Could looming new energy efficiency standards spark a green rental market?

A Minimum Energy Efficiency Standard (MEES) will take effect as of 1st April 2018, imposing new rules on both domestic and commercial properties within the private rental sector.

These new rules will prohibit landlords from granting a tenancy to new or existing tenants if the property has an Energy Performance Certificate (EPC) rating below band ‘E’. It is estimated that as much as 20% of commercial properties in the UK will would fail to meet the new standards.

Commercial landlords that fail to comply with the new legislation could face fines of up to £150,000. As a result, there is a potential for green bonds to enter the market in the mortgage-backed sector, according to credit rating agency DBRS.

Residential mortgage-backed security (RMBS) investors are likely to realise the potential for additional credit risk arising as a result of non-compliance with MEES, the agency claims.

‘Forefront of considerations’

DBRS predicts that green buy-to-let properties will avoid the expected impact of MEES-based tenancy void periods and the additional refinancing risk, and may even benefit from rental and valuation premiums.

“The regulation should bring energy efficiency to the forefront of considerations for UK buy-to-let RMBS originators and investors, due to the potential credit implication…. but also for the opportunities such bonds bring,” DBRS states.

Green securitisation – the process of taking an illiquid green asset, or series of assets, and transferring it into a security – is a relatively new phenomenon. Issuers are therefore likely to find the opportunities to tap a diversified investor base and potential pricing benefits appealing, according to DBRS.

But the development of a UK green securitisation market will only edge closer if greater data on energy efficiency can be produced, DBRS contends. There is a “disconcerting” lack of data on EPC ratings available currently, the agency notes, and supplying such information could become a prerequisite to satisfy the needs of so-called green investors.

Fast-growing market

Green RMBS transactions are part of a fast-growing market. Last year, Dutch mortgage lender Obvion issued the first bond of this type, unique in the fact that the proceeds will be used to finance prime mortgages for new and refurbished homes that meet the highest standards for energy in the Netherlands.  

Barclays, meanwhile, has issued a £445m bond which intends to refinance residential mortgage properties across England and Wales based on the carbon intensity of each property.

Last week, some of the biggest UK housebuilders faced criticism from the Chairman of the Committee on Climate Change (CCC) for delivering new homes that allegedly fail to meet energy efficiency standards.

Lord Deben specifically called out three of the UK’s largest housebuilders – Barratt, Persimmon and Taylor Wimpey – for failing to implement these standards and “cheating the public” by inflating the cost of energy bills for homeowners and tenants.

George Ogleby