One of the City’s best-known real estate equity analysts has singled out Derwent London and Great Portland Estates as the kind of office ‘upcyclers’ best-placed to turn around the fortunes of buildings with less-than-impressive environmental credentials.
In a note this week, Jefferies’ Mike Prew said the investment bank will start incorporating property portfolio EPC data into its research reports on REITs. By 2030 rented commercial property must have a rating of A or B, while for residential property the required band will be A, B or C from 2025 for new leases and 2028 for existing ones.
With the electricity grid being cleaned up, some ratings may be due a lift naturally, Prew predicted. “With decreasing carbon emissions from UK grid electricity, building EPC ratings should improve at no cost to the landlord, with the lowest F-G bands benefiting most,” he wrote.
He added: “In the hands of expert building ‘upcyclers’ such as Derwent London or Great Portland Estates, the £60 per sq ft at 4% ‘pig’s ear’ office might be upgraded to a £75 per sq ft at 3.75% ‘silk purse’ and revalued from £1,500 per sq ft to £2,000 per sq ft, which is a tidy gross profit.”
Prew wrote: “‘E’ isn’t just a landlord issue. Standard shops are fitted out by retailers over which the landlord has limited control unless specified in the lease. Offices and logistics are more ‘plug and play’ assets into the electricity grid, but gas can be more heavily consumed.
“Tenants and lenders have their own green targets and brown buildings could see rents underperform and be less leverageable, impairing liquidity and value. It’s a toxic mix of a lower numerator – rent – higher denominator – cap rate – and lower capital value.”
Prew also highlighted ongoing concerns over companies misleading other parties about the degree to which they were prioritising environmental factors.
“ESG is well-meaning but ‘E’ gets mixed up with a plethora of social and governance targets with issues of greenwashing to game the EPC metric, or selling brown assets to owners who run them as before.”
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