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New research by global real estate advisor, Savills, has revealed that UK landlords could be spending upwards of £40 per sq ft to make high cost improvements if they are to achieve the proposed legislative energy targets set to come into effect from 2027.
A number of significant legislative changes, which are currently under consultation, will see all commercial rental buildings requiring an in-date Energy Performance Certificate (EPC) lodged on the national register by 2025. By 2027 a minimum EPC Grade ‘C’ rating will be needed in order to receive any further rent from tenants or to re-let a property, with a Grade ‘B’ required by April 2030 onwards.
According to Savills research 85 per cent of office stock in the major UK office markets is currently rated an EPC ‘C’ or below, whilst 800 million sq ft is below the proposed minimum EPC ‘B’ rating. Based on the indicative cost modelling to make the required improvements, Savills says it could cost UK landlords as much as £63 billion to reach EPC targets across key UK cities over the next eight years.
Whilst every asset is different and will require different levels of intervention to meet the required changes, there are a number of typical enhancements that can be made to improve most buildings. This might include the use of LED lighting, the removal of gas in favour of electricity (increasingly from renewable sources) and smart energy metering.
Mat Oakley, Head of Commercial Research at Savills, commented: “In 2021 we saw more than 90 per cent of leasing activity being for the best quality office accommodation in some locations. This is clearly a sign that tenants are looking for prime space with good ESG credentials. The supply of such space is limited across the UK, with only around 10 per cent of office buildings having an EPC rating of B or above. This should mean that rental pressure will remain upwards on high quality offices, and thus justify the spend on bringing secondary stock up the EPC ladder in most major office markets.”
Jack Pugh, Director in the Building & Project Consultancy team, said: “At present the average EPC rating for a commercial building in the UK stands at Grade ‘D’, meaning a significant proportion of existing building stock will be impacted by the proposed change of regulations. As a landlord with stock below a ‘B’ rating, it is important to take the opportunity to work on that building ahead of proposed deadlines and undertake improvements to obtain at least a Grade ‘B’ in order to future-proof the asset wherever possible. What’s clear is that legislation will only tighten in the coming years, and operational energy consumption will be increasingly scrutinised, which will force the industry to take action; it is therefore crucial to get ahead in order to make the required improvements on your own terms.”
