Feb

Commercial property energy upgrades could cost over £30bn

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The road to net zero is paved with additional costs for Britain, not least the amount of money it will take to upgrade commercial property, in the industrial alone.

Achieving grade “B” ratings under the 2030 Minimum Energy Efficiency Standards (MEES) requirements for the UK’s industrial, manufacturing, logistics and warehousing property stock has been estimated to cost up to £30.5bn, that’s according to data supplied to Property Week by commercial real estate agents, Avison Young.

The agency’s soon to be published “Building Zero: the road to zero carbon logistics” report, spells out the changes that will need to be made, and the cost of doing so to achieve the new standards. If the regulations shift to require owners to meet an even higher standard, an EPC rating of “A” for example, post 2030, to meet the 2050 net zero target, costs will be higher still.

The UK Government’s recently announced 10-point plan to accelerate progress to net zero carbon, supporting the delivery of objectives set out in the Paris Climate Change Agreement, has encouraged all industries to refocus on their environmental commitments. The push for legislation

and more industry standards, led by the UK Business Council for Sustainable Development (UKBCSD), is also gathering pace.

The Current Standards

Currently, with only a few exemptions, the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (MEES) prevent landlords from granting a new tenancy of sub-standard commercial property, i.e. property that has an EPC rating of F or G. It means that landlords must make sufficient energy efficiency improvements to their properties in time to ensure they meet the standards.

Government has estimated that approximately 18% of commercial properties are currently in the EPC ‘F’ and ‘G’ rating brackets. In future this will adversely affect the ability of landlords to let or continue to let such properties – valuation and marketability are diminished, and debt borrowing will be affected, along with rent reviews and dilapidations assessments.

2030 and beyond

MEES will not currently apply if a commercial property has an EPC of E or above, however, the UK Energy White Paper 2020: Powering our net zero future confirms the Government’s intention that the future for non-domestic MEES regulation will move to EPC rating of “B” by 1 April 2030.

Therefore, although it may be tempting for landlords to target an EPC rating of E when upgrading, this is the bare minimum standard – such a commitment could be short-sighted. Landlords who decide to future-proof their buildings will not only save money in the long-term, their buildings will immediately be more marketable, a more attractive proposition for tenants, prospective purchasers and investors.

There is now a suggestion that Government might give local authorities access to the central EPC database to assist them in identifying properties that are let in breach of MEES. This would greatly assist local authorities in enforcing the MEES regulations and put pressure on owners to comply.

Daryl Perry, head of UK insight at Avison Young has said:

“The cost of improving the UK’s industrial, manufacturing, logistics and warehousing stock – even just in terms of MEES – is immense, Taking into consideration merely recommendations for improvement for existing buildings with EPCs, we estimate that the total cost for achieving the 2030 MEES requirement for industrial stock comes to £30.5bn, at an average cost of just under £344,000 per building.”

Mr Perry says that detailed modelling on an array of buildings undertaken by the company suggests that 1980s and 1960s buildings – under the current seven-year payback guidance – would only achieve and EPC grade ‘C’.

“While a number of forward-thinking developers are moving towards net zero carbon development and on-site energy generation, arguably the greater challenge is around how to upgrade existing stock, with 80% of the UK’s industrial stock more than 20 years old,” he says. “The policy shift around MEES, and changing requirements, has the potential to create significant environmental obsolescence.”

Meeting EPC standards is a huge challenge for property owners, but it is not the only task involved in meeting overall business sustainability standards in the industrial sector. Occupier requirements will drive the work needed to minimise buildings and supply chain emissions.

Non-domestic private rented property: minimum energy efficiency standard – landlord guidance