A new set of rules in the UK, taking force from the start of September, is designed to improve energy efficiency in commercial property. This means that asset owners, such as family offices, have much to think about and do.
As holders of so-called “patient capital,” family offices are natural investors in commercial and residential property. In this article, Stuart Funiciello, partner at property consultancy, Hartnell Taylor Cook, looks at how new UK regulations for commercial properties – designed to improve heat efficiency – will affect investors. Over the years, this news service has covered family offices' property investments, such as here, via Highworth Research.
The editors of this news service are pleased to share these views and invite readers to comment. The usual editorial disclaimers apply. Email firstname.lastname@example.org
By 1 September this year, landlords must ensure that their commercial properties meet the criteria of the new Heat Network Regulation – a long-awaited change that aims to improve energy use within the UK’s commercial property, but which brings a range of considerations for asset owners.
In short, it means that family offices with property must prepare to charge tenants for heating, cooling and hot water based on their actual consumption rather than using the old system of charging based on the consumption of the entire building divided by the square footage of the property in which they reside. With September now less than six months away and utility prices ever increasing, family offices must act quickly to meet the deadline. As well as supporting the UK’s ESG agenda, they could even reap benefits from the regulation themselves.
Planning is half the battle
The first step offices need to make in order to meet this deadline is to complete the cost-effectiveness assessment to determine whether they need to install metering devices. To complete this, family offices need to have their utility consumption data and net and internal floor area figures to hand and organised effectively. For example, a building could have air conditioning units that differ from floor to floor, with some being covered in the regulation and some not, so accurate data is essential for arriving at a correct calculation.
From our experience, many family offices fall down at this first hurdle. An exercise that should take twenty minutes can be stretched into weeks or even months of back and forth with a family office that was unprepared to hand over the necessary data, especially those with a larger number of tenants.
We have learnt that ensuring family offices have a checklist of the required data before beginning the process increases the chances of a smooth and successful assessment. Indeed, we have been supporting several offices by preparating them for the regulation and found that after creating this checklist the assessment took half the time. With that in mind, my key top tip for family offices is to prepare your data and prepare it correctly.
The clock is ticking
Once cost-effectiveness assessments have been undertaken, family offices have a duty to install metering devices by 1 September. However, with continuing fallout from Brexit and the pandemic, supply chain problems and labour shortages are wreaking havoc on lead times for obtaining supplies necessary to install the system. For example, one project that we began in November is yet to be finished due to an eighteen-week wait for supplies.
To meet the government’s deadline, family offices must factor in enough time for the procurement, design and installation of their metering devices. Again, careful planning is key to achieving this. In fact, if offices do not start planning now it is likely that they will miss the impending deadline.
If family offices can factor in enough time to collate the right data and plan, they can calculate how much each of their tenants should be charged for gas and electricity based on actual consumption, rather than increasing all tenants’ service charge to accommodate rising costs ahead of the regulation coming into force.
This week the Centre for Economics and Business Research warned that gas prices will stay high for years to come, meaning that tenants are likely to face increased bills and expenses across the board. As such, any existing tenant faced with a dramatically increased service charge caused by a lack of planning by its landlord ahead of the regulation may be deterred from occupying the building.
In addition, those family offices which can calculate each tenant’s charge based on consumption will not have to market their service charge as highly, which should result in new tenants also being attracted to the family office’s offering. All in all, it should also result in tenants using utilities within the building more environmentally friendly, as they can see their actions affecting the cost of their monthly service charge.
Benefit to the tenant
With tenants now paying for their consumption, the regulation should make them more aware and therefore use less. With utilities accounting for 40 to 60 per cent of a service charge, this should have a significant effect on a business’ overheads. Indeed, the government introduced the Heat Network Regulations, in the first instance, as a way of reducing the country’s environmental footprint; by shifting responsibility to the tenant, might this goal be more achievable?
Happily, this regulation also supports companies that have adopted a hybrid model post-pandemic, as tenants can now adjust their utility usage to the amount of people who are in their offices each day, which should see the reduction of this usage mirrored in their service charge. Really, it’s a win-win situation for family offices, their tenants and ultimately our planet.
All of that said, the government has taken six years to introduce even the assessment tool for this regulation, so it would only be fair to offer some leeway for those who struggle to meet September’s deadline. With months lost to data collection and procurement as well as the continuing impact of Brexit and the pandemic leaving much of the financial burden with landlords, the government should review its initial system and refrain from administering financial penalties to those who miss the deadline.
However, for now, the message to family offices is clear – act now to meet this deadline and support tenants in cutting their energy consumption.