EDITOR’S COMMENT This 1 April will be no fool for the real estate sector. It is, perhaps, something more of a fright as from this Saturday it becomes unlawful to grant a lease on a building that has an EPC rating of less than E.
From this Saturday there will be more than 119m sq ft of commercial buildings across the UK that will become unlettable, according to EG data. From this Saturday some £2.5bn of rent is potentially at risk because landlords have not brought their buildings up to scratch.
This Saturday could be a very unfunny day for huge swathes of the sector.
£2.5bn is a big number. It is a huge amount of potential lost income, but the threat is actually much more than that. What is a building worth if it has no income and – unless capital is spent on it – no potential income? Zero pounds? Less than zero?
So, let’s use my very bad maths and see what 1 April and 119m sq ft of unlettable property really might mean for the UK commercial real estate sector.
That 119m sq ft is equivalent to around 199 Shards. Now, I’m no valuer but let’s say the Shard is valued at £1bn. 199 multiplied by £1bn is what? £199bn. An unfathomable amount of money.
Let’s be a little kinder to the industry. Much of that 119m sq ft of unlettable property probably isn’t to the standard of the Shard, so probably doesn’t have quite as high a capital value.
So, let’s take the UK average capital value of a commercial asset. That sits at about £250–£350 per sq ft. That takes the figure down to a slightly more palatable £29.7bn-£41.6bn. But I’m going to be even fairer and take the average of those two numbers. That’s £35.6bn. So, from this Saturday, not only could landlords lose £2.5bn of rent, but some £35.6bn may well be wiped off the value of UK commercial real estate stock.
Then, of course, there is the cost of bringing those assets back up to scratch, so they can hold some value and be rented again.
See also: EG INVESTIGATION: Landlords face £16bn EPC time bomb
Figures from Cushman & Wakefield reveal that just 24% of current building stock across Europe is fit for purpose and needs nothing doing to it. It reckons around 14% is probably beyond saving. But – guess what – you probably can’t pull it down and rebuild it. Think of the embodied carbon; think of Marks & Spencer. And then there is 62%, says Cushman, that needs repositioning. And who knows how much that might cost? Millions? Billions? Trillions?
The estimate for how much it will cost to decarbonise the real estate industry globally currently sits at $115tn (£93tn). That is more than five times the GDP of the US.
All of that hurts. Couple that with the anticipated rise in rates by £1.4bn from 1 April, the expected tightening in lending as banks get more than a little bit nervous about the circa $3tn of commercial loans on their balance sheets, and reasons to have a spring in your step in real estate feel a little sparse right now.
But, as you will have come to expect from me, there is always an upside. And this is not my optimism bias talking this time.
All of the big numbers I have mentioned above show how powerful, how important and how vital this sector is. They show the impact that real estate has. That our failure to meet what we all know are not the best environmental standards, has such big numbers attached to it.
Regardless of whether this chosen measure is the right one or not, the impetus is there, even for those who do not believe in climate change, to take action. And it is moments like this, when the cold hard cost of real estate’s failures is laid bare, that I feel hopeful. Because money does talk. And action will follow. Because real estate is no fool.
To send feedback, e-mail samantha.mcclary@eg.co.uk or tweet @samanthamcclary or @EGPropertyNews
