Our views

Energy efficiency 'business as usual' for responsible landlords

Gail Counihan, ESG Analyst and Zilla Chan, Senior Credit Analyst

8 June 2018

The Minimum Energy Efficiency Standards (MEES) came into force in April of this year, making it unlawful for landlords to grant new tenancies for properties that have an Energy Performance Certificate (EPC) that is less than an ‘E’.  This wouldn’t have been a surprise to landlords, since the government has consulted extensively on the legislation. The broader objective is to “improve business and industry efficiency’ – an area that accounts for 25% of the UK’s carbon emissions. The MEES regulation forms part of a package of measures to support businesses to improve their energy productivity by at least 20% by 2030. This is crucial legislation – the UK was ranked as one of the worst EU member states for energy efficiency in 2016, judged by national progress.

RLAM has engaged with landlords across our portfolios, in order to gain a better understanding of the progress made or challenges encountered with the legislation. The reality is that achieving an ‘E’ EPC isn’t a stretch for responsible landlords - most properties that fall short would need only minor enhancements to achieve an ‘E’ rating. Where being a landlord is the primary business of a company, achieving energy efficiency of an E or upwards should be business as usual. There are a variety of measures available to landlords via the Green Deal – a finance arrangement whereby energy efficiency enhancements can be made for no upfront cost, and the tenant repays the loan through savings that are made on the energy bill.

We’ve been particularly encouraged by the approach that some of our landlords have taken to listed buildings – a category that has caused a reasonable amount of confusion. This type is building stock is excluded where compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance. Our view is that the responsibility to be more energy efficient isn’t removed because the legislation exempts the building category. Some of our leading landlords have challenged themselves to investigate the extent to which listed buildings can be made more environmentally friendly, while still preserving original period features.  Introducing enhancements such as rainwater harvesting, Photovoltaic (PV) panels, and an innovative heat recovery system has resulted in the first listed residential building in the UK achieving a Building Research Establishment Environmental Assessment Method (BREEAM) ‘Outstanding’ Environmental rating.

In preparation for the MEES regulation, RLAM carried out analysis across our own property portfolio. We found that the proportion of non-compliant properties in our own portfolio was less than half of the national average. We consider energy efficiency across our portfolio of buildings to be a priority – we recently installed a combined heat and power plant that will provide a centralised source of highly efficient heating and hot water for all flats in one of our buildings. The flats also benefit from green roofs and sustainable drainage. 

Given the ambitious targets in the upcoming carbon budgets, there is a widely held expectation that the government will ratchet the minimum required EPC from an E, to a D or C – meaning that property owners who prioritise energy efficiency should be well prepared. As a responsible investor, we support this and would like to see energy efficiency prioritised across all building stock.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.