As the scale of the UK government’s strategy to reach net zero emissions by 2050 sinks in, we need to consider how it will be funded. In the commercial real estate market there is already a strong and growing appetite for lending where energy efficient buildings are provided as security. But is the data readily available to understand not only the energy efficiency profile of that security but also the impact on value and liquidity available for buildings that do not fall within the proposed energy efficient standards?
This is not just a funder and borrower relationship – it involves tenants too – and as most commercial space is leased, any solution requires collaboration between all three parties. Lawyers can, of course, pore over facility agreements and leases to give an opinion on legal liability, but there is a wider commercial question around who is the right person to bear this cost.
With the ratchet on Energy Performance Certificates looking likely to be implemented from 2025 through to 2030 when the B rating requirements will apply to space to be let, funders need to be considering both an action plan now for existing portfolios but also how to address what is coming down the track for new funding. The risk of inaction now will increase the likelihood of unoccupied buildings and stranded assets in the future.
The extent and therefore the cost of works required to improve the energy efficiency of buildings will differ wildly. Knowledge is key, and a detailed understanding is needed of the current energy efficiency of buildings, costed options of works to improve that energy efficiency, and to also understand what is not possible. The inclusion of energy efficiency analysis will necessarily take standard building surveys to a completely different level, leading to a crucial question: does the surveying industry have the capacity to provide that level of support when it is confronted with a deluge of building owners and investors who want to understand how energy performance can be optimised.
Similarly, new capex lines are likely to be needed to undertake energy efficient improvement works, but this may not always be viable from an equity perspective and we may begin to see green capex lines being included in loans going forward, with a clear business plan as to what must be done and when. The competitive pressure to be seen to fund green will bring margins down for these green capex lines, but we are also likely to see a huge growth in funding defensive green capex to counter deterioration in values. Without a proper focus on energy efficiency, distressed assets are more likely which could lead to loan to value covenants being challenged and a rise in insolvency procedures. There will no-doubt be opportunities for opportunistic investors/developers with the expertise to take on inefficient buildings at a discount.
Collaboration is key, and the next few years will be critical for the real estate sector if we are to avoid seeing “stranded assets” which will simply not be capable of achieving an EPC rating of B by 2030.