Legislation on cutting energy use and demand from investors for sustainable buildings is putting thousands of properties in danger of becoming stranded assets. The UK government’s proposals to raise minimum ratings for buildings’ energy performance certificates (EPCs) from C to B will force many commercial buildings to undergo expensive improvements.
Measures may include swapping gas boilers for heat pumps or improving the thermal performance of the façade. Properties that can’t be upgraded because of cost or complexity risk becoming unlettable or having their sales value slashed.
The amount of commercial space affected is vast. For example, in the retail sector Savills notes that lifting the minimum EPC requirement to B will mean 83% of UK retail stock will have to be improved, which amounts to 1.4 billion ft2 of retail space.
Last autumn, heat pump manufacturer Mitsubishi Electric published a guide to stranded assets and, here, the company’s sustainability and construction manager, Dan Smith, explains why owners of properties are being forced to act to protect the value of their assets.
What is a stranded asset?
It is a building that is falling behind the increasingly stringent environmental requirements. Buildings must meet high standards of EPC rating and failure to do so will result in a less commercially appealing asset for landlords, investors and tenants. This is not just about the EPC rating, however, as a building could get stranded because it is not on the right pathway to net zero or still uses fossil fuels, which won’t align with the aspirations of current or future tenants.
What kind of buildings are most at risk?
All commercial building stock that requires an EPC rating is at risk, especially if the building still uses fossil fuels and does not have a plan in place to remove it from site in the coming decade.
Have you seen examples of buildings that are ‘stranded’ because they haven’t been designed for net zero?There is ongoing work to devise a Net Zero Carbon Buildings Standard, but – regardless of any progress on the definitions and standards required –we are still facing a roadmap with a clear destination of net zero by 2050 but no clear signposts as to how we get there.
This could mean some buildings that are currently in the design or early construction phase could be in danger of becoming a stranded asset even before they open their doors to potential buyers or tenants, especially if they do not have a clear plan of how they will reduce emissions on the road to net zero.
For existing buildings, there is ongoing work in bodies such as the UK Green Building Council and the Supply Chain Sustainability School, which are creating focus groups on the retrofit challenges – but, again, while we know the destination, we are currently on an open road with few signposts in place.
Are regulations or the markets driving this?
There is a growing body of legislation driving reduction in energy consumption and pushing decarbonisation in our commercial building stock. While the Minimum Energy Efficient Standard is not mandated until 2023 for all existing commercial leases, tightening regulations will raise the requirement to C by 2030.
At the same time, we have seen a real appetite from the market to drive this further and quicker, with decarbonisation clusters or retrofit-focused teams appearing across the larger main contractors to capitalise on this opportunity.
What is the financial benefit of ensuring your building is on the path to net zero?
While a very reasonable and valid question – the real question is: what is the danger if your building isn’t on the path to net zero? Doing nothing is no longer an option for owners or investors. JLL research, in central London, suggests an 11% rental premium for a building with an EPC rating of A or B.