New minimum efficiency standards for property tenants present huge opportunities for fit-out and refurb contractors, explains WSP Parsons Brinckerhoff’s Simon Clouston.
Energy Performance Certificates have had a limited impact in driving actual energy efficiency, but this could all be about to change.
Since 2008, it has been a legal requirement to provide evidence of the energy performance of any property that is placed on the market for sale or rent.
EPCs are required for both domestic and non-domestic properties, and rank the energy efficiency of the building on a scale of A to G, with A-rated buildings the most energy-efficient and G the least.
This has provided better information to the property market and has influenced the choices of some organisations about the property they lease.
This might be to meet corporate commitments to only occupy property that is at least D-rated for example.
Plan of action
Regulations have now been passed for England and Wales, meaning that from 1 April 2018 it will be illegal to start a new tenancy for a property, or even to renew a lease with a sitting tenant, unless that property has at least an E rating in its EPC.
While there will be some exemptions, such as for very short or very long leases, the majority of private rented property, both domestic and non-domestic, will be affected.
In the longer term the minimum E rating will apply to all rented property irrespective of whether or not there is a change or renewal of lease. This will apply from 1 April 2020 for domestic property and 1 April 2023 for non-domestic property.
“From 1 April 2018 it will be illegal to start a new tenancy for a property, or even to renew a lease with a sitting tenant, unless that property has at least an E rating in its EPC”
Scotland is also introducing regulations for Minimum Energy Efficiency Standards (MEES) for non-domestic property, although they are taking a different approach.
From September this year, property owners and landlords will be obliged to carry out an Assessment of Carbon and Energy Performance (ACEP) and produce an action plan for any property that is larger than 1,000 sq m and was built before 2002 Building Standards.
Once the action plan is finalised, the property’s owner is legally obliged to implement all feasible recommendations within three-and-a-half years, although they do have the option to defer this by using a Display Energy Certificate (DEC) to report on the building’s operational energy performance on an annual basis.
So how will this be implemented and what does this mean for contractors?
Different measures required
In England and Wales, currently close to 20 per cent of all non-domestic rented property is either F- or G-rated. All of that property will have to be improved to at least an E rating if it is to continue to be let.
The EPC rating of a property is calculated using software modelling to assess the energy performance based on the building geometry together with the make-up of the building fabric and systems that were installed.
The EPC will also include a recommendation report listing the building upgrades that will have the greatest positive impact on the EPC rating to increase it from an F or G to an E rating or higher.
These recommendation reports will therefore form the basis of any building improvement works.
Given the range and diversity of the building stock in the UK, the specific measures required will vary from building to building. However, there are some common themes and therefore improvement measures likely to feature on a regular basis.
- Conversion to LED lighting;
- Upgrading lighting control systems;
- Replacement of inefficient boilers, either with more efficient boiler or a heat pump;
- Minor upgrades to HVAC systems (eg installing variable speed drives);
- Major upgrades to HVAC systems (eg replacement of fan coil units with a VRF system).
This varies by property type and for some it is already clear which measures will be implemented most frequently.
For example, the lighting technology and associated control systems have the biggest impact on EPC ratings for retail units in shopping centres and retail parks. Based on our experience, we estimate that in 80-90 per cent of cases, F or G-rated retail units can be improved to a minimum E rating by making improvements to the lighting fit-out alone.
More work for contractors
Some property owners have already recognised the potential risk to their rental income and property value posed by poor EPC ratings.
They have reviewed their portfolios to identify the properties that are F or G-rated and what improvements will be needed to achieve a minimum E rating.
They are already implementing the required improvements and, with the benefit of an extended run-in to the April 2018 deadline, have been able to incorporate these works into planned building upgrades or refurbishments triggered by lease events.
However, the majority of the property sector is still in the process of assessing their level of exposure to F and G-rated property and identifying what improvements are needed for which buildings.
“Wherever possible, works for EPC compliance will be incorporated with other planned works, although the closer it gets to the deadline the less opportunity there will be to do this”
This assessment work will continue throughout this year and, in many cases, into 2017. Accordingly, the amount of improvement work to be undertaken will steadily increase and is likely to intensify as April 2018 gets closer.
Wherever possible, works for EPC compliance will be incorporated with other planned works, although the closer it gets to the deadline the harder this will become.
In some cases it will make sense for the property owner to wait for the next change or renewal of before making any improvements.
This is typically the case in retail where the EPC rating is largely determined by the unit fit out which in turn is determined by tenant requirements.
It is becoming increasingly common for property owners to set requirements on any future building improvement works to ensure that they will always deliver a minimum rating.
For example, some are introducing requirements that all major refurbishment works must target a D rating, to provide a ‘safe zone’ above the minimum requirement. Where tenant fit-outs have a major impact on the EPC rating, property owners are starting to build minimum fit-out requirements into their lease agreements for future tenancies.
For new build, these requirements should be more straightforward.
Any building that is designed and constructed in accordance with current Part L standards will probably achieve an A or B rating if it is satisfying all the building control requirements. However, some attention will still be needed for shell and core buildings to ensure that the first fit-out is consistent with a minimum E rating.
“MEES requirements will be integrated into existing planned refurbishments or new fit-outs associated with a lease event”
The new regulatory requirements for MEES will affect the nature and potentially the volume of work to be undertaken by contractors.
The most significant impact will be on the upgrade of existing buildings and in most cases this will involve improving the efficiency of the main building systems (ie lighting, HVAC and boilers).
Where possible, these requirements will be integrated into existing planned refurbishments or new fit-outs associated with a change or renewal of a lease.
However, there is likely to be further work required to ensure that the minimum requirements are met, particularly for lease events occurring in 2018. Contractors should look out for increased opportunities for refurbishment works through 2017 and into 2018.
Both property owners and occupiers are thinking through these issues right now so it is the ideal time for contractors to be speaking to their clients to understand their plans and what these mean both for future opportunities as well as how refurbishment works will need to be delivered in the future.
Simon Clouston is environmental technical director at WSP Parsons Brinckerhoff