Large swathes of London’s office property risk becoming stranded assets as landlords run out of time to embark on major upgrades needed to meet new energy efficiency standards.
That’s according to Robert Irving Burns, a property consultant, which says its analysis of government data shows that 78% of offices in Westminster and 71% in the City of London “will fail” to meet Minimum Energy Efficiency Standards (MEES) expected to take effect in the early 2030s.
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“Not only will achieving compliance require enormous capital expenditure across the board, but current market capacity with labor shortages and financing constraints will make achieving the early 2030s deadline virtually impossible,” Antony Antoniou, chief executive of RIB, said in a statement on Tuesday.
The UK government has said that building owners in the country will need to meet tougher standards for energy efficiency in order to be able to lease commercial properties. That will likely mean having an Energy Performance Certificate (EPC) rating no lower than “B” by the early 2030s.
Landlords will struggle in the new regulatory environment given the “huge scope” of the challenges ahead, RIB said. In all, more than 12,000 offices across central London currently require “significant” upgrades to comply with the new regulations, it estimates. In Westminster alone, more than three-quarters of offices “risk obsolescence,” RIB warned.
The EPC deadline is being viewed by some investors as an opportunity to buy commercial real estate at a discount, invest in green refurbishments and sell or lease the upgraded property at a premium. Firms engaging in such deals include Blackstone Inc., Brookfield Asset Management Ltd. and Henderson Park Capital Partners, Bloomberg reported in February.
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“We’re seeing traditional landlords, smaller landlords selling, and we’re seeing specialist funds who are looking for these office buildings,” Antoniou said in an interview.
The highest EPC rating of “A” is held by just 4% of office properties in the City of London, according to RIB. The lack of prime real estate with high EPC scores is already forcing potential tenants to delay plans to move into London offices, RIB said.
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The upshot is that the UK capital faces a future with a two-tier office market, as large numbers of landlords fail to meet the looming EPC deadline, according to RIB.
“As demand increasingly concentrates on high-performing, energy-efficient buildings, the market is becoming more polarized,” it said. “Assets with strong sustainability credentials are commanding premium rents and values, while older, non-compliant stock are generating significantly lower rents and seeing longer void periods.”
