"It was inevitable that challenging economic conditions would impact the ability of asset owners to commit to costly retrofits and refurbishments immediately"
- Andy Sommerville - Search Acumen
Despite tighter energy efficiency regulations banning landlords from leasing commercial buildings with EPC ratings below an E, there are still over 19,000 commercial rental properties with non-compliant ratings, according to research from property data and technology provider Search Acumen.
The findings reveal that, based on average rents in England and Wales, the commercial property sector could be set to lose over £1bn in annual rents from non-compliance with the Minimum Energy Efficiency Standards (MEES), which were tightened in April this year.
Sector behind schedule as climate change and operating pressures collide
According to the research, 132 commercial buildings for rent actually obtained new EPCs between 1st April and 30th June at a non-compliant F or G rating. Overall, non-compliant properties represent 5% of leased commercial stock across England and Wales. This percentage has been unchanged since the new MEES came into force, evidencing the slow rate of progress.
From 2030, all rented non-domestic properties will need to achieve an even higher standard to obtain an EPC at a B or above.
However, the pace at which buildings are accessing the best EPC grades remains drastically below what is needed to achieve this target.
In July 2023, EPCs rated B or above account for 14% of rented commercial property, compared to 12% in April; an increase of just two percentage points since the MEES changes took effect.
At the current rate of progress, Search Acumen estimates it will take 13 years, or until 2036, for all rental properties below a B to hit the 2030 MEES standards – putting the industry on course to miss the deadline by six years.
Taking all properties into account – including those for sale or under development, as well as those which obtained an EPC to support leasing – Search Acumen’s research indicates the time needed to reach full compliance with the 2030 requirements jumps to 15 years. This means it will be closer to 2040 before all commercial properties in England and Wales are rated at B or above.
Andy Sommerville, Director at Search Acumen said: “Despite the financial implications of non-compliance, let alone the impacts of poor energy efficiency on the planet, the speed at which properties are being upgraded to meet higher energy efficiency codes is painfully slow as investment capital remains restricted. But it is vital for the planet and for balance sheets that the pace of change accelerates.
“Given the competing commercial challenges, portfolio managers have urgent decisions to make about whether to invest in their assets or move them on. Across the country, this is likely to be a crucial factor in catalysing asset management and transactional activity over the coming years, as fund managers, developers, and asset managers look to reshape their portfolios.
“As these decisions become more pressing, but also more complex, the quality of data available to support property transactions becomes even more critical. That’s why we’ve integrated EPC data alongside 500 other critical data layers within our digital due diligence platform, so property professionals have as much information as possible to navigate these difficult but crucial decisions.”
Green shoots provide cause for optimism
While adaption to new MEES regulations hasn’t yet moved the dial in a significant way, Search Acumen’s data does indicate there has been some improvement in overall EPC ratings since April. There has been a reduction of 1,440 EPCs at F & G rating over the last three months, representing a 7% improvement on the figures in April. There has also been a 16% increase in the number of commercial properties with higher-rated EPCs at B or above., representing 7,444 properties.
Over the last ten years, there has been an 87% decrease in EPCs at an F & G rating.
Andy Sommerville adds: “While the industry is struggling to make significant inroads in the short term, primarily due to the rising cost of capital, the good news is that some progress is being made. This is cause for optimism, but we do need to be realistic; we need to move rapidly through the gears to meet key deadlines like the 2030 MEES regulations and, ultimately, net-zero by 2050.
He concludes: “It was inevitable that challenging economic conditions would impact the ability of asset owners to commit to costly retrofits and refurbishments immediately. But as inflation falls and the economic situation stabilises, progressive asset managers who recognise the environmental and commercial imperative of decarbonisation will start to find ways to use the financial wiggle room they have to fund new sustainability initiatives.”
