New research by CBRE UK suggests demand for good quality, energy efficient offices is high, with tenants increasingly motivated to occupy energy efficient space due to corporate net zero targets. However, the UK has an ‘oversupply’ of outdated and energy-inefficient secondary stock, for which demand is low and capital expenditure costs are high.
Energy efficient office and retail stock resilient in economic downturn
These are just some of the key findings of real estate advisor’s newly launched Sustainability index. In the context of a challenging economic climate in the UK, and falling values during the 12 months to Q2 2023, the index shows that efficient properties in both the office and retail sectors experienced smaller declines in total returns than inefficient properties:
- Energy-efficient office assets recorded annual total investment returns of -1.4% compared to -4.6% for inefficient offices.
- Annual total returns for efficient retail assets from Q1 2021 to Q2 2023 were 2.6%, compared to -0.6% for inefficient assets.
Glut of energy inefficient office space to be released in London by 2027
The Sustainability Index also suggests that 11.9 million sq ft of office space, which is due to be released on to central London’s market by the end of 2027, either has an Energy Performance Certificate (EPC) lower than C or is categorised as energy inefficient.
CBRE estimates around 15.9 million sq ft of London office space will be released back into the market by the end of 2027 due to upcoming large lease expiry events. EPC data is available for around 80% of this stock or 12.6 million sq ft. Of this, only 6% is classified as energy efficient with an EPC of A or B, while 94% (11.9 million sq ft) has an EPC lower than C and is therefore categorised as energy inefficient based on Sustainable Finance Disclosure Regulation definitions.
Upgrading London office stock to energy efficient standards could cost £370m
Using proprietary retrofit data, CBRE predicts the cost of upgrading this stock to energy efficient standards could be up to £370 million. This sum does not include unrelated building improvements and equates to around 9% of this stock’s estimated capital value.
CBRE’s analysis indicates that if the 11.9m sq ft is not upgraded to higher energy efficiency standards it will experience a sharp fall in capital value. In contrast, upgraded stock is expected to have more resilient capital values. CBRE predicts the £370 million of capital expenditure for upgrading the stock could be offset by more resilient capital values within three years.
The Index concludes: “These trends arguably reflect the two-tier state of the UK Office market. There is an oversupply of outdated and energy-inefficient secondary stock, for which demand is low and CapEx costs are high. In contrast, the demand for good quality, energy efficient offices is high, with tenants increasingly motivated to occupy energy efficient space due to corporate net zero targets.”
About CBRE’s Sustainability Index
CBRE analysed over 1,000 regularly valued properties to create an index of investment performance based on their energy efficiency ratings. Using data from Q1 2021 to Q2 2023, it examined the investment returns for efficient and inefficient properties. EPCs are the basis for the energy efficiency ratings.
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