By Legal Futures Associate Search Acumen
- There are still nearly 18,000 commercial rental properties with EPCs rated F or G that are non-compliant with Minimum Energy Efficiency Standards (MEES) that took effect in April 2023
- Based on current average rents and volume, could equate to nearly £750m in lost annual rental income
- Offices are the most likely property type to be non-compliant with nearly 8,000 rating F or G
- The hospitality sector has highest percentage of A, A* and B rated buildings (27%) and the lowest proportion of F or G rated buildings (2%)
- Research from Search Acumen suggests that at the current rate of progress for building upgrades, it will take until 2038 for all commercial properties that are rented to meet current legal standards, meaning the sector will miss its regulatory deadline by nearly a decade
- For all commercial property types beyond those just rented, the rate of progress is even slower, set to take 21 years, or until 2045 at its current pace
- Andrew Lloyd, Director of Search Acumen: “Complacency in energy upgrades will continue to hamper yield and transactional growth – now is the time to act”
Despite tighter Minimum Energy Efficiency Standards (MEES) coming into force over a year ago in April 2023 prohibiting landlords from leasing buildings with an EPC rating below E, nearly 18,000 (17,957) rental buildings still have substandard F or G ratings.
Analysis by property data provider Search Acumen has revealed the sector is still at risk of losing out on hundreds of millions in rental income a year due to non-compliance with regulations. Based on average rental values, commercial leasehold properties with an EPC of F or G represent a potential loss of nearly £750 million in annual rental income across England and Wales.
From 2030, all rented non-domestic properties will need to achieve an even higher standard to obtain an EPC at 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. At the current rate of progress, Search Acumen estimates it will take 14 and a half years, or until 2038, for all commercial rental properties below a B to hit the 2030 MEES standards. This not only indicates that the industry will miss the deadline by nearly a decade (eight years), but also shows that the rate of improvement is slower than it was mid-last year. In August 2023, the commercial real estate market was due to miss the target by six years, showing an increase of two years on the already sluggish pace of change.
Taking all commercial properties into account beyond leasehold – including those for sale or under development – Search Acumen’s research indicates the time needed to reach full compliance in line with the 2030 standards jumps to 21 years. This means it will be closer to 2045 before all commercial properties in England and Wales are rated at B or above at the current rate of progress. The timeline has also worsened across all property types, increasing by six years annually, from 15 years in August 2023 to 21 years today.
Signs of positive movement
Whilst progress is slow, the analysis by Search Acumen highlights that there are signs of positive change happening. In the last nine months, there has been a reduction of just over 1,000 properties rated F or G, resulting in a saving of £250m for the commercial property sector with landlords legally allowed to rent these properties for use.
Comparing the decade of F and G rated listings before the MEES regulations came into effect, there has been a shift from over 23,000 buildings to just under 18,000 – a total reduction of 5,000 non-compliant properties.
Which sector is leading the pack
The research highlights that office buildings are currently the most likely to have poor energy ratings, with over 8,000 (7,753) still rated F or G and 13% rated A, A* or B.
The education sector, despite only having 2% of building rated F and G, has 12% of buildings rated as A, A* or B. In contrast, the hospitality sector is performing more favourably, with nearly a third (27%) of rental properties achieving an A, A* or B rating. Just 2% of hospitality buildings are rated F or G.
[Graph 1: Proportion of A*-B EPC Registrations and F&G EPC Registrations by sector]
Market analysis
The latest findings form part of Search Acumen’s work to integrate EPC data into its digital due diligence platform, providing lawyers, investors and asset managers with enhanced insight to assess risk and opportunity.
Andrew Lloyd, Managing Director at Search Acumen, said: “Complacency in energy upgrades of commercial real estate will continue to hamper yield potential and transactional growth – now is the time to act.
“Whilst the commercial sector has faced many hurdles in the past 12 months, in which despite falling inflation and a stable base rate fiscal drag continues to bear significant weight, it is important for commercial landlords to look ten steps ahead to avoid obsolescence. High-performing buildings command the best commercial yields and have been a fundamental driver in leasehold transactions, kicking lower-grade buildings to the curb.
“Real estate has been a traditionally sluggish sector when it comes to change. But with potential annual losses nearing £750 million from non-compliant commercial properties, not to mention rising reputational and regulatory risks, the industry cannot afford to be stagnant.
“That being said, many landlords may be making improvements that haven’t yet been reflected in updated EPC ratings. The bureaucratic process of getting an official new EPC can take time, ultimately forming part of the problem.
“The truth is we have a long road ahead of us, and the pace of change needs to dramatically accelerate if we want to meet the 2030 mandate. It is time for us to start measuring real estate through an environmental lens to avoid being widely out-of-step with the UK’s climate commitments. By providing comprehensive data on energy efficiency alongside other critical factors, we’re equipping property professionals to make better informed decisions that protect investment value while also supporting sustainability goals.”
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