You have to have a certain appetite for risk to be purchasing property in the UK amidst Brexit uncertainty and under the rule of a “weak” government, which does not have a clear majority in the house of commons. These political factors indicate a potentially rocky future for the UK government, economy and general stability.
In just a few months the minimum energy efficiency standards (MEES) for commercially rented properties will come into force.
From 1 April 2018, landlords of non-domestic private rented properties (including public sector landlords) may not grant a tenancy to new or existing tenants if their property has an EPC rating of band F or G (shown on a valid Energy Performance Certificate (EPC) for the property).
There is ample guidance on the internet about the legal requirements, allowable exceptions and assessing the risk to property portfolios. This article sets out to explain in non-technical terms the process by which the energy performance of a property is assessed and what the rating on the EPC means.
It will advise on how to interpret the recommendations that accompany the EPC and to develop the business case for making improvements that may be necessary to achieve the minimum energy efficiency rating of E or better in order to comply with the legislation.
Assessing Energy Performance
The legislation governing the energy performance of building in the UK arises for the European Energy Performance of Building Regulations. In the UK the government has implemented the Directive through Part L of the Building Regulations and the National Calculation Method (NCM) for assessing the energy performance of buildings. The government has issued a software tool known as the Simplified Building Energy Model (SBEM) for calculating energy performance ratings, while software vendors have issued their own tools which have been assessed and approved by the government as compliant with the NCM.
Interpreting the EPC
The EPC shows the energy efficiency rating on a linear scale of 0 to 150 divided into bands A to G with A being the most efficient. The numerical rating is a measure of the CO2 emission from the actual building compared to a Standard Emission Rate (SER) based on a reference building of the same type, size and orientation under standardised occupancy, operation and weather conditions. It should be noted it is not based on the actual energy consumption of the building. The rating can be compared to the car manufacturers’ quoted mpg which is much lower than for the car as driven. It is important to be aware of this when considering the business case for making improvements and estimating return on capital invested.
The EPC rating assesses the energy performance of the building fabric and the fixed building services compared to minimum standards defined in the reference building. It does not include other energy uses such as small loads, appliances and office equipment. The EPC is accompanied by a Recommendation Report based on a generic list of improvement measures defined in the NCM. This list is filtered based on the input data. For example if double glazing is entered into the calculation tool then the recommendation to fit double glazing would be omitted. Energy assessor may delete inappropriate recommendations and add others. The recommendations are divided into short payback less than 3 years, medium payback 3 to 7 years and long payback more than 7 years. It should be noted that the software generated paybacks are only indicative and further investigation and calculations will be necessary to make a business case for investment.
Making the business case for improvement measures
Where a commercially rented property currently has an EPC showing an F or G rating, with few exceptions, urgent action is required to improve the energy performance to achieve at least an E rating. As a first step we strongly recommend having the building be re-surveyed taking note of any changes and improvements since the original EPC was produced, taking the time to gather as much detailed information about the building as needed to produce the best EPC rating. Many energy assessors working for low fixed fees use default values when calculating the EPC rating which tends to produce an F or G rating. A re-calculation of the rating with more detailed and more recent data may be the most cost effective way to comply with the MEES legislation.
It will be apparent from what is said above that the EPC and recommendation report are only the starting point for assessing possible improvement measures and ranking them in order of cost effectiveness. Landlords or tenants are interested in the energy they pay for as recorded on the meter which can be substantially higher than that predicted by the NCM. Developing the business case for improvement has much in common with the Energy Saving Opportunities Scheme (ESOS) which large organisations have been required to carry out. Organisations that have completed an ESOS audit should start by looking at the recommendations in their ESOS report. The principle is to first identify the total energy consumption by all end uses and generate an energy profile to show where most energy is used. For example, in the profile below for a modern office, IT equipment and servers account for a significant part of the total while also creating a large cooling load.It can also be seen that other uses of electricity such as desktop equipment, not accounted for in the NCM, are significant.
Estimates based on independent spreadsheet calculations or dynamic simulation software such as DesignBuildercan then be made of the energy savings from a range of improvement measures and these can be ranked in order of payback or other criteria. Where there is significant capital investment a Life Cycle Cost Analysis (LCCA) should be carried out. For example, replacing existing lighting with LEDs which can have a lifetime of up to 50,000 hours achieves a large Net Present Value over the life of the lamps.
If the primary objective is to improve the EPC rating to comply with MEES, then improvements should only be made to those elements of the fabric and fixed services that are included in the NCM. There may be other cost effective improvement measures, such as reducing the set point temperature for heating, that while very cost effective they will not improve the EPC rating because of the limitations of the NCM calculation method. To future proof the building against further tightening of the energy performance legislation it would be prudent to aim for a D rating.
Before starting to consider improvement measures it is important to understand the significance of basing the energy efficiency rating on CO2 emissions. A carbon dioxide emission factor in kg CO2/kWh is applied to each fuel type. Grid supplied electricity has the highest factor 0.519 kgCO2/kWh compared with 0.216 kg CO2/kWh for natural gas. It will be apparent that measures to reduce or displace grid supplied electricity will have the biggest impact on improving EPC ratings.
A further consideration is the impact of the improvement work on the tenants with the possible loss of rental income.
Some low cost least disruptive measures to improve the EPC ratings include:
Provide more information to allow a more details to be entered into calculation of the EPC rating. For example entering lighting data as ‘designed’ rather than ‘unknown’ can significantly improve the EPC rating.
Check for recent improvements
Re-calculate the EPC rating using more detailed and accurate data
Install daylight sensors and occupancy sensors to control the lighting
Install or upgrade heating and cooling controls
Other relatively easy to install measures:
Upgrade older lighting technology with good quality LED lighting. LEDs have high efficiencies and if adequately cooled can have a lifetime of up to 50,000 hours greatly reducing maintenance costs. Life Cycle Cost Analysis shows that the Net Present Value at the end of the lamp’s life in very good.
Consider installing renewable energy sources such as solar panels or wind turbines. Their output displaces grid supplied electricity and may be the least disruptive way to improve the EPC rating.
Other measures such as replacing the HVAC system or improving the fabric of the building will require more capital investment and be more disruptive leading to possible loss of rental income. Older buildings may benefit from improved insulation but given the short time between now and 1 April 2018 and the current concerns about cladding following the Grenfell Tower fire, this is probably a non-starter.
Achieving the most cost effective and least disruptive package of improvement measures
Investigating all possible improvement measures and identifying the most cost effective and least disruptive package of measures requires a level of knowledge and skills that go beyond those required to produce EPCs. For many years the Chartered Institute of Building Service Engineers (CIBSE) have maintained a register of Low Carbon Consultants (LCCs) who have been assessed as having additional competencies beyond those required to produce an EPC. Many LCCs are also registered with CIBSE as Lead ESOS Assessors and have carried out audits of the total energy consumption of large organisations. They are able to advise on all aspects of energy use in buildings, not just those uses of energy included in the NCM to calculate the EPC rating. Colin Lillicrap Associates uses LCCs who are accredited users of approved dynamic simulation software such as DesignBuilder DSM. Dynamic simulation tools create a detailed model of the building and calculate how it performs using local weather data throughout the year (not possible with the more basic SBEM software).Our LCCs skilled in the use of dynamic simulation software can investigate a broader range of improvement measures and advise on the most cost effective package of measures.
Originally posted in: www.propertyinvestortoday.co.uk
Author: Dr Colin Lillicrap
London – April 2017 – A crack team of British professionals have joined forces to “capture the perfect storm” in the UK property market with the launch of their company Max Property Investment Group plc today which pays out 8% p.a. to investors as well as a 30% profit share. Adopting a corporate bond structure means that money is invested in property but it is the company rather than the investor that deals with the wave of financial, regulatory and practical challenges currently facing existing and aspiring landlords.
Managing Director and property educator, Mark Lloyd, says, “As property investors ourselves, we have been personally affected by the recent changes in the UK property market. We decided to turn a negative into a positive by creating a company that can help others avoid the problems we have been facing.”
The company’s Directors believe that with living costs rising, low interest rates, property prices in the UK fluctuating, as well as the weak Pound, there is an opportunity to be seized. “It’s at perfect storm”, says Mark Lloyd “The market is experiencing a lot of uncertainty and turbulence and that creates opportunities. If you know how to navigate the rapids, the UK property market can still be a very attractive way to generate returns for investors.”
But instead of investors directly investing in UK real estate Max Property is offering a fixed rate bond of 8% p.a. to investors with full management in place so that individuals can enjoy yields derived from UK property without the hassle of tax returns, deposits, repairs, property management, advertising and all other tasks and costs associated with private property ownership. Moreover, the much discussed buy-to-let tax changes coming into effect this month do not apply to properties under the ownership of a company, further influencing buy-to-let profitability.
Mark Lloyd, who owns a property sourcing company and spends his time giving seminars and workshops to aspiring property investors, has unique access to undervalued properties which further boosts the company’s ability to achieve healthy returns.
The company has partnered with Intertrust, the global leader in corporate and trustee services since 1952. Senior tax lawyer, formerly for HMRC, Paula Ruffell, says “We wanted to find a way to safeguard people’s money whilst maximising returns and making their investments tax efficient.”
The launch of Max Property UK follows the success of Max Property Fund in the Netherlands and precedes the launch of an additional property investment structure in Germany.
Co- Founder and Director: Paula Ruffell
Lawyer, tax adviser, property investor
Co- Founder and Director: Bruce Rayner
International banker turned philanthropist
Max Property Investment Group Plc
April is just around the corner, with the changes in landlord taxes due to come in. Buy to let landlords are set for potentially big increases in their tax payments, but what exactly are they, who do they affect and how can they be avoided?
Limited companies are not affected by the changes to mortgage interest tax relief. Landlords could therefore move their assets into a company structure. However, such a move may incur a capital gains tax payment, and mortgage options for companies might also be limited. Alternatively, a landlord could transfer property ownership to a spouse or partner who is in a lower tax band, bearing in mind this could also have capital gains tax implications, and/or lift the spouse into a higher tax bracket.