Minimum Energy Efficiency Standards: what this means for property investors
We asked David Thomas, Partner at Vail Williams to provide an overview of MEES and how they may impact property investors.
The Minimum Energy Efficiency Standards (MEES) were introduced to ensure that rental properties meet a minimum level of energy efficiency. With regulations tightening from 1st April 2023, all new lettings and lease renewals now require an Energy Performance Certificate (EPC) rating of at least ‘E’. This change has far-reaching implications for property investors, with some lenders even requiring a minimum ‘C’ rating for loan renewals. Here’s what this means for you as a property investor and how you can stay ahead of the curve.
Tightening regulations and lending
Since April 2023, landlords must have an EPC rating of at least ‘E’ to legally lease their properties. However, the challenge goes beyond meeting this minimum requirement. Investors with finance on their property stock, typically on a 5-year commitment basis but with longer amortisation periods, are being warned that their loans may not be renewed unless their properties have a minimum ‘C’ rating.
Lenders are increasingly concerned about being left with properties that don’t meet energy efficiency standards. If a lender needs to repossess a property after 2027, they will be required to upgrade it to at least a ‘C’ rating to re-let it legally. This concern is pushing many banks to demand higher EPC ratings now. Although some lenders continue to offer financing regardless of the EPC rating, they tend to be more expensive than prime lenders.
For landlords with properties currently rated ‘D’ or lower, especially with longer-term tenants in place, this presents a significant challenge. Energy efficiency improvements will need to be made, often while the tenant is still occupying the property, to secure loan renewals. Some landlords are even offering properties to tenants at below-market rates to offload assets and avoid the complications, but tenants may face the same financing issues.
Reassessment challenges
In June 2022, the software used to calculate EPC ratings, known as the Simplified Building Energy Model (SBEM), was updated to comply with UK building regulations. This software assesses energy use and carbon dioxide emissions based on various factors, such as building geometry, construction, HVAC systems, and lighting. Since this update, properties powered by electricity have been awarded better EPC outcomes than those relying on natural gas.
As a result, properties that previously had a satisfactory EPC rating may now find themselves downgraded, particularly if their main heating source is natural gas. This change has caught many landlords off guard, as they now face the challenge of reassessment with potentially less favourable outcomes.
To counter this, landlords should ensure they provide accurate data during the EPC assessment, such as the exact make and model of lighting or heating equipment. Otherwise, assessors might use standard assumptions, resulting in an inaccurate and potentially lower EPC rating.
Future MEES requirements
Looking ahead, the government plans to tighten MEES requirements even further, with a minimum ‘C’ rating by 2027 and ‘B’ rating by 2030. Valuers are likely to consider these upcoming changes when assessing a property, but they may not always account for issues related to the assessment date or main heating source.
Investing in energy-efficient upgrades, such as LED lighting or improved heating systems, can significantly improve your building’s energy efficiency and EPC rating. However, it’s essential to address fundamental aspects like airtightness and insulation first to ensure maximum impact.
The risk of ‘stranded assets’
A ‘stranded asset’ is a property that fails to meet current or future MEES regulations. Such properties risk becoming less attractive to investors and tenants, particularly as environmental, social, and governance (ESG) criteria and Corporate Social Responsibility (CSR) policies increasingly favour buildings with higher energy efficiency and reduced reliance on natural gas or non-renewable fuels.
If you don’t act now, your property could become a stranded asset, making it harder to lease, finance, or sell in the future.
Conclusion
Achieving MEES compliance can be complex, but with careful planning and the right guidance, it’s entirely possible. Collaboration between landlords and tenants is key to making energy efficiency improvements in a timely manner. By taking action now, property investors can stay ahead of tightening regulations, protect their investments, and contribute to a more sustainable future.
For more insights and guidance on navigating the latest property regulations, check out our South East Property Newsletter.
For further guidance on the energy efficiency standards for property investors, please do not hesitate to contact our team on 01293 227670.