Ruth Gilbody (pictured) is product manager at Arbnco.
The MEES regulations will prohibit a landlord from letting a sub-standard commercial property from April 1st 2018 and from continuing to let a sub-standard commercial property from 1st April 2023.
A sub-standard property is one that fails to meet the minimum energy efficiency standard set at an Energy Performance Certificate (EPC) rating of an E.
If a property fails to meet this minimum standard, an assessment must be undertaken to identify relevant energy efficiency improvements. These improvements must then be implemented before the property can be let, even if the EPC rating does not improve.
Clearly, in many cases there will be a financial cost to compliance and this needs to be fully understood and considered by the commercial lender with an interest in the asset.
There have been a number of important papers written on the subject particularly looking at the financial implications. More recently, Better Buildings Partnership (BBP) released a report “How sustainability is driving innovation in commercial real estate finance” which almost entirely focussed on the commercial opportunities lenders are exploring.
Some of the key drivers addressed were:
- Enhancing borrower relationships – for example helping borrowers identify energy efficiency opportunities to upgrade their buildings or offering cheaper finance to meet specific sustainability requirements set by the lender.
- Integrated approaches to banking – there is an opportunity for lenders and financial institutions to leverage their customer relationships to cross-sell or up-sell other products, such as funding to fix up their properties or invest in sustainability programmes.
- Market leadership and new product development – forward-thinking lenders are testing new initiatives to provide them with their leadership positions, successfully developing a market advantage.
- Investor Interest – The GRESB Debt Assessment introduced in 2015 has helped stir interest from existing shareholders or fund investors.
Lenders need to be taking advantage of a two-year initiative that comes into force in June 2017 called The Energy Efficient Mortgage Initiative. The underlying concept is that mortgage lenders in the EU will offer households the possibility of a preferential rate and/or additional funds at the time of origination of the mortgage/re-mortgage in return for making energy efficient improvements to the property.
The proposed methodology rests on two key assumptions regarding market characteristics that will be tested by the initiative:
- Retrofitting impacts positively on property value, ensuring wealth conservation and loss mitigations by preventing ‘brown discount’; and
- Energy efficiency leads to a reduction in the impact of energy costs on income, reducing the borrowers’ probability of default.
Although commercial lenders can never be as close to a building as its owner and are a step removed from the economic consequences of improvement measures, we are witnessing a sea change in the uptake and action from a number of the leading lenders.
Lenders can and should play an important role in driving market transformation to a sustainable built environment by acting as a catalyst to those commercial property owners who rely on debt finance.
Arbnco has developed a tool for commercial lenders and their advisors to identify energy improvement strategies that comply with the MEES legislation, deliver the most attractive financial returns and achieve the greatest carbon emission reductions.
This tool forms the basis for lenders to support their borrowers in identifying optimum retrofit strategies, which they can then finance, achieving their objectives of enhanced borrower relationships and potential market advantage.