermes Investment Management, Blackstock, Grantham Institute for Climate Change & the Environment and DealX.

For more information, please contact Blackstock Consulting / Tyron Wilson / tyron@blackstockpr.com / 07725 197364

Notes for editors

Daniel Watney LLP is not a contributor to the report, but their research on the value of F + G-rated property is based on the DealX data within the report. The rental estimates are based on the latest rateable values used to calculate business rates, calculated using the average rateable value in each local authority and the number of F + G-rated buildings in each district.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees serving more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas – the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.

About Hillbreak

Hillbreak is a unique training and advisory firm that helps organisations seeking competitive advantage in a changing urban world. Its mission is to expedite the transition to a sustainable policy, business and investment environment by bringing intelligence, challenge and inspiration to its clients and stakeholders. Please visit hillbreak.com for further information or follow us on Twitter, Facebook, and LinkedIn.

Hillbreak verdict on Government “MEES” guidance

March 3, 2017/in Insights /by Miles Keeping

The Government recently published its guidance to landlords on Minimum Energy Efficiency Standards for non-domestic property, a matter on which much confusion and uncertainty has prevailed. So, have the outstanding issues now been resolved, or do material unknowns continue to cast a headache for the real estate industry? Miles Keeping, who chaired the succession of commercial property groups which advised Government on the regulations, provides his comprehensive take on the new guidance.

Brief background

The Energy Act 2011 (the Act) introduced the concept of MEES in England & Wales. As we know, this introduced a timetable to make unlawful the letting of privately rented property which failed to meet a minimum energy standard of efficiency. In its wisdom, the government decided that energy efficiency should be measured by virtue of an Energy Performance Certificate (EPC) rating, and the minimum standard would be an E (on a scale of A (most efficient) to G). The timetable is:

1^st April 2018 New non-domestic leases and lease renewals
1^st April 2020 All residential privately rented properties
1^st April 2023 All existing non-domestic leases

New guidance was issued by the government on 23^rd February 2017.

Uncertainty & doubt

At the time of the publication of the Act, there was a deal of uncertainty as to whether subsequent regulations would actually be enacted – that it would all be too difficult to organise and that the necessary political will would fall away in response to business opposition. Indeed, at the time, there was seemingly a lot that needed to be arranged if regulations were to be forthcoming. The then Department for Energy & Climate Change (DECC) reached out to the commercial and residential property sectors to ask how best to frame the regulations. I was asked the chair the commercial property group and, with significant support from Patrick Brown at the British Property Federation, populated the group with a range of environmental, commercial, legal and technical specialists. The group worked hard, efficiently and openly to support DECC officials.

The regulations (inconveniently named the “Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015”) arrived and, barring certain issues, were a decent attempt to incorporate a balance of policy intention and commercial practicality. What was clear, however, was that guidance was certainly required in order to put some flesh on the bone in terms of how the regulations should be applied – to get Rumsfeld about it, there were definitely some unknowns, both known and unknown. Some of those concerns related to factors such as how the regulations might apply with regard to Listed Buildings, buildings with whole or partial EPCs and where voluntary EPCs had been registered. There was also confusion as to how MEES might be affected by other law, e.g. the 1954 Landlord & Tenant Act and would MEES apply to licences or just leases?

The commercial property sector reached out to government and offered to pen some guidance. I again chaired the working group which delivered draft guidance to government, after which there was a long hiatus that inevitably refuelled the doubters into voicing opinions that the regulations wouldn’t be implemented. And then, last week, the guidance was published unheralded.

So what does this new guidance tell us that we didn’t already know?

Perhaps the key question to ask is whether the guidance addresses the known unknowns? Well, it does a bit. Let’s have a look at issues settled by the guidance… and where some confusion still exists…

First to remember is that the guidance only covers the non-domestic property regulations; we’ll have to wait for the residential counterpart. Secondly, it only covers England & Wales, Scotland’s s.63 Regulations and Northern Ireland’s 2014 Energy Efficiency Regulations being quite different kettles of fishes.

“Sub-standard property”

The guidance sets out its stall early on by noting that a property which fails to meet MEES is to be known as “sub-standard property”. A small point perhaps, but it’s a phrase which would no doubt stick in the craw of most letting agents; how many landlords would want to go to market with sub-standard properties?

MEES relies on EPCs

Yes, I know you know that, but what some still perhaps don’t appreciate is that MEES only apply to properties where a valid EPC is in place for the property in question and that this has implications in the following situations:

Voluntary EPCs: Some buildings have EPCs which were commissioned for general asset management purposes (i.e. were not procured because they were legally required such as for a letting of a property). The guidance states that in such circumstances, the existence of a voluntary EPC will not trigger a MEES compliance requirement. Clearly, this will only be relevant at the 2023 trigger date.
Where whole building EPCs exist but only part of a building is being let: Some buildings, e.g. shopping centres, have EPCs to cover the whole asset as well as for individual units. In such cases, the guidance states that where a whole building EPC exists, only the property being let (e.g. a retail unit in a shopping centre) needs to be improved.
Listed Buildings: The guidance notes that there is a misconception that listed buildings or those in a conservation area do not require EPCs, because they do unless energy efficiency improvements would unacceptably alter their special character. This is a significant issue and many landlords have chosen to ignore MEES in listed buildings – more about this below.

MEES applies to lettings

I know you know that too, but what constitutes a letting? The guidance is both clear and unhelpful when it states: “the PRS Regulations only apply to properties which are let under a tenancy, non-domestic properties which are occupied under other arrangements, for example properties let on licence, or ‘agreement for lease’ arrangements, are unlikely to be required to meet the minimum standard”. “Unlikely”… What makes it “unlikely”? We need to know whether marketing a property for occupation under a licence would trigger MEES or not? I think we can take it that licences are out of scope of MEES. But what about tenancies at will, for example? Again, our discussions with legal specialists suggest that these would also be out of scope, but a more definitive line from government on such matters would be welcome.

Other exemptions

Other exemptions from MEES exist and it had been thought that an exemption of any nature could negate any need to comply with MEES. The guidance carefully explains that this is not the case – a thread running through various of the exemption categories is that exemptions must be considered as individual issues, rather than in blanket terms. For example, if a suggested improvement measure to a building would have the effect of devaluing the property sufficiently to trigger that exemption, other measures which would not have that effect would have to be undertaken (provided no other exemption applied). Whilst we’re on devaluation, the guidance makes it clear that claiming devaluation will be a rarity.

Another exemption exists when legally required third party consent to undertake improvements cannot be received, such as from a planning authority, superior landlord or tenant; some leases require landlords to obtain a tenant’s consent to undertake improvements within their demise. In such circumstances, the guidance states that landlords must “make, and be able to demonstrate to enforcement authorities on request, ‘reasonable effort’ to seek consent” and thereafter register the exemption in that they “could not carry out the proposed improvements without the consent of the tenant or tenants of the property, and one or more of the tenants refused to give consent”.

Such an exemption would only be temporary, lasting for up to five years or until a tenancy change enabled a new tenant to be approached regarding the improvement. A question which landlords would need to ask themselves is whether the lease provides for them to be able to enter the property to make improvements – presumably, if so, such an exemption would be negated.

Part 2 of the Landlord & Tenant Act 1954 provides security of tenure provisions to tenants at lease end. The guidance is clear that sub-standard property status does not provide a complete exemption from MEES in such circumstances but does allow for a six months exemption from renewal for necessary works to be undertaken. Equally, landlords cannot refuse a renewal nor tenants prematurely terminate a lease because the property is sub-standard.

Landlords and tenants seeking to let or sublet sub-standard properties will need to be aware that whilst any measures which fail the seven year affordability payback test will not need to be undertaken (but registered as such, with three quotes from suppliers and calculations which prove that point) but any measures which do meet the affordability test will have to be undertaken. In other words, one expensive measure does not negate the need to undertake cheaper measures, so landlords will need to ensure they check all potential measures included in their energy assessor’s reports. Furthermore, assessors may suggest that measures which individually fail the affordability test be packaged together such that they then pass the affordability test. However, landlords are not required to install packages if they opt to install a discrete measure instead.

Registration of exemptions

All exemptions must be registered on the publicly available PRS exemptions register – importantly, this must be undertaken prior to an exemption being relied upon. It is also worth noting that should an affordability exemption be relied upon, its registration must be made before any price changes (e.g. in energy or potential improvement measures) have the effect of making potential measures affordable.

Those registering exemptions will need to provide evidence to support their view that an exemption is appropriate and in some cases this might be quite extensive. For example, exemption from undertaking potential measures because they would fail the seven-year payback affordability test will require the submission of a spreadsheet of calculations for all suggested measures and quotations from three suppliers/installers with cost information to support the exemption case.

So where are we now?

The new guidance does give us some clarity relating to how MEES will need to be implemented but it also throws up some new uncertainty. I feel certain, for example, that landlords with listed buildings will be rightly unsettled by the guidance which reminds us of the poorly drafted EPC regulation: It’s a nonsense, impractical and open to differing interpretations. I’m also sure that the uncertainty in the guidance about licences being “unlikely” to be required to meet MEES will delight the legal profession but not landlords and tenants. There will no doubt be some confusion about which EPCs might be considered as “voluntary” and those relying on exemptions will perhaps be surprised by the amount of work which will have to be undertaken for these to be able to be relied upon.

What should landlords be doing?

Example of a Hillbreak dashboard highlighting F&G rated properties within an investment portfolio

As in most circumstances where there is uncertainty or doubt, landlords facing the prospect of MEES will be best placed if they can reduce the potential impact of uncertainties. In this regard, ensuring that they have as much relevant information as possible will be vital and to do that, landlords must review their portfolios with a view to understanding where there MEES risks lie at individual asset level. Having high quality information is vital, as is drawing upon sufficient expertise to undertake risk-based thinking which accounts for EPC data in the context of factors such as rental income at risk due to lease events, lease types and provisions as well as forthcoming asset management activities. Savvy landlords will also review their leases to better understand how they can provide protection of rental income from MEES risks.

Final thoughts

The MEES regulations rely upon EPCs which are not an ideal basis for such regulations given their all-too-frequent inadequacies. The blame for this can be spread far and wide but should in part land on those who procured EPCs very cheaply and got sub-standard results – they are now reaping what they sowed. There is a role for landlords, the property industry generally and for government in dealing with inevitable mess:

Landlords must attend to the risks in their portfolios by procuring high quality advice and data reviews;
the property industry, principally professional and accreditation bodies, must ensure that EPC provision improves radically and quickly; and
the government must clarify outstanding and confusing issues with competent guidance, keeping an eagle eye on how MEES is rolled out.

Listed Real Estate lags on CRC emissions reduction

December 21, 2016/in Insights, News /by Jon Lovell

Introduction

The Environment Agency, the administrator of the UK Government’s CRC Energy Efficiency Scheme (“the Scheme”), has published its Annual Report Publication (ARP) covering the first 2 Compliance Years of Phase 2 of the Scheme. Hillbreak has analysed a selection of the data with a particular focus on real estate sector participants, especially those in the listed sub-sectors.

Key findings

Listed real estate companies are underperforming the wider economy when it comes to reducing carbon emissions. Whilst all participants in the Scheme yielded an average reduction in their emissions of 9.7% last year, the average reduction across listed real estate participants was only 0.48%.
Although the energy consumption data of each participant has not been published, it can be deduced that energy procured by listed real estate companies (a proportion of which may have been supplied to tenants) increased over the two Compliance Years, with all of the carbon reduction realised by the companies arising from improvements in the emissions factors attributed to grid electricity and natural gas.
Analysis undertaken by Hillbreak also shows wide variations in both the year-on-year carbon performance of listed property vehicles, as well as in their relative carbon intensity by market capitalisation.
The Exchequer generated a little under £1bn of total revenue from the sale of allowances in the 2015/16 Compliance Year, of which over £5.2m* came from the 18 listed real estate companies that are participants in Phase 2 (an average of £290,760 per organisation).

*Based on a blended allowance price of £16.25 per tonne of CO₂.

Emissions trends

The chart below shows the absolute CRC emissions for each of the listed real estate companies that are participants in Phase 2 of the Scheme. It shows that emissions vary significantly between individual companies within each of the sub-sectors. This is unsurprising given differences in the scale and composition of their respective portfolios.

The change in emissions reported between the two Phase 2 compliance years is more revealing, as the graph below indicates. It shows an increase of nearly 50% at one end of the spectrum (a REIT with a heavy weighting towards central London offices) to a reduction of nearly 20% at the other (a REIT with a diversified portfolio, focused on London and the South East). The average level of reduction was only 0.48%, compared to an average across all CRC participants (in all sectors of the economy) of nearly 10%.

Carbon Intensity

The market capitalisation of the listed real estate companies varied significantly at the end of the 2015/16 Compliance Year (30 March 2016), from the largest at £8.729bn to the smallest at a little under one quarter of a billion pounds.

The variance in the carbon intensity (relating specifically to CRC emissions) is also very wide. There are five companies with a CRC carbon intensity of less than 5 tCO₂ per £1m of capitalisation value, whereas the most carbon intensive shows over 35 tCO₂ per £1m of value. The mean average is ~10 tCO₂ per £1m.

Note of caution

Whilst these trends are interesting and noteworthy, caution should be applied to drawing conclusions about the energy and carbon performance of individual entities based solely on CRC data. This is because variations in energy consumption can be influenced by a wide range of factors, many of which are likely to be outside of a landlord’s control or reasonable influence. Key examples include the impact of portfolio churn (both the buying and selling of buildings and changes to the occupational profile), and changes in energy consumption by tenants who may be procuring the energy from their landlord (and which falls into the landlord’s CRC reporting boundary).

However, responsible shareholders in the entities showing the most significant changes in year-on-year emissions, and indeed those with a particularly high carbon intensity relative to market capitalisation, may be minded to investigate the underlying causes of these performance characteristics further.

It is also important to note that CRC emissions, which are limited to those associated with the majority of the electricity and gas procured by an organisation, do not represent the total footprint of greenhouse gas emissions for an entity. Amendments to the Companies Act 2006 also require UK quoted companies to report GHG emissions in their Directors’ Reports and these should be referred to by analysts seeking a more comprehensive view of the carbon intensity of their, or their clients’, investments.

The full Hillbreak dashboard CRC Emissions of Listed Real Estate is available to view and download by clicking on the image below.

CRC Emissions Of Listed Real Estate

Concerns with s63 Energy Regulations for Scotland

September 16, 2016/in Insights /by Jon Lovell

The Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 (“the s63 Regulations”) came into effect on 1 September 2016.

These are effectively the Scottish Government’s alternative to the ‘Minimum Energy Efficiency Standards’ (MEES) which are due to come into effect in England & Wales in 2018. In similar vein to MEES, the s63 Regulations pose investment management considerations at the point of acquisition, throughout the leasing cycle, and when preparing for a sale. However, whilst the s63 Regulations similarly target the energy performance of existing properties at the point of a transaction, there are significant differences to MEES in terms of regulatory scope, triggers and the resultant obligations.

Summary of the s63 Regulations

The Regulations apply to the owners of buildings which have a floor area in excess of 1,000m² (on a Gross Internal Area basis) and which are being offered for sale or for rent to a new tenant on or after 1 September 2016.
Buildings and building units (i.e. a separate lettable area) with a GIA of 1,000m² or less are out of scope, although there is a possibility that the floor area threshold will be reduced in the future.
Where the property to be offered for sale or let is defined as a building unit (meaning part of a non-domestic building that is designed or altered to be used separately, such as a retail unit within a shopping centre), it is the area of the building unit, not the whole building, that is relevant when determining whether or not the Regulations apply.
Similarly, buildings that were constructed in accordance with Building Regulations prevailing from 4 March 2002 onwards are out of the scope of the regulations; the aim is to target older buildings which did not have to be built in accordance with modern energy efficiency standards.
Unlike the MEES Regulations in England & Wales, and because of the link to the Building Regulations standard to which the building was constructed, the Regulations in Scotland are not triggered by a minimum threshold of energy performance based on their EPC rating.
The renewal of a lease with an existing tenant does not trigger the regulations. Short-term leases (less than 16 weeks) are also exempt in certain circumstances.
Where the Regulations apply, building owners are required to produce an Action Plan prior to marketing the property. This must be prepared by an accredited “Section 63 Advisor”.
The building owner then has the option of either improving the energy and emissions performance of the building within 3.5 years of the date of issue of the Action Plan, or deferring that improvement in lieu of formally reporting annual energy use by way of an annual Display Energy Certificate (the first of which must be in place within twelve months of the date of issue of the Action Plan).
Compliance with the Regulations is the responsibility of the building owner; in the event of a sale, any obligations under the Regulations pass to the new owner. Unlike the MEES Regulations in England & Wales, there is no obligation to implement improvements prior to a transaction taking place.
The Action Plan must be made available to prospective buyers and tenants when marketing a property (in the same way that EPCs must be), and a copy provided on conclusion of the transaction.
The completion of improvement works needs to be formally recorded in the form of an updated Action Plan and a new EPC which confirms the rating of the improved building.
All documentation associated with these Regulations (i.e. the Action Plan, the EPC and the DEC) must be lodged on the central register by the relevant advisor/assessor.
The Regulations do not replace or alter the requirement to have a valid EPC in place for newly constructed buildings or for buildings being sold or rented to a new tenant under the Energy Performance of Buildings (Scotland) Regulations 2008; they continue to apply. However, there are significant and unhelpful consequences relating to the incompatibility of existing EPC data with the Action Plan requirements of the Regulations.
Enforcement of the Regulations will be the responsibility of the local authority for the area in which the building is situated – the same as for the arrangements currently with respect to EPCs in Scotland. Penalty charge notices with a fine of £1,000 will be issued for each case of non-compliance, with penalty charges levied retained by the enforcing authority.

Aside from creating altogether different regimes for regulating the energy performance of existing non-domestic property in different parts of the UK, there are a number of specific issues which threaten to undermine significantly the effectiveness of the s63 Regulations which is cause for major concern. In particular, we think that the two issues described below are worthy of highlight.

Incompatible systems

Where there is a requirement to produce an Action Plan under the Regulations, a specific software solution, embedded into the latest version of iSBEM, must be used to determine the appropriate improvement measures. However, to date, none of the leading proprietary software solutions that are commonly used to prepare EPCs (e.g. IES, DesignBuilder) have developed an interface for this new solution. Some have unspecified plans to rectify this, whilst others do not intend to do so at all due to the relatively small size of the Scottish market.

The consequence of this regulatory stipulation is that the modelling outputs used to underpin many existing EPCs will not be compatible with the Regulations. This is an absurd, and presumably unintended, consequence; it renders many existing EPCs obsolete in the context of the s63 Regulations. As things currently stand, this means that replacement EPCs will need to be commissioned for many assets for which an Action Plan is required.

These new EPCs will need to be produced in iSBEM which is a basic application more prone to human error. The modelling process can be improved through a proprietary graphical interface known as G-iSBEM, but EPCs produced in this way are limited to SBEM and far less useful from a design and energy management perspective than those generated by the more advanced proprietary systems, which can use both SBEM and a more rigorous dynamic simulation methodology (DSM). For more complicated buildings, the replacement EPCs may require considerably more modelling time and, therefore, cost a lot more to produce than would normally be the case. This is because iSBEM requires users to manually calculate and enter surface areas for every room (walls, floors etc.) and as there is not a graphical (3D) interface, it is easy to make mistakes as one cannot visualise these areas. This means that iSBEM is not geared up for complex geometries and zones.

Clearly, this absurdity means not only that EPCs prepared in Scotland going forward are likely to be less accurate than they otherwise would be, it also adds an additional cost and administrative burden for building owners that need to comply with the Regulations. It is likely to further disenfranchise market actors from the wider Energy Performance Certificates regime, which is already viewed by many with a considerable degree of scepticism.

Inconsequential penalties

The Regulations place a duty on all local authorities in Scotland to enforce the regulations within their respective administrative boundaries. In essence, their powers extend to the issuance of fixed penalties of £1,000 for non-compliance in the event that:

an Action Plan is not provided to a prospective purchaser or tenant within 9 days of a request for it; and
building improvement measures set out in an Action Plan have not been implemented in time.

The time limit for the local authority to impose a penalty is 6 months after it becomes aware of the breach. They must allow a minimum of 28 days for payment of a fixed penalty notice. Rights of appeal and bases for defence are also set out in the Regulations.

Notably, the Regulations appear only to provide for penalty notices to be levied on a one-off basis (although worth noting that penalties can be charged under two separate scenarios; one for not having made the action plan available when selling or letting, as well as for not implementing the improvement measures within the Action Plan).

This would mean the cost of the penalty may well be significantly less than the cost of procuring a replacement EPC where one is required, preparing an Action Plan and implementing improvement measures. However, given that the trigger for the regulations is transactional, it is likely that the Scottish government holds the view that not having the appropriate documentation in place when offering a property for sale or lease may have a negative effect on a potential transaction, and that prospect would be sufficient to deter non-compliance, at least in respect of the requirement to have the Action Plan in place at the point of marketing.

That being said, the enforcement provisions do seem, in our opinion, to be very soft. We would not be surprised if a number of asset owners elect to take the risk of a fine, rather than comply with their legal obligations. Time will tell how the market responds, and indeed what moves the Scottish government might make in the future, if any, to address ineffectual aspects of the regulations as they are observed.

Our call

In light of these issues, Hillbreak calls on the Scottish government to move quickly to correct the unintended consequences of the s63 Regulations, or risk causing significant and unnecessary frustration to the effective working of the property market, not to mention being ineffectual in achieving the policy objectives. In the meantime, Hillbreak will continue to support and advise its UK property clients on the requirements and implications of the s63 Regulations.

Post-BREXIT environmental policy changes

Navigating environmental policy following the UK Referendum on membership of the EU

July 6, 2016/in Insights /by Miles Keeping

It would be an understatement to say that the outcome of the UK referendum on its membership of the European Union has caused something of a stir. Aside from the ongoing civic debate, some of which has been civil, about whether the vote by a third of the British people to leave the EU was informed and sensible, the impact on the UK political landscape has been nothing short of spectacular. The dust will take a good while to settle, with a changing of the guard within three parliamentary parties in various stages of advancement and in various states of acrimony.

The impact on markets has been no less abrupt. The £ has plummeted in value to its lowest levels in well over 30 years, $2 trillion was wiped off the value of global stock markets in the immediate “BREXIT” aftermath, the UK’s credit rating has been eroded significantly, and several property funds have ceased trading in light of significant value write-down concerns.

The extent to and timing over which both political and market disruption will be steadied remains to be seen, and will no doubt continue to capture much of the media and industry attention. Certainly, these issues will be front of mind as the UK and global real estate markets look to navigate the testing and uncertain waters of a post-Referendum transition. The fundamental question of whether Article 50 will actually be invoked remains somewhat unanswered, not to mention the countless scenarios that could follow if it is (and, indeed, if it is isn’t).

It would be easy to think, therefore, that the status of the plethora of legislative instruments pertaining to the environmental performance and impact of the UK built environment, a good deal of which has stemmed from EU laws of one form or another, is in a similar state of disarray. We’ve seen commentary to this effect from several industry voices, including from fellow advisors. However, there are no immediate parallels to be drawn between the political and market consequences of the Referendum and the anticipated effects on environmental policy. Our message on this matter is clear: it’s business as usual for the time being, and the direction of overall travel very likely to continue whatever the outcome of BREXIT negotiations both here in the UK and in wider Europe markets.

Sure, if the UK does leave the EU, it will have to negotiate with its counterparts within the Union on the sort of relationship that will exist between them in future. The UK Government, no doubt with the backing of most UK businesses, will be keen to retain favourable access to the Single Market, but this will almost certainly come with policy strings attached; it will have a key determining effect on which EU policies and regulations the UK will need to retain or adopt in future. Even if continued access to the Single Market is not realised, it’s important to remember two key things:

much of the environmental requirements for business, property and construction are enshrined in UK law and it seems unlikely that repealing secondary legislation will be a priority for the UK government; and
the UK Government has, since the Referendum, strengthened its commitment to the legally-binding goals of the Climate Change Act (a novel piece of UK legislation, with no European provenance) by adopting a seriously ambitious carbon budget for the period 2028-2032 (with budgets requiring substantial carbon reduction between now and then already in place).

Some evolution in the policy landscape is inevitable, though. A good deal of that is already in the pipeline, notably under the auspices of the Business Energy Tax Reform. A focus on the implementation of Minimum Energy Efficiency Standards also continues to make progress; just this week, Hillbreak’s Miles Keeping was part of the property working group he has helped to coordinate which is advising the Department of Energy and Climate Change on the preparation of detailed guidance for non-domestic properties.

So, in this era of post-Referendum uncertainty, we think it’s important that:

Policy-makers:

show leadership in maintaining and developing regulatory and market-based instruments to strengthen the commercial benefits of climate action and environmental stewardship;
understand that robust environmental and climate standards are essential for the UK’s competitiveness in the global economy;
stay true to the principles of effective policy and policy-making, for which the recommendations arising from the analysis of Carbon Penalties and Incentives for commercial buildings in the UK commissioned by the Green Construction Board and the Green Property Alliance provides a useful framework; and
in particular, provide as much certainty as possible to the market on the intended direction of travel, building on the recent adoption of the fifth Carbon Budget;

Businesses:

stay focused on your existing compliance obligations – don’t let them slip – and take full advantage of the commercial benefits of over-compliance where they exist;
don’t lose sight of the business case for sustainability – outperformance in the market almost always rests with those who attend effectively to their Environmental, Social and Governance responsibilities;
engage positively with policy-makers – either directly, through the industry bodies with which you have membership, or through us – to inform sensible policy debates and outcomes; and
stay close to your advisors in navigating the policy framework as it evolves – change is certain, irrespective of the recent Referendum and its potential outcome – being ready for those changes will yield competitive advantage and business productivity benefits.

Of course, we stand ready to support all of our clients, both governmental and private sector, on how best to navigate and deal with the issues that the prospect of a UK exit from the EU throws into the ever-present mix of future uncertainties.

Addressing market failures in the building energy sector

May 30, 2016/in News /by Jon Lovell

Miles Keeping, co-Founder of Hillbreak, features in a new and detailed Property Week article on key limitations and failures in the building energy assessment market. The role of Energy Performance Certificates (EPCs), historically treated by many as merely an administrative licence to transact, has been brought into much sharper focus in the commercial and domestic real estate markets by the forthcoming Minimum Energy Efficiency Standards (MEES) regulations.

Miles comments on Hillbreak’s experience of advising clients in both transaction and portfolio risk management contexts, where examples of negligent energy assessments undertaken by third party assessors have been found. It’s a common problem in the market, the risk being for property owners that their Energy Performance Certificates will be challenged by potential purchasers and occupiers, leading to delayed deals and chipped prices. Assessors who issue inaccurate EPCs may also find that they face claims for damages arising from their negligence.

The article also announces that Keeping has been appointed to lead an industry group convened to provide the Department for Energy and Climate Change (DECC) with advice on additional guidance on EPCs and MEES, as well as to deliver training to civil servants in DECC and Department for Communities & Local Government.

Regulatory Update – Key Recent Sustainability Changes

May 16, 2016/in Insights, Resources /by Miles Keeping

Miles Keeping delivered a presentation at the annual breakfast seminar of the Investor Property Forum on recent changes to the policy and regulatory landscape in the UK relating to sustainability. These included an overview of:

• Budget 2016 – What can we expect?

• Business Energy Tax Reform – Where will it take us?

• Future of environmental regulation – What hope is there?

The IPF has published a synopsis of the key topics covered during the event, which also included an update on valuation matters from Philip Parnell of Deloitte Real Estate.

A copy of Miles’ presentation slides can be viewed here:

IPF Regulatory Update

IPF Regulatory Update Miles Keeping (March 2016)

Investor Briefing on Minimum Energy Efficiency Standards

March 30, 2016/in Insights, Resources /by Miles Keeping

Commercial Real Estate Investors need to ensure that their fund and asset managers are fully prepared to deal with the liabilities that will almost inevitably exist in relation to Minimum Energy Efficiency Standards, and that they have robust procedures in place to deal with these and any future risks. We’ve put this Briefing Note together to guide investors through the key elements and implications of the Regulations, and with the key questions they need to be asking of those mandated to manage their real estate allocations.

Hillbreak Investor Briefing On MEES (Sept 2015)

MEES Briefing Note For Investors

This is intended as a high-level and general introduction to the issues. Please contact us if you would like to discuss them in more detail. Hillbreak has helped a number of landlords to consider how factors such as lease type, lease events, tenants, income profiles and regulatory timetables present particular risks to their portfolios which could result in significant income loss, liquidity impacts or capital works being required. With careful planning, Hillbreak has been able to minimise these types of risk with its clients.

regulations ARCHIVE