As we know, ESG remains a key priority for investors when buying office assets in central London and those that don’t meet the required standards, or have a clear route to improvement, are often overlooked.
Upgrading occupied commercial buildings, which make up the majority of existing stock, can seem too challenging an undertaking for many.
However, EPC ratings and energy consumption can be improved around tenants, and such measures could even encourage them to extend or renegotiate their lease terms.
At present, in London, the volume of offices rated an EPC C or below currently equates to around 9 million sq ft. This suggests that 46% of current supply is soon to fall foul of minimum energy efficiency requirements, which, in turn, will have a notable impact on their investment value.
What’s more, 39% of current supply in the capital has not been comprehensively refurbished within the last decade.
More often than not, the methodologies to improve the performance of these occupied buildings are not explored sufficiently or are not considered at all. This is because it often requires a difficult combination of engineering ingenuity and delivery-led solutions, along with commercial pragmatism to support collaboration and negotiation between landlords and tenants.
While it might take more than a simple EPC assessment, if you are willing to take a multi-disciplinary and multi-faceted approach to understand what works, is technically feasible and of course practical, then it can be commercially advantageous to all.
Commercial office assets are often large and complex, with huge volumes of heating and cooling systems which dictate the building performance and EPC rating. The easy solution is often to suggest a full replacement with an all-electric system which requires vacant possession or causes impractical disruption, as well as a loss of income. But, by focusing on the possibilities for the existing systems and how this can be delivered in practice, we are able to find a realistic pathway towards achieving net zero carbon (NZC) status.
This is why landlords should undertake delivery-led assessments rather than just an EPC certificate. For occupied, but lower performing and less sustainable buildings, understanding the art of the possible pre-transaction or lease can be hugely powerful. Delivery-driven strategies can demonstrate that not only do you enhance a buildings potential ESG credentials, but there’s also the chance to retain consistent income, or even increase it, by achieving lease renewals from in situ occupiers. Enhanced rental income, an improved service charge position and a better onward sale value could be secured as a result.
Using GreenFiT you are able to identify viable ESG improvement strategies for occupied buildings, by either working around, or in collaboration with occupiers as part of current or potential future lease terms. For example, de-gassing projects and ventilation upgrades are major works, but can be done while tenants remain in the building. Bespoke building upgrades such as this are often not captured by a simple EPC or engineering assessments, missing the opportunity to make notable improvements.
We have found that, in many cases, if an improvement strategy can be demonstrated as achievable then occupiers are open to negotiating new lease terms. Often, landlords have not been able to find a feasible way to deliver this, however, by unlocking a leasing strategy, particularly for key or anchor tenants, this can create significant investment value.
In short, by generating a delivery-focused action plan to upgrade a building alongside its current occupiers, improving lease terms and enabling the asset to remain income generating throughout can only be positive for both London landlords and tenants.
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