Warehouses unlettable after April energy efficiency regulation changes

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Up to 24% of inner London commercial stock including warehouses could be made unlettable after energy efficiency regulation changes come into force this April.

This is the stark warning given by BNP Paribas Real Estate after analysing inner London data from the government’s non-domestic EPC register in the light of the looming Minimum Energy Efficiency Standards (MEES) energy efficiency regulation changes which will apply to all privately rented property, making it an offence to continue to let a commercial space with an EPC worse than an E, even in the middle of a lease term.

According to its review of the latest December 2022 figures, which is inclusive of buildings that are currently eligible for exemptions, it is estimated that up to 24% of inner London commercial stock could be unlawful for new lettings and unlawful to let from April 2023. In addition, up to 27% could, under proposed MEES regulation changes, be unlawful to let from April 2027. Just over 26% is rated C and could be unlawful to let from April 2030

Only 23% of inner London stock is rated A+, A, or B and is currently fully MEES-compliant according to current legislation.

Donna Rourke, Head of ESG and Sustainability at BNP Paribas Real Estate said: “Many landlords are still in the dark about MEES changes. For others, there is a trade-off taking place with their occupiers on where the lease obligations lie in undertaking works.”

The news comes as the Department for Business, Energy and Industrial Strategy’s latest report on construction materials costs revealed the price index for all construction work rose 11.2% year-on-year in December, with costs for non-domestic property construction rising by just under 15% in the same period. Moreover, the construction material seeing the largest price increase over 2022 was building insulation (+38.6%).

Stephen Wolfe, Head of Commercial at BNP Paribas Real Estate commented: “The inflationary effects of post pandemic shortages, the Ukraine war, and the cost-of-living crisis have driven up energy and material prices, leaving many landlords at a standstill with rating changes on the horizon. Across London, the market and competition for occupiers is hot, putting the value of assets at an even greater threat. This is no time for landlords to sit on their hands, even super prime asset values are coming down, but further discounts will be expected if your space isn’t up to scratch.”

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