New energy efficiency rules affect pension funds

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The Minimum Energy Efficiency Standard (MEES) rules were introduced in April 2018 and require most buildings to have an Energy Performance Certificate (EPC) of between A and E.

It is illegal to issue new leases or renew leases for buildings that have EPC ratings of F or G. This has affected buy to let and commercial landlords, and pension funds that have invested in property.

The Department of Business and Energy estimates that there are 200,000 commercial and 280,000 residential buildings in the UK that are rated F or G. These properties are difficult to let or sell without upgrading their energy efficiency. It may also be difficult to obtain a commercial mortgage to purchase low energy-rated buildings. Some mortgage lenders stipulate that energy upgrade work must be completed within a few months of completing a purchase. If landlords rent out low-rated buildings, they face fines of up to £150,000.

Many pension funds have invested large amounts in a property. For example, Dentons Pension Management owns around 2,500 commercial properties and estimates that 10% of them have low EPC ratings. The money needed to upgrade these buildings will decrease the profits of the pension fund.

If the pension funds do not upgrade their low energy-efficient buildings, they will generate no income as no new leases can be issued.

Property funds such as Aviva UK Property have calculated the cost of refurbishments and believe that these costs will have a minimum effect on the value of their shares, so individual investors should not be affected.

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