The Changing Landscape of EPC Ratings: What Commercial Building Operators Need to Know
As the UK pushes towards its Net Zero by 2050 target, significant regulatory changes are being introduced to improve energy efficiency in the commercial property sector. A key aspect of this shift is the tightening of Energy Performance Certificate (EPC) requirements. Building owners and operators need to be fully aware of these upcoming changes, as failure to comply could have adverse consequences for their buildings or wider portfolios.
Key EPC Changes for Commercial Buildings
Minimum EPC Rating: April 2023
Since April 2023, commercial properties must have a minimum EPC rating of E to be legally let. This means that buildings with an EPC rating of F or G are now considered ‘substandard’, and landlords cannot continue to lease them without making energy efficiency improvements or registering an exemption.
Future Tightening of EPC Standards
The government has announced ambitious future targets, with the EPC requirements set to become progressively stricter in the coming years:
• By 2027, commercial buildings will need a minimum EPC rating of C.
• By 2030, this is expected to rise further to a minimum of B.
For many building owners, this will require substantial upgrades to their properties to meet these new standards.
Exemptions and Penalties
While there are some exemptions available—such as cases where the cost of improvements would exceed the cap set by the government, or where upgrades are not feasible—landlords who fail to comply face hefty penalties. Fines for non-compliance can reach up to £150,000 for larger commercial properties, making it crucial to stay ahead of the regulations.
Potential Impact on Commercial Property Portfolios
The changes to EPC regulations will have far-reaching effects on building owners and operators, especially those with older or less energy-efficient properties. Below are some key areas to consider:
Portfolio Risk: Properties Becoming ‘Unlettable’
Properties that do not meet the minimum EPC standards will become legally ‘unlettable’. For buildings currently rated F or G, this is already the case as of 2023. However, with the future tightening to C by 2027 and B by 2030, even properties with a D or E rating may soon become non-compliant.
For owners with large commercial portfolios, this poses a significant risk. You may be forced to take properties off the market until upgrades are made, leading to potential void periods and loss of rental income.
Financial Impact: Upgrade Costs vs. Penalties
Bringing properties up to the required EPC standards can be costly, especially for older buildings that may need substantial energy efficiency improvements. These could include:
Insulation upgrades
Installing double or triple-glazing
Upgrading heating, ventilation, and air conditioning (HVAC) systems
Switching to renewable energy sources, such as solar panels
Investing in technology to monitor and optimise energy usage (see how Verv does this)
While these improvements may require significant upfront investment, the alternative—facing penalties and loss of rental income—could be even more financially damaging.
Valuation: Impact on Property Values
As the EPC requirements tighten, the marketability and value of properties with poor energy performance will likely decline. Investors and tenants are increasingly prioritising energy-efficient, sustainable buildings due to growing awareness of environmental impacts and rising energy costs.
Conversely, properties that meet or exceed the new standards are likely to see an increase in value, as they become more attractive to eco-conscious tenants and investors. As such, upgrading your properties to a higher EPC rating could improve both rental income and long-term asset value.
“There is growing sentiment that green buildings will attract higher rents and fewer void periods. A report by Savills suggests that tenants are increasingly looking for sustainable spaces, meaning that buildings with higher EPC ratings could command a “green premium”.”
Tenant Relationships: Impact on Leasing
Tenants are also becoming more concerned with energy efficiency, both for environmental reasons and due to the financial benefits of lower energy bills. By proactively upgrading your properties, you can appeal to high-quality tenants who prioritise sustainability, improving occupancy rates and lease renewals. Additionally, with government support increasingly focused on sustainability initiatives, properties with good EPC ratings may benefit from incentives and grants, further enhancing their appeal to potential tenants.
Next Steps: Future-Proofing Your Portfolio
To minimise the impact of these regulatory changes, building owners and operators should take a proactive approach to EPC compliance. Here’s what you can do:
1. Assess Your Current EPC Ratings: Conduct a comprehensive review of your portfolio to understand which properties may fall below the upcoming standards. Buildings with an EPC rating of D or lower should be prioritised for energy efficiency improvements.
2. Plan Upgrades Now: While the deadlines for achieving EPC ratings of C (2027) and B (2030) may seem distant, starting the upgrade process now will help spread the cost and avoid rushed, costly improvements later.
3. Consider Long-Term Sustainability: Rather than focusing solely on meeting the minimum EPC requirements, consider investing in renewable energy sources or sustainable building practices. This could future-proof your portfolio, ensuring long-term compliance with any future regulations.
4. Monitor Policy Changes: Keep an eye on further government announcements and sustainability initiatives that could affect your properties. Engaging with an energy consultant may also help you navigate complex regulations and identify the most cost-effective solutions.
What does the future hold?
The tightening of EPC regulations marks a significant shift for the commercial property sector. While the immediate changes in 2023 may already be affecting landlords, the forthcoming deadlines in 2027 and 2030 pose an even greater challenge. For building owners and operators, now is the time to take stock of your portfolio and plan for the future.
By taking proactive steps to improve energy efficiency, you can avoid costly penalties, future-proof your properties, and ensure your portfolio remains attractive to tenants and investors alike in the years to come.
