Market Insight

Mitigating EPC risk – the challenge for banks

July 18, 2016

The prevalence of sustainability as a consideration in real estate is one which continues to rise as investors, developers and occupiers alike, seek to develop more environmentally friendly working environments for their employees.

From rainwater collection to green living walls, we’re seeing a huge rise in the use of emerging technologies to create more offices of the future.

Just take The Edge building in Amsterdam, which uses digital algae canopies and where global engineering firm, Arup, is developing a research project around the ‘interactive desk’, with sensors to control light and measure temperature and humidity.

This drive towards creating a more sustainable future in the property sector has been driven by a number of factors, including the rise of corporate social responsibility amongst companies, and increased innovation in the construction and engineering industries to drive efficiency savings.

However, it has also been driven by policy changes from Brussels, such as the Energy Performance of Buildings Directive (EPBD) from 2003.

This directive led to the implementation of the Energy Performance of Buildings (Certificates and Inspections) Regulation by the UK government in 2007, to help drive improvements to the energy efficiency of both domestic and non-domestic buildings.

An energy performance scale from A to G was introduced, representing the energy efficiency of a building by exploring things such as CO2 emissions, construction fabric and heating, as well as cooling and lighting services.

But what implications does this have for property lenders?

In 2008 it was made compulsory for all buildings to have an EPC whenever they are being sold, build or rented.

Now, from 2018 it will not be possible for both commercial and residential properties with an EPC rating of F & G to be able to be let, unless their EPC rating improves.

This could have a significant negative effect on the ability of investors and landlords to be able to let their buildings, and is therefore a key consideration for banks from a risk and lending perspective. It could also have a wider impact on the overall valuation of a property or estate.

For those banks used to operating within the commercial property sector, this change should already be on the radar.

The good news is that there are steps that can be taken by investors and landlords to mitigate the risk both to themselves and inadvertently to the banks, in advance of 2018.

If there is definitely a market for a building with an EPC rating of F or G, then it would be worthwhile for investors and landlords to take steps now to improve their building’s energy efficiency – 2018 will be here a lot sooner than we may think!

There are a number of improvements and changes that can be made which, whilst involving an initial outlay, would reap longer term benefits once the EPC rating improves.

Typically this would involve inviting a professional company in to carry out an assessment of the property to evaluate its EPC rating.

Based on the outcomes of this and the resulting report, a number of recommendations would be put in place to help improve the EPC rating.

These might include reviewing air conditioning equipment with a view to improving its energy efficiency, replacing windows with more insulated versions, and exploring ways to improve energy and heat retention in the building.

The challenge from the banks’ perspective is to ensure that when lending to support a client’s energy efficiency improvements, the client can definitely afford to implement the necessary changes and repay the loan in the longer term.

Only by acting now to take the necessary remedial steps, will it be possible to ensure that any significant works to improve EPC ratings can be implemented in time.

For more information about issues such as EPC ratings to consider from a secured lending perspective, don’t hesitate to contact our expert valuation team.