Changes to the Minimum Energy Efficiency Standards (MEES) for commercial buildings that come into effect at the beginning of April should just be the starting point for landlords of poor-performing assets. There is value in planning ahead, but despite this, many property owners have yet to take action.
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ISSUE 02 | February 2023
“There's a very high level of non-compliant buildings out there, which suggests either a lack of awareness or clearly a lack of response to what's coming”
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On the right tracks
Property & Asset management
Mind The Gap
Strategic property advice needed
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On the right tracks
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A void left in town centres and retail parks
Aside from doing the right thing for the climate, the imperative to upgrade buildings to ensure they have an energy performance certificate of E or above is real. In addition to the current ban on granting new leases, or renewals of existing leases for non-compliant buildings, from 1 April continuing to lease F or G rated non-domestic property will also be a breach of MEES.
Tom Roundell Greene
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Tom Roundell Greene
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Energy efficient buildings:
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the value-add of long-term strategy
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The ‘Cinderella’ of the surveying world
A void left in town centres and retail parks
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"It’s about breaking it down and making step changes. With multi-tenanted offices, there’s a need for collaboration, and green leases can be used to drive cost and benefit sharing”
“There's a very high level of non-compliant buildings out there, which suggests either a lack of awareness or clearly a lack of response to what's coming,” says Tom Roundell Greene, Head of Sustainability.
Office properties with EPC bands G and F account for 17.2% of all offices in Great Britain. This means that nearly a fifth of all office stock could be forced off the market by 1 April 2023.
Fines can be imposed: Up to £5,000 for giving false or misleading information or up to £150,000 for breaching the regulations. But some may decide to take a chance in the hope that under-resourced local authorities won’t enforce the regulations.
But Roundell Greene warns: “Given it’s a potential source of income for local authorities, there is an additional incentive for them to enforce, making non-compliance all the more risky.”
Aside from being unable to lease a building rated EPC F or G, there is a risk of losing existing tenants with a looming lease expiry. Faced with rising energy costs and the need to improve sustainability, leaving a poor-performing building is a relatively straightforward and cost-effective way for an occupier to make a step change.
To achieve net zero by 2050, the Government will have to raise MEES, so it will only get more challenging. An EPC C minimum is expected for non-domestic properties by April 2027 and an EPC B minimum by 2030.
This raises important questions about investment strategy, asset management and future-proofing. If a landlord is focused purely on compliance, there is a risk, says Roundell Greene, of incurring more significant costs over time as regulations change.
“You are also potentially missing out on the broader benefits and value a more sustainable asset can create within a portfolio,” he says.
Buildings that are more sustainable are more attractive to occupiers. Large corporate businesses will have their own sustainability goals and will look for energy-efficient space to meet those targets.
Added to this, an office with associated sustainability and wellness credentials is a signal to clients and potential talent of the position the business is taking.
There is a so-called ‘green premium’ with highly sustainable and wellness-focused buildings securing higher rents. “That may well be driven by an imbalance in supply and demand,” says Roundell Greene. “But the same thing will happen with the MEES changes as the stock of lettable buildings reduces.”
‘Let-ability’ will also impact asset value. Investors look to mitigate the risk of their capital allocation decisions, and sustainability credentials or lack of them is a potential risk. “I don’t think that will change in the long term,” he adds.
But every building is different and a useful first step for any landlords is to make sure the EPC is correct so an appropriate energy strategy can be planned and implemented.
The EPC is helpful in highlighting areas to review, and there are some simpler measures, like installing energy-efficient light bulbs and insulation. If plant equipment or heating systems need upgrading, that will require more investment.
“It’s about breaking it down and making step changes. With multi-tenanted offices, there’s a need for collaboration, and green leases can be used to drive cost and benefit sharing,” says Roundell Greene.
But MEES is really the ground floor of sustainability; it’s an immediately pressing issue but broader thinking is required to realise the commercial value of sustainable buildings.
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