The net-zero push that could leave swathes of the City empty

A ban on renting out offices with an EPC below E leaves landlords with stark choice, reports Riya Makwana

Thousands of offices across Britain have become unlettable after new net-zero rules left landlords unable to let them out. Laws that came into force yesterday ban landlords from renting out offices with an energy efficiency rating below E. The minimum E rating has left around 8pc of offices obsolete, according to BNP Paribas. That equates to 10,000 office spaces in London alone, the bank says.

Landlords are facing a choice between either doing expensive renovation work to bring buildings up to standard or cutting their losses and trying to sell up.

It has led to concerns that green targets could prompt a sharp downturn in the office market, mirroring the recent collapse in the rental market triggered by tougher Government rules and higher taxes.

“The real pain is yet to come,” says Antony Antoniou, managing director at property agency Robert Irving Burns. “Upgrading a property to an energy efficient rating of E is not the most difficult, but to get a B or an A is a different ball game. There is a concern that stock will become obsolete.”

The Government intends to ratchet up the new Minimum Energy Efficient Standards (MEES) for commercial properties over time as part of efforts to hit national net-zero targets.

It plans to introduce a minimum rating of C by 2027 and a B in 2030.

All buildings have an energy performance certificate (EPC) that gives owners and renters an idea of how much it will cost to heat and light a property, as well as its CO2 emissions. Properties are given a reading of A to G and must be rated every 10 years.

However, what was originally introduced as a measure to give buyers a better idea of running costs is now being used as a tool to force owners to upgrade their properties.

In London, only around 23pc of all offices are rated A+, A or B, meaning most landlords will have to spend money doing up their properties.

While EPC improvements typically lower the energy bills of buildings, they can involve large upfront costs.

Lifting a building from an EPC rating of C to A costs between £26 and £40 per square foot on average, according to Savills. For a 10,000sq ft office, which could hold around 100 people, that would mean costs of up to £400,000.

Citi, the Wall Street bank, announced last year it would spend £100m renovating its 42-storey Canary Wharf tower to make it a zero-carbon building. Features include recycling water from sinks and showers for flushing toilets.

Many building owners may struggle to find that kind of money.

Improvement works are also becoming more expensive by the day: building material costs rose by 10.4pc in February, following an 11.2pc increase in December, according to official figures.

Property agents say that some landlords have been rushing to sell ahead of the first MEES deadline.

Even if buildings are sold on, it will be at prices far below what they would have achieved this time last year. The combination of a drop in property values and an unviable building with an EPC rating of below E will lead to fire-sale prices.

In some cases, owners are giving up altogether and knocking blocks down. A former Home Office building by London Bridge is being replaced by a new development that claims to be London’s first purpose built net-zero office.

However, green new-builds are not as clear cut as they seem: demolition can contribute to emissions by releasing so-called “embodied carbon”. Environmental campaigners have opposed the new London Bridge development on these grounds.

In a row over plans to demolish Marks & Spencer’s Oxford Street store and rebuild it, campaigners say knocking it down will release 40,000 tons of carbon dioxide. The company maintains that any carbon footprint from demolition would eventually be offset by its new, more sustainable building.

According to office managers, small changes can boost a building to an E rating, such as motion-activated lights and better thermostat controls.

However, in order to get to an EPC rating of B or above, most buildings would need significant improvements. These include solar panels, replacing old heating systems with heat pumps, restructuring the facade of buildings to add more windows, improving ventilation and adding insulation.

Although a move to a minimum EPC rating of B is under consideration, there is no legislation in place to enforce this. However, industry observers believe an announcement is imminent.

“In our view, most owners of older properties in the City with low EPC ratings will want to prioritise energy efficiency upgrades, as otherwise buildings would become unattractive to occupiers and difficult to let,” says Shravan Joshi, chairman of the City of London planning committee.

The City of London Corporation has its own target to make the Square Mile net zero by 2040. Plans include turning off lights at its skyscrapers after 11pm.

Joshi adds: “Recent studies suggest those buildings in central London with better sustainability credentials are achieving markedly higher capital values and rents – above 20pc.”

Landlords who have not upgraded buildings in time for this weekend’s deadline could face hefty fines.

Fines for leasing out property below energy efficient standards can hit £150,000, according to Iain Hindhaugh, head of real estate at the law firm Addleshaw Goddard.

He notes: “Getting fined isn’t a landlord’s biggest concern, being seen as not meeting basic requirements by your investors or shareholders is.”

Costly green upgrades are just one headache commercial landlords face. A recession in the tech sector and the continued prevalence of working from home has prompted many big companies to cut back on office space.

Perhaps unsurprisingly, the value of commercial property is falling rapidly around the world, not helped by rising interest rates. Antoniou says: “This is not the best time for commercial property – with people re-evaluating how they use offices, coupled with 2030 energy targets, some landlords could find themselves in a heap of trouble.”

‘Getting fined isn’t a big concern. Being seen as not hitting basic requirements by your investors is’