The government has committed to a 78% reduction in greenhouse gas emissions by 2035, with stringent new domestic and commercial energy efficiency standards introduced to meet those targets.
To put the scale of the challenge into perspective, 90% of UK buildings face a fall in valuations as new legislation comes into play.
From April 2023, landlords cannot let commercial buildings under an existing lease without an EPC rating of ‘E’ or above – in 2028 that will increase to ‘C’ for homes, and by 2030 ‘B’ for commercial schemes.
The drive for net zero poses a challenging prospect for many landlords and investors, who may find that the cost of the necessary upgrades will exceed the value of the asset. We have already seen requirements reversed and deals delayed as a direct result of new building regulations.
Landlords also face the reality that buildings falling far short of expectations on sustainability and energy efficiency will not be top of the list for businesses – coupled with considerations around ESG and wellbeing, and the demand for experiential space, assets that do not make the grade will struggle to attract occupiers.
It is vital that landlords and investors put net zero plans in place across their real estate portfolio sooner rather than later, making well-evidenced investment decisions on whether to divest buildings or put plans in place to achieve compliance.
Commercial upgrades to meet net zero targets are expected to cost landlords more than £30bn. As the recovery from the pandemic continues and the cost-of-living crisis begins to bite – with potentially significant impacts on the hospitality, retail, leisure and industrial sectors – is it a cost the industry can afford to bear?
We may find that the delivery of retrofitting and refurbishment on such a huge scale is not achievable without government support. But without a plan to tackle the challenge ahead, we almost certainly risk a collapse in valuations as the compliance gap continues to grow and net zero deadlines loom closer.
Edward Scott is associate director of valuations at chartered surveyor Copping Joyce