The equivalent of the combined annual income of the UK’s top 10 listed real estate companies by market cap could be wiped out by changes to EPC rules due to come into force next April.
According to exclusive research compiled by EG, almost £2.5bn of rental income is under threat if owners of commercial real estate that is not up to scratch fail to boost their EPC ratings above an E ahead of next year’s deadline.
The combined annual rental income of the top 10 listed real estate companies is around £2.6bn, according to their most recently filed accounts.
EG’s research uncovers the sheer volume of commercial buildings across England that have EPC ratings that will fail to meet 2023’s new E benchmark.
From 1 April 2023, buildings that do not have an EPC rating of E or above will not be able to be traded or leased under new government regulations. This rises to C in 2027 and B in 2030.
EG’s exclusive Radius data, coupled with EPC figures, shows that some 120m sq ft of commercial real estate – the equivalent to 199 Shards – across England will have failing EPCs in 2023.
Property owners that fail to have a valid EPC in place face fines of around 12.5% of a property’s rateable value. For the volume of assets that are due to fail, this would be a total penalty of just £45.8m.
The bigger cost to landlords, however, is the potential loss of income. Based on average five-year rental figures, this could be as much as £2.5bn.
London landlords face the biggest potential rental shortfall. Some 24.1m sq ft of EPCs are due to fail in the capital next year, which could see as much as £1.1bn of rent at risk.
Closest behind London is the South East, where landlords of the 15.2m sq ft of commercial space failing their EPCs in 2023 potentially risk losing £273.1m of rental income.
The North East has the smallest volume of commercial real estate on track to fail to reach an EPC of E next year – some 6m sq ft – which, with one of the lowest average rental values across the nine regions tracked by EG, means the smallest amount of rental income at risk. EG’s research shows landlords in the region could be in line to lose more than £75m of rental income next year if they do not upgrade their buildings’ EPC ratings.
Looking ahead to 2027 and 2030, the volume of space across England failing to meet EPC C and EPC B, respectively, grows dramatically – with the potential for rental loss following suit.
According to EG data, 257.2m sq ft of commercial real estate (427 Shards) will fall short of the EPC C target in 2027, putting some £5.3bn of rent at risk. Again, London landlords could be hardest hit, with 43.6% (£2.3bn) of that total potential rental loss being within the M25.
By 2030, if no remedial action is taken, the volume of space failing to meet the new EPC B standard rises by 50.2% to 413.2m sq ft (685 Shards), with the rent at risk growing by almost two-thirds to a whopping £8.5bn.
Without serious capital investment across England’s commercial assets over the next one to eight years, EG’s research reveals that more than £16bn of rental income could be at risk if landlords do not take action now to upgrade their properties.
To send feedback, e-mail samantha.mcclary@eg.co.uk or tweet @samanthamcclary or @EGPropertyNews
