With buildings accounting for 40% of the UK carbon footprint, environmental issues are becoming a significant focus for the commercial property industry. Since 2007 almost all units marketed for sale or lease have required to exhibit an Energy Performance Certificate providing a rating of the energy efficiency of the unit from A (very efficient) to G (least efficient) as assessed by a specialist surveyor.
More recently there has been a marked divergence in approach between Scotland and England in terms of the effect of an EPC rating. In England, as from 2018, the lease of properties with an EPC band of F or G has been prohibited altogether.
In Scotland, no such prohibition subsists. However, (subject to a few exceptions – including buildings constructed in accordance with 2002 Building Regulations) the sale or lease of all units with a floor area of more than 1,000 sq m requires preparation of an Action Plan stipulating measures to be taken which will improve the performance of the property – and an undertaking thereafter either to implement those measures or to display an annual certificate recording the energy performance of the property.
But while the regulations governing energy performance north and south of the border are now well-established and understood, what is the actual effect of an EPC rating on valuation?
Estates Gazette published a detailed study earlier this year showing the impact of EPC ratings on rental yields within the London area. It's fair to say that the evidence was not unequivocal that a better rating automatically gives rise to a higher rent. Other factors obviously come in to play too - for example, how recently the building may have been refurbished. And indeed in certain submarkets within the city, the data revealed that buildings with lower ratings commanded a higher rent than those with a superior EPC rating.
But while it has to be acknowledged that EPC rating is perhaps something of a blunt instrument when it comes to valuation – and should be seen alongside other sustainability markers e.g. LEED and BREEAM certification - the general trend seems clear and Estates Gazette noted overall that the margins in rental yield between the different ratings were as high as 14.3% (8.1% when discounting the possibly disproportionate impact of premium "A" ratings).
Needless to say, a higher EPC rating also accords with the energy, sustainability and corporate governance policies of larger potential occupiers.
This market analysis broadly reflects the position in Scotland. Cameron Stott, Lead Director in JLL's Edinburgh office comments "We are already getting occupiers telling us that they must have sustainable buildings now. And although impact on valuation is a slowly evolving position, we expect that energy efficiency and sustainability performance will overall have a strong positive impact and the position will become clearer and clearer as we approach 2030."
The trend is perhaps most clearly seen on the ground, with HFD Property Group's flagship development at 177 Bothwell Street, Glasgow set to be fully electric with zero carbon emissions. The building, already subject to a pre-let to Virgin Money for its new headquarters, will be powered by 100% renewable energy and an EPC "A" rating is not expected to be in doubt. Indeed, the building is anticipated to be 50% more efficient than a standard "A" rated building - and to have the most efficient EPC score for a city centre office in Glasgow.
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