Environmental requirements impacting the future of REI?

Question

So there's this thing that's been bugging me for some time.

I'm in two European markets. Legally, one is 'saturated' in that all rehabs need to cover a myriad of environmental concerns. For example: touch a roof that has asbestos isolation and you HAVE to take it out, whether you need to or not. Also, the fire department won't give you a permit before you vow to make it napalm-proof.

The other is very lax (different country). The fire department doesn't care. Environmental requirements are only compulsory with new construction. And so on.

The two differ like day and night, is what I'm saying.

Now, if the latter were to implement the requirements of the former, about half the inventory would be deemed unliveable. Because of EU and such, these requirements are set for 2020, which will be impossible. The current sellers aren't willing to take a decent haircut in anticipation of these requirements.

So I don't know how environmental requirements are enforced in the US, but I expect any market not prepped to be shellshocked if the law gets laid down.

This greatly affects any buy & hold strategy in the long run. I would have to reserve about 20% of revenues to cover any future requirements on some of the deals I've seen.

New construction ('green housing') is becoming more attractive because of this, but that usually isn't where private real estate investors like us are active.

So am I overthinking this? Do I underestimate government hypocrisy? Or is a storm coming?

Jon Holdman · Answer

@Thierry Van Roy there are many similar regulations here in the US. Asbestos and lead paint are two heavily controlled materials and landlords can end up on the hook for remediating these.

Building permits often require doing unrelated work for safety issues.

On larger building, an "environmental study" is often required as part of the appraisal process. Not usually done on SFRs, but a buyer is wise to be aware of any such issues with properties they're buying.

And this stuff does vary a lot from place to place. The federal government has some regulations in place that apply nationwide. Many locales have more stringent regulations that property owners and builders must comply with. Properties are typically grandfathered in that they don't have to actively make changes to comply with new regulations and building codes. But when they change hands or when any permits are pulled then the new ones often kick in.

Thierry Van Roy · Answer

Thanks for your reply!

A holding period of 6 years is kind of a minimum. Of course everything will depend on how much of the theory ever gets implemented, but my main concern is "nearly zero energy housing" becoming a market disruptor which will favor big developers over small investors, as is the case in my saturated market. And by "becoming", I mean during the next 30 years.

Amanda Hensley · Answer

I guess it depends on how long YOU plan to hold these investments. If you plan to get out quickly, then maybe you should worry less. But if you plan to hold until your retirement or something, and that hold date is past 2020 - then I would say it does warrant some concern.

Question, when you say - these requirements were set for 2020 and are impossible - do you mean that the buildings which house people now, would be deemed unlivable, and that would be impossible to get people out and raze the buildings by 2020? or to repair them by 2020 would be impossible?

I'm not sure where in EU you're looking but one angle I would think about is cultural heritage. EU seems to strongly support that, and so if you could make a case at all that these buildings are part of the cultural heritage of your city and as such, can't be torn down, you may not only get a "pass" on certain requirements, you may also be able to get funding help to get them up to code.

Environmental requirements impacting the future of REI?

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