Retro-fitting buildings for energy efficiency – is it worth it?

Refurbishing, or in the jargon – retrofitting – older commercial and residential buildings, according to the Government, is desirable and necessary, given that energy efficiency standards that will need to be met under the Government’s legal commitment to net zero by 2050.

But is this kind of refurbishment economically viable in today’s straightened times; UK businesses are operating in a low grow, high tax economy that’s likely to be years in recovery? Residential landlords are under pressure with rising mortgage rates and other costs, a punishing tax regime and ever increasing regulation.

Many small-scale buy-to-let investors are weighing the economics of doing this right now. Many single lets are of the older property stock types, terrace properties with solid walls which present expensive up-grade costs, not to mention the hassle involved if it’s under a long-term tenancy.

The environmental cost

With energy consumption and costs increasing across the globe, older commercial and residential buildings are said to be responsible for consuming a large portion of the nation’s energy – they account for up to 20 per cent of carbon emissions in the UK and represent a higher than necessary amount of energy consumption.

Cutting pollution and saving energy is the need of the hour, but just how cost effective is investing in an environmentally sound refurbishment (retrofitting) project to the average commercial or residential large building owner?

Commercial buildings

Commercial building owners often struggle to see the evidence that these outlays will generate their desired returns, but that perception is beginning to change says property international property agents JLL.

Traditionally, owners see improvements in the efficiency of a building on a years-return basis – if the return period is short enough they will do it. The problem is that a simple cash return break-even analysis, looking only at operating costs, acts as a barrier to investment judged simply over the short-term.

Retrofitting investments must be viewed in a different context says JLL: they may not be self-funding on a purely operational cash flow basis, but other long-term benefits will ensue – the old rules for evaluating these projects must change, that’s the argument being put forward by several recent studies as well.

The return on sustainability investments is often undervalued, says JLL. Building owners need to look beyond operating costs to assess the impact on a building’s overall value, taking a longer term view.

JLL gives the example of a building worth £120 million in today’s market and needs a £18 million (15 per cent) upgrade.

That sort of investment may never be fully recovered on an operating-cost break-even basis, but tenant demand for low-carbon buildings is accelerating apace: there’s a big risk that a building’s value will fall dramatically if it fails to meet future tenants’ needs and the Government’s low-carbon targets.

Building will become unlettable

It means that older buildings throughout the globe that cannot meet low-carbon targets could become unsaleable and unlettable. Whereas low-carbon rental space in the right locations will likely earn substantial premiums when they benefit from efficient and tasteful retrofit conversions.

This risk-versus-value spread is beginning to show in multiple markets around the globe, London being a prime example. JLL predicts there being as significant shortage of commercial spaces with the right low-carbon footprints by 2025. This, they say, is down to the number of companies with net zero commitments, compared with the retrofit pipeline.

The supply simply won’t meet the demand in the future. “Retrofitting will contribute to delivering on that growing demand and driving value from changes to valuation fundamentals including rents, voids and operating costs,” says JLL.

“We consistently see these results in practice. A tenfold increase in mechanical, electrical and plumbing engineering (MEP) related capital costs to decarbonize prime office space in London are often more than offset by improvements in rent, reduced void periods and lower exit yield discounts. The result is that implementing a zero-carbon strategy is accretive – especially where some significant works are already planned.

“As companies continue to take action on decarbonizing their businesses, building owners who wait for greater certainty or regulation will fall behind the demand curve and face valuation risks. The reality is sustainability-minded companies will vacate buildings if owners don’t invest in retrofitting them. And we’ll see more pressure from that every year.”

80% of office buildings which exist today will still be in-use in 2050, says JLL

What about vintage buildings?

According to a recent report commissioned by the National Trust, Historic England, the Crown Estate and property companies Peabody and Grosvenor, retrofitting the UK’s historic buildings would support 290,000 jobs and boost the UK economy by £35 billion, while at the same time meeting the Government’s energy efficiency targets by slashing Britain’s carbon emissions.

Improving the energy efficiency of these historic buildings – those built before 1919 – both commercial and residential, would reduce the carbon emissions from all of the UK’s buildings by 5% per year; it would make these older buildings, homes and workplaces warmer to work in and live in and much cheaper to run.

Heritage and property groups have outlined a plan to boost energy efficiency at historical sites to create jobs, cut emissions and meet net-zero targets. Retrofitting the UK’s historical buildings – from Georgian town houses to the mills and factories that kickstarted the Industrial Revolution – could, says the report, generate £35bn of economic output per year. It would also result in additional skills training, create thousands of extra jobs and skills, and it would help achieve the Government’s climate change targets.

Just under 25 per cent of all UK houses, around 6 million of them, are pre 1919, and around 30 per cent of the commercial property stock in the UK is also in this vintage category. That’s around 600,000 commercial buildings. Property is responsible for around 20 per cent of the nation’s greenhouse gas emissions, and these older buildings are a significant proportion of that.

A bigger challenge

Retrofitting vintage buildings represents a bigger challenge than the same process in more modern buildings, but ensuring their insulation, windows and heating systems are more energy efficient will lower emissions and prolong the building’s lifespan.

Doing this avoids the wasted carbon emissions when a building is demolished and re-built from scratch. It avoids the large amount of emissions emitted during the site clearance and making the building materials such as cement and steel production necessary for construction.

The housing association Peabody, the crown estate and Grosvenor, the Duke of Westminster’s property firm, are arguing that a national retrofitting campaign for older buildings would result in the extra £35bn of economic output annually benefiting many industries along the way.

An example cited is Peabody Avenue in Pimlico in London where two terraces of staircase-access flats built in 1876 was used as a pilot project, an experiment to understand how to sensitively retrofit a set of heritage buildings.

Another example is the Grade II-listed Canada House in Manchester retrofit now in progress. Built in 1909 and owned by Grosvenor, the programme is to improve the building’s environmental performance.

Historic England has a record of restoring listed buildings, for example the 18th-century Shrewsbury Flaxmill Maltings.

Traditional skills needed in these refurbishments, such as lime plastering, are taught at workshops at the Heritage Skills Centre in Oxfordshire.

The report estimates there will be 105,000 new workers needed in this work, including plumbers, electricians, carpenters and scaffolders over a period of three decades if net zero targets are to be met – 14,500 more electricians and 14,300 plumbers will be required.

The organisations involved in this project want the government to make the apprenticeship levy more flexible, allowing unspent funds to be channelled into training people in heritage retrofit.

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