There has been a change of rules on the commercial property front over the weekend. New energy-efficiency standards regulations now make it unlawful for landlords in England and Wales to rent out commercial properties that don’t have an Energy Performance Certificate (EPC) of at least an E, as part of a UK Government plan to decarbonise the built environment sector. What is the impact of this new measure likely to be across the UK’s largest cities and towns?
One in eight commercial property units is affected by the new regulations in place, and most of these are in cities
The quality and energy-efficiency of the country’s commercial stock is quite poor, with a majority of units below EPC band C (Figure 1). Looking at properties directly affected by the new regulations shows that across England and Wales, a total of 130,452 commercial units are graded below EPC band E. That’s 12 per cent of the total number of commercial property stock (Figure 1). This means nearly 57 million square metres of commercial floorspace doesn’t meet the new requirements, or one and a half times the total commercial space in in Manchester.
Figure 1: In England, one in eight commercial units don’t match the new minimum standards
Source: Non-Domestic Energy Performance Certificate Register, 2023.
Nearly 55 per cent of units (and 63 per cent of floorspace) with an EPC grade F or G are in urban areas (Figure 2). City centres account for a disproportionately high share: they make up 15 per cent of all commercial space (in terms of surface), but more than 18 per cent of the stock that is below EPC grade E.
Figure 2: More than half of commercial units below EPC band E are in urban areas
Source: Non-Domestic Energy Performance Certificate Register, 2023.
While cities will be unevenly impacted, there isn’t a clear geographic trend
With one in seven commercial properties below the new minimum standards, Norwich, Northampton, and Leicester are likely to be the most affected by the new regulation. By contrast, cities including Portsmouth, Milton Keynes and Crawley, where only 7 per cent of the stock is below EPC E, are less exposed. And the share of that stock that’s located in city centres varies across places, too: in Exeter, Ipswich, Worthing and York, more than half of those units are in the city centre, while in Telford, Manchester and Portsmouth, nearly all of them are in suburban areas.
Figure 3: The share of commercial units below EPC band E varies between cities
Source: Non-Domestic Energy Performance Certificate Register, 2023.
While there is variation between places, there isn’t a particularly clear-cut geography to it. The places with the highest share of sub-standard properties include several cities in the North of England (like Huddersfield, Hull and Burnley), the Midlands (like Northampton and Leicester) and the East (like Ipswich and Norwich).
The variation we’re seeing between places is likely to be determined the age of the property stock. Many ‘new towns’ (like Milton Keynes and Telford) where the building stock is relatively recent have fewer buildings in dire need of retrofit. By contrast, the places with a higher share of commercial units below EPC E include older coastal cities (like Worthing and Brighton), places like Hull or Burnley that haven’t seen major improvements in their old property stock in recent decades, or indeed other ‘new towns’ that were built around a pre-existing core (Northampton and Peterborough are examples of this).
In cities, it’s mostly office and retail spaces that don’t comply with the new standards
In urban areas, most of the commercial stock that doesn’t meet the new requirements comprises either offices (particularly in city centres) or retail spaces. Combined, both sectors account for 70 per cent of the total stock that is graded below EPC band E in cities.
In some cities, quite a high share of the overall existing office stock is at risk of becoming unlettable. That’s the case in Northampton, Huddersfield, and Leicester, for example, where one in five office units is graded F or G (Figure 4). And zooming in on city centres shows the problem is even bigger in some places, like in central Middlesbrough where more than a third of all office units don’t meet the new energy-efficiency requirements.
The retail sector is less affected, relative to the overall size of its stock. But in cities like Cambridge, Exeter, and Blackpool, it’s still nearly 15 per cent of retail properties that are threatened by the new standards in place. Given that retail tends to take up around half of the overall commercial space in these centres, this poses a particular problem for them.
Figure 4 looks at the impact of the new minimum standards on office and retail across places. Those on the top right corner will see large shares of both their shops and offices affected. In Northampton, Worthing, Hull and Stoke more than 20 per cent of office space and just under 15 per cent of retail space are below the new standards. By contrast, cities on the bottom left (including Crawley, Milton Keynes, and Portsmouth) are relatively less exposed.
Figure 4: In Northampton, a high share of shops and offices are likely to be affected by the change
Source: Non-Domestic Energy Performance Certificate Register, 2023.
The policy change is likely to create a large number of ‘stranded assets’ in northern English towns and cities
The policy change is designed to spur investment to make commercial property more energy efficient. Whether the market does this or not though depends on how viable it is. Plotting the share of commercial properties affected against rents (proxied by rateable values per square metre), Figure 5 shows that this is much more likely to happen in some places than others. In cities in the top right quadrant, such as Exeter and Brighton, the cost of space means that investing in it is likely to be more viable than for those in the bottom right, which includes many towns and cities in the North and Midlands such as Hull, Stoke and Blackpool.
Figure 5: Retrofitting the commercial stock is likely to be financially more viable in Reading than in Hull
Source: Non-Domestic Energy Performance Certificate Register, 2023; VOA data 2023.
The risk for the latter is that a number of properties become ‘stranded assets’ – unable to be let out in their current condition and unable to secure a large enough rent to make investment worth it. Given that a number of these places are already likely to have a large share of properties that aren’t used (as a proxy, more than a quarter of high street units were vacant in the centres of Hull, Stoke and Bradford in 2021), this change is likely to compound an already large problem in these places.
What isn’t clear as yet though is how the exceptions to the policy will play out. There is a long list of exemptions, such as listed buildings (likely to apply to large shares of property in Oxford, Cambridge and York). One which is especially unclear is the seven-year payback test, which exempts property if the investment in energy efficiency can’t be recouped in seven years. This may well be the case in many towns and cities further north.
If this isn’t the case, then two things will need to happen if these properties aren’t to bring further urban blight to their areas. The first is that public investment will be needed to bring them up to standard (noting that minimum standards will tighten again in 2027). The second is that the stock will need to be demolished. Both will require significant funding. As yet, the Government has not made this funding available in line with the policy change.
A straightforward change could be to expand the Green Homes Grant Local Authority fund to cover commercial property, which may address part of the problem. But a separate slug of money will also be required for demolition and subsequent redevelopment (which may be the creation of green space rather than the construction of a new building).
The change in rules around commercial property have a noble goal to reduce carbon emissions from commercial buildings. But without policy support to help this happen, it could have unintended consequences for some of our weakest city economies.
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