And just like that 2022 comes to an end. Another roller coaster of a year but we go again in 2023. Thank you to everyone who has subscribed and engaged with the newsletter. It’s what keeps me going! Would love to hear your thoughts on ideas for 2023.
Countdown to April 2023
April 2023 and all commercial buildings with EPCs of F or G will be illegal. Savills estimate that as much as 185,000,000 square feet (185 million!) of retail property in the UK will be illegal, whilst Colliers estimate 10% of all London offices will be illegal.
EPCs of F and G have been illegal for new lettings since 2018, but come 2023 this will be the case for new as well as existing lettings. So what next? Will these spaces become illegal overnight? A few thoughts on what is most likely to happen:
The most likely scenario is for the legislation to be phased, deferred or amended. Legislation for new lettings is kept in place whilst existing leases are left to expiry. In other words, existing leases are allowed to run their course (with EPCs of F or G), but new lettings must have a minimum EPC level. In what are already challenging times, this is the most sensible approach.
The legislation goes ahead as planned and chaos ensues. Thousands of buildings and millions of square feet became illegal overnight. The industry is in disorder with vacancies and values all over the place. I cannot envisage this scenario, but you never know.
The legislation is completely scrapped. This is the least likely scenario.
Ultimately, time will tell, but I suspect some sort of deferral will be put in place. Come 2027, the minimum standard is set to rise to EPC C, and B in 2030. For now, let’s focus on getting through April 2023.
The big winners are the EPC assessors. They will be in high demand with thousands of EPCs needing reassessment over the coming years.
Beyond April 2023
Much media attention is focused on the larger corporate buildings. An under-researched area is smaller properties where landlords and occupiers focus on occupancy and energy costs rather than sustainability targets. With these smaller buildings, the value lies in reducing costs and simultaneously increasing sustainability credentials. Some key points to consider:
Which properties have EPCs of F and G. When are their leases coming to an end or how long have they been vacant for.
What are the costs of sustainability improvements versus the energy savings and rental premiums.
What improvements are needed. Examples include replacing gas boilers with electric heat pumps and installing double glazing & wall insulation. Also looking into proptech solutions such as automating lighting, air-conditioning and heating.
Who is the current landlord and do they have enough capital and appetite to conduct the works. Undoubtedly, many will not, leaving them with little choice. Upgrade, keep it vacant, or sell.
Research by BGE shows that theatres, music halls and cinemas are most likely to have EPC’s of F or G. It might make sense to target these properties.
A Case for Investors
There are risks involved and investors must be savvy. They must be educated on the market and the financials must stack up. The opportunities are there for those willing to take on the risk. The buildings need to have low EPC credentials and high energy costs. The space needs to have a lease expiry coming up or be vacant. Then, focusing on reducing energy costs and increasing the EPC credentials. Ultimately, finding a tenant and selling the asset at a premium price. For this to work, there needs to be a willing vendor.
On to the fun stuff:
A fantastic video on why we need to give our streets back to the people.
A useful list of things to buy. Sam is a great economist and for some reason decides to share his buying guide for 2023.
I finally understand what it means when people say timing is everything. The graph below shows your return If someone entered the stock market (Nasdaq) for the first time this time last year. It is not enough to be smart, you need luck.