Mar

Government landlord commits to large sustainability investment

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One commercial landlord, a Singapore registered real estate investment trust, established to invest directly and indirectly in UK commercial assets, has already bitten the bullet!

Elite Commercial REIT a £293m market cap business has re-geared leases, getting lease commitments from its government tenant, to invest £12.5m over the next three years in an Asset Enhancement Initiative (AEI). These works will improve the sustainability and energy efficiency of buildings in its portfolio that are currently occupied by the UK’s Department for Work and Pensions (DWP).

The DWP is one of the UK’s largest department responsible for people’s welfare, pensions and child maintenance and it occupies buildings throughout the UK.

The real estate investment trust Elite says it is to collaborate with its major tenant, the DWP, to boost the sustainability and energy efficiency of its occupied estate.

The AEI works are to include repair, replacement or upgrading of existing lighting, heating and cooling systems, as well as insulation and solar panels. The aim is to upgrade the Trust’s properties’ Energy Performance Certificate (EPC) ratings to meet the forthcoming higher regulation standards.

Shaldine Wang, chief executive of the commercial property management group, Elite, has said:

“Investing in retrofitting works to enhance the energy efficiency ratings of assets in the portfolio will contribute towards reducing their environmental impact.

“This win-win initiative demonstrates our commitment to adapt our portfolio to address sustainability and climate change requirements, and to extend the relevance of our assets to tenants,” she says.

Elite’s re-gearing of the DWP leases means that it’s got commitment from its government tenant to support its new investment, to be matched with DWP’s agreement to the removing of lease break options. The lease re-gearing gives Elite the added security of knowing that its high quality government tenant is committed to stay for the full length of its lease.

Elite currently has 117 properties leased to the DWP which represent over half of the Reit’s total portfolio in gross rental income, with a lease break option currently set for March next year.

After the re-gearing, Elite secures nearly 80% of its income from the government estate through to 2028, in return for its commitment to the new investment in sustainability, albeit with a small number of the properties enjoying some rent reductions.

Commercial landlords under pressure to improve

The Elite move is likely to be one of the first of many moves to secure tenants into the future by committing to improve the energy efficiency of their tenants’ buildings, while they remain in situ.

The government’s commitment to its net zero target means it is lifting the minimum energy efficiency standard in to-let non-domestic buildings to an EPC rating of ‘B’, as part of its target for the UK being net zero by 2050.

Currently, with very few buildings exemptions, landlords must not let a building not complying with the minimum energy efficiency standard, currently set at an ‘E’ rating on a valid Energy Performance Certificate (EPC).

But the “E” rating is a now likey to be an interim measure, and landlords are sitting on an investment “time-bomb” as the target is to be lifted to a minimum energy efficiency standard for non-domestic buildings to ‘B’ by 2030.

To achieve this higher rating will involve owners in considerable expense for most buildings, though upgrading should result in lower maintenance and energy costs.

It has been estimated that the 2030 upgrading deadline to an EPC “B” for all those buildings affected could involve a total of around 85% of the UK’s rented commercial buildings.

Consultation

The Department for Business, Energy & Industrial Strategy is soon to publish the results of a recent consultation on changes needed to the Minimum Energy Efficiency Standards (MEES) Regulations in the commercial sector to meet the new target commitments, entitled ‘Non-domestic Private Rented Sector minimum energy efficiency standards: EPC B implementation’.

The government is proposing a phased-in implementation of the ‘B’ minimum standard by setting an interim target for 2027 of a minimum standard of EPC ‘C’ for commercial buildings, but this target has yet to be agreed.

It has been estimated by the government that currently around 10% of UK commercial let buildings are still below the minimum ‘E’ rating. From 1 April 2023, commercial landlords with tenants in situ will be breaking the law if they continue to let, if the building has an energy rating below ‘E’.

In some cases buildings will be without a valid EPC after 2023 if the usual 10-year EPC lifespan has expired. It is the government’s intention to change the rules on this so that a building must always have an EPC in place which lasts the whole length of the tenant’s occupation.

This would mean that in future, in cases of lease renewals, there would be a change to the current guidance that suggests that an EPC is not necessary at that point.

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