Common energy goals will focus market
Next month the Assessment of Energy Performance of Non-domestic Buildings (Scotland) Regulations 2016 come into force.
The legislation is being implemented by the Scottish Government to improve the energy performance of buildings Scotland.
It sets out requirements on building owners for the assessment and improvement of the carbon and energy performance of their buildings.
In most instances, if the building is greater than 1000m2 and constructed before 2002, owners will need an action plan detailing potential energy performance improvements and the measures required to meet those targets, before the property can be sold or let to a new tenant.
Property owners can action the suggested improvements or alternatively defer the work by producing a Display Energy Certificate (DEC).
Both the action plan and the DEC will be stored on an electronic register available to the public.
This approach to energy performance legislation seems more sensible than the English equivalent.
It is still the landlord’s responsibility but by linking requirements to the DEC rather than the Energy Performance Certificate, there is a clear visibility to operational performance of a building.
As a result, both landlords and tenants are focused on a common energy performance goal.
Initial compliance requirements are relatively light touch, but the Scottish Government has indicated this will be made more stringent as time goes on.
However, landlords would be wise not to overlook the new regulation and should prepare a strategy to collaborate with tenants.
While the new regulation should be welcomed by the industry as a measure to improve energy performance, it is likely to have an impact on the value of properties.
For instance, the action plan will include a detailed breakdown of the required improvement measures, which may be readily costed and used by a savvy buyer to negotiate a lower purchase price.
If a rental property cannot be let, its value will decrease to approximately the cost of the required improvement measures.
The loss in value could be significant to the landlord, particularly if substantial works are needed.
The landlord may also incur a loss of rent if the premises have to be vacated while the works are carried out.
Loss of value in the property is also a risk for lenders.
A negative impact on the asset value may lead to an increased loan to value ratio, while a possible loss of rent through increased void periods, expected while improvements are carried out, may lead to the borrower defaulting on their loan.
There is also the potential for increased borrowing by the property owner in order to pay for the improvements required. These perceived risks may lead to lenders becoming more robust in their due diligence process, and more likely to implement risk strategies ahead of funds being released.
We all have a part to play in engaging with the trend for greater energy performance.
While it is good that the measures will bring greater focus to energy performance and the carbon emissions in existing commercial buildings for both landlords and tenants, it is important that property owners and landlords understand the full impact of these changes on their properties both in the short and long term.