When announcements were made that the prime minister was to speak on the government’s net-zero goals, the real estate industry waited with bated breath for the clarity it had been calling for around EPCs. As far back as March/April, there was uncertainty as to whether the 2025 deadline for UK properties to meet the EPC “C” would be pushed back to 2028, with the British Property Federation recently asking the government on behalf of landlords for more guidance around target dates. As Sunak’s speech turned to property, residential landlords no doubt breathed a sigh of relief as the prime minister announced plans to relax/scrap its deadlines in relation to heat pump implementation and the meeting of EPC targets. However, there was a curious absence from this part of the discussion – the commercial real estate sector. Given that the prime minister’s allusion to EPCs was entirely confined to the residential market, there is doubt as to whether this relaxation of deadlines will apply to offices as well.
What makes this position all the more ambiguous is the way that EPC regulation has been enacted previously. Both domestic and non-domestic properties have been dealt with under the banner of the Minimum Energy Efficiency Standard (MEES) which came into force in 2018. As such, any change to MEES could affect both residential and commercial EPC enforcement. That being said, domestic and non-domestic properties had also been given slightly different EPC deadlines under this legislation. Although domestic properties were only given until 2020 to achieve an EPC “C”, non-domestic properties were given an extended deadline of April 2023, indicating that these property categories are treated somewhat distinctly under current legislation. Therefore, it is difficult to say with certainty that any changes to residential EPC legislation will automatically apply to commercial real estate.
If we are in fact looking at an imminent relaxation in EPC deadlines for offices, this will have a considerable impact on the commercial real estate market. Recent research from Savills has suggested that 87% of the current office stock in the UK is below a “C” rating. As such if EPC deadlines for offices were to be paused, then this stock is safe from being declared unlettable in 2030. This would take the pressure off landlords to carry out costly retrofits, with the same going for tenants that are sub-letting their spaces. However, for many this will have come too late. Already those offices that did not meet the EPC “F” deadline of April 2023 have become unlettable, which a report by Carter Jonas suggests equated to 17.2% of the total UK office stock. Whilst this will take some pressure off availability, the scrapping of EPC deadlines would be unlikely to affect the wider push on the part of occupiers towards taking sustainable and efficient spaces. Given that the government is maintaining its net-zero target of 2050, occupiers will continue to opt for best-in-class spaces so as to future-proof their office footprint against any further changes in legislation as well as to meet ESG goals. As such, the so-called “green premium” that sustainable office spaces now command will ensure that prime Grade A rental growth marches onwards.
While it is unclear what the prime minister’s announcement means for commercial property at this time, it is clear that the general direction of travel for government regulation of the property market is towards a relaxation of deadlines around decarbonisation requirements. For more well-established firms such a move is less consequential, as they continue their push towards achieving individual ESG goals which in many cases are already over and above government requirements. However, for those more nascent firms assessing their office footprint, especially those in secondhand spaces, such a relaxation in EPC deadlines would serve to assuage their uncertainty. On this basis, what the industry truly needs now more than anything is some real clarity.