10% of London offices that may be out of date due to the new energy regulations

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A view of the City of London on a clear day.

Vuk Valcic | SOPA pictures | LightRocket via Getty Images

LONDON – According to an analysis by a leading real estate company, around 10% of London offices could soon become unusable if new energy efficiency rules are introduced.

Under the new standards, due to be introduced in 2023, buildings in England and Wales with an energy class lower than “E” cannot conclude new leases. The upcoming measures are part of a broader government effort to be carbon neutral. The lowest energy efficiency class is set from ‘G’, the least efficient, to ‘A’, the most efficient.

In that regard, an analysis published by Colliers last week showed that around 20 million square feet of London workspace, which is nearly 10% of the total stock, does not meet these rules.

This raises questions about the future of these office buildings, especially at a time when many workers are pushing to partially work from home amid the ongoing coronavirus pandemic.

“It’s like a double blow for these buildings,” Andrew Burrell, senior real estate economist at Capital Economics, told CNBC, referring to the upcoming environmental regulations and the impact of the Covid-19 crisis.

Offices that fail to comply with energy efficiency regulations are at risk of becoming “obsolete,” he added.

That comes faster than [landlords] expected.

Tom Wildash

Co-Head of West End Leasing at Colliers

In addition, the same study found that currently only about 20% of offices in central London have an energy rating of “A” and “B”, with about 57% of jobs in the UK capital falling into “D” and “G” categories ‘Categories.

Tom Wildash, co-head of West End Leasing at Colliers, told CNBC that landlords must decide whether to upgrade their buildings to an energy rating of “E” to meet the 2023 rules, or upgrade their energy rating directly to “B” renew. Meet laws by 2030. The UK government has reportedly been deliberating on legislation that could mean that only ‘A’ or ‘B’ ratings for non-residential buildings can be rented by 2030.

“That comes faster than [landlords] expected, “said Wildash, adding,” behind the scenes they will likely tell you it’s under control. “

Landsec and British Land, two leading office developers in London, have unveiled their own plans to become carbon neutral in the coming years. However, the new energy regulations will require renovations and thus additional costs in part of the existing building.

“Refurbishment is an important tool in the race for net zero real estate. With the preservation of structures, careful selection of new materials and modern construction techniques, the embodied carbon of a refurbishment project could mean a 50% saving compared to building a new one, “said James Pay, director of sustainability at Colliers, said in a statement.

Speaking to CNBC, Pay said residents are open to renovation options rather than high quality new build.

Sales areas

“Retail space faces similar problems,” said Nicholas Hyett, senior equity analyst at Hargreaves Lansdown, a private investment platform.

Retail is also going through massive changes, compounded by the coronavirus pandemic, as more and more people buy online.

Data released by the UK’s Office for National Statistics shows that while the share of online retail spending fell in June, it is still higher than pre-pandemic levels.

Colliers’ Wildash told CNBC that around 10% of London’s retail space can be expected to need updating too to become more energy efficient.