Commercial attractions of the most sustainable offices

The commercial imperative for driving up energy performance certificate ratings has been laid bare by new research based on figures from EG Radius, which reveal that office buildings are now more likely to sell, and command a much greater premium, if they are in the top EPC bands. The figures reveal a stark change in approach to the importance of EPCs over the past decade, driven by tighter government regulation as well as a stronger culture around ESG, within both occupiers themselves and the financial institutions that are lending money to potential purchasers. In 2015, sales of UK office buildings with EPC ratings of A-C accounted for just 34.6% of total transactions, and this dipped to below a third in the following year (see chart 1). However, this figure has crept up over time, with 2022 proving to be a massive tipping point in which sales of band A-C buildings accounted for a significant majority. Last year, almost two-thirds of sales were for band A-C buildings, and 2024 is in line to be around the same. EG Radius figures also reveal a sharp increase in sales of EPC band A offices in 2019. In the four years from the start of 2015 there were just two band A buildings sold (both in 2017), but this rose to six in 2019 and levels have remained between four and six ever since. Four have already transacted in 2024. At the opposite end of the spectrum, it took until 2018 for combined sales of band A and B offices to outnumber sales of band G. For the first time since EPCs were introduced, there have been no band G sales this year.   Price differential Alongside the deal volumes, the prices achieved for more energy-efficient buildings reveal a strong change in attitude from buyers as to how important the issue is. Back in 2015, average prices for UK properties in bands D-G were higher than for those in bands A-C, starkly illustrating how little attention was being paid to EPCs. This soon changed, however, as a considerable gap began to emerge between the A-C and D-G groupings (see chart 2). Last year, band A-C offices commanded prices of more than double their less energy-efficient counterparts, and so far in 2024 average prices for band D-G buildings stand at just 16% of those with A-C ratings. These changes have happened in line with a regulatory framework which is placing much stricter conditions on energy efficiency. With a few exceptions, all commercial buildings have required an EPC rating of at least E if they are to be let or sold since April 2023. This is due to increase to a minimum rating of C in 2028 and to B in 2030, prompting huge concern about commercial property obsolescence, particularly in secondary markets where rental values make it difficult to justify the levels of investment necessary to hit those grades. Moving the goalposts Changes were made in June 2022 to the way in which EPCs are calculated. It was decided that electricity should effectively be downgraded as a source of fossil fuel emissions owing to the increasing amount of renewable energy being fed into the national grid, meaning that buildings which are reliant on electricity for heating can expect to receive better EPC ratings despite no physical improvements being carried out. However, the reverse is true for those reliant on gas, and some buildings that were previously hitting band C may now find themselves a D. The changes have led to speculation that purchasers looking to buy buildings for their own occupation, and who therefore have no pressing need to meet EPC obligations for transactional purposes, may increasingly look to snap up bargains in the lower-performing grades. However, the data does not necessarily back this up (see chart 3). While bands A-C have generally accounted for a larger proportion of the investment market’s deals compared with occupational deals, that was turned on its head last year. Some 68% of all occupational deals were for grades A-C while in the investment market this figure was almost 10 percentage points lower. And while for occupiers the most popular EPC rating was C, for investors it was D, suggesting that the expectation is there that they will be able to add value to buildings by performing the necessary upgrades. Although there is still much work to be done, the data provides clear evidence that UK offices are making progress on the path towards decarbonisation and that energy efficiency is now positively linked to profitability. Photo © Steven Lelham/Unsplash