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Rising tide of emissions rules theratens to drown smaller landlords

Cost of pulling UK offices up to new enviornmental standard piles pressure on owners rliant on low rents

More than £60bn will have to be spent to drag the UK’s offices up to new environmental standards, according to analysis by Savills, adding to the pressure on landlords of older buildings who are already grappling with the shift to hybrid work.

Landlords are racing to ensure that offices meet new emissions regulations, as well as the expectations of tenants and investors who are committed to making their own businesses greener.

By 2025, every commercial building in the UK will require an energy performance certificate (EPC), which rates its energy efficiency from grade A to G. New minimum energy efficiency standards, currently before parliament, will require buildings to have a minimum rating of C by 2027 and B by 2030. Those that do not will become illegal to let out in most cases.

Large property owners are in a position to absorb the cost of that work but smaller landlords in cities with lower average rents will struggle, running the risk that the value of their buildings will enter a downward spiral.

“The challenge is your secondary town where the rent is, at best, £20 a square foot. How do you justify spending £80 a square foot [to make a building meet new standards]?” said Mat Oakley, head of commercial property research at Savills.

That legislation is an important tool in greening the UK’s building stock, which accounts directly for around a quarter of the country’s overall greenhouse gas emissions, according to the UK Green Building Council.

But with 85 per cent of offices in UK cities currently rated below a B, it also represents a substantial hurdle for landlords to clear.

Paying for better insulation, new fixtures or cleaner energy is “mostly viable for major landlords in big regional cities and London because the capital value per square foot is high enough”, said Oakley.

The largest listed landlords in the UK, such as British Land, Landsec or GPE, have already committed financing towards greening their portfolios and are confident that prospective tenants will be willing to fork out more to occupy a green building.

“Those occupiers for whom sustainability [and] net zero is really important, their real estate footprint is one of the two levers they have got to pull. The other is their travel policy,” said Mark Allan, chief executive of Landsec, a big office developer and landlord concentrated in London and Manchester.

But smaller, less well capitalised property owners that make up a far larger portion of the UK office market are finding it harder to attract tenants and will now require the greatest outlay to bring up to new emissions standards.

Those costs are only set to rise in the coming months, with supply chain disruption and most recently Russia’s invasion of Ukraine causing the price of goods and materials to rise dramatically.

Both Allan and Oakley describe the EPC regime as a “blunt” tool. The certificate takes a theoretical energy use reading at a single point in time, similar to the battery performance estimate a computer or phonemaker might provide to consumers.

Oakley estimates that, by 2030, a more nuanced emissions monitoring system that captures energy use in real time will have been introduced. The current regulation “undeniably will change and needs to change in the markets where the landlords can’t spend the money”, he said.

Source: Financial Times

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