Building Zero - Upgrading our existing stock

Building Zero - Upgrading our existing stock 21 March 2022

One of the reasons for the considerable challenges posed by the retrofit requirements to increase the sustainability of the UK industrial market is the age of the stock.

  • Only 20% of industrial stock has been built between 2000 and 2019
  • 43% was built in the 1980s and 1990s
  • 38% is more than 40 years old

Historically, industrial and distribution warehouses have suffered less from obsolescence than offices and have also benefitted from relative ease of new build development. As a result, much of this stock remains largely fit for purpose. This is particularly the case given high levels of demand for all sizes of units. In many instances, this excess demand has reversed locational obsolescence, as disused 1970s edge-of-town industrial units are now perfect for last-mile logistics.

However, older stock built before current standards, tends to underperform in sustainability measures.

These ageing assets are encountering environmental obsolescence as climate policies and energy efficiency requirements become more stringent.

The introduction of MEES has already had a positive impact on the measured energy performance of the built stock.

Green Premium/Brown Discount

As a result of the environmental obsolescence risk posed by the impending MEES and the costs of reaching the minimum rating, combined with growing sustainability demand, we are already able to see a relationship between EPC performance and values. Higher EPC grades are correlated with higher rental values in industrial properties. This is likely to also be impacted by a building’s age, location and quality, with better EPC grades more likely to be held by newer, prime, high quality stock, thus attracting higher rents.

The gap between the grade G and grade A average capital values per sq ft increased by 16% from the 2010 to 2015 and 2015 to 2021 periods. Additionally, the difference between the grade G and grade E rose by 2% in the timeframe. Taking these two value relationships together suggests that making improvements to a building’s EPC rating could provide greater security in investments and income by increasing the property’s appeal to buyers and tenants.

A ‘green premium’ on the top performing assets is currently visible – and increasing in rental values, with the differential between grade B and grade A average rents increasing by 2 percentage points between the pre and post- MEES period. The growth of the difference over the grade F and grade E compliance boundary of 11 percentage points also evidences a ‘brown discount’. Further, this discount is expected to grow as MEES deadlines draw nearer, bringing a greater risk of environmental obsolescence for substandard buildings which could result in them becoming stranded assets.

Overshooting the minimum

With EPC banding derived from the building regulations, landlords should be prepared for a higher standard of grade B by 2030. Landlords are encouraged to set their targets higher than the minimum standards as regulations and levies are expected to become increasingly targeted to reducing carbon, such as the climate change levy and carbon taxes. These are currently set very low, to the extent that some developers will just pay the tax, but this will change and there is increased evidence of shadow carbon pricing in order to foreshadow absorption of taxes, spreading the cost and action as a form of risk management.

What should you do next?

Read our Building Zero report for the full analysis and contact us to discuss how we can guide you through the industrial green revolution.

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