DON’T WAIT FOR THE POLITICIANS – GRASP THE SUSTAINABILITY NETTLE NOW

The mixed messages coming from the COP28 conference in the United Arab Emirates, along with our own government’s application of the brakes in recent months on several sustainability measures, suggests that there is a lack of political consensus about whether and how the world should be tackling the issue of climate change.

As ever, though, the world’s populations are ahead of their politicians on this one, and there is now a growing and unstoppable realisation that doing nothing is not an option.  In every area of our lives, sustainability is increasingly important, and that includes the world of commercial property.

In September Rishi Sunak may have kicked the stricter EPC regulations for commercial buildings down the road, but investors shouldn’t believe that this decision will make the imperative to bring their buildings up to environmental scratch is any less urgent.

The market is changing quickly.  The soaring – and volatile – cost of energy, coupled with a drive on the part of businesses to be seen as more environmentally responsible (driven by both customers and employees), means that an increasing price differential has emerged in the commercial property market.

Transactional evidence suggests that sustainable prime assets with the necessary ESG certification are starting to command higher rents, and the capital value of their freeholds are starting to increase too.  Conversely, those buildings which do not meet high sustainability standards could become more difficult to let, return lower rental yields, and see their freehold values drop.

Occupiers are already selecting buildings on the basis of their sustainability, and are asking landlords for their upgrade plans for those which do not meet the standards they are demanding – and demanding to know who will pay for that improvement work.

There is a real danger of obsolescence in buildings which do not meet increasingly stringent standards.  For the owners of such assets, the choice will be between capital expenditure to bring them up to scratch, or else looking at alternative uses, repurposing the asset, or even demolishing it and starting again.

Irrespective of which party is in government, how committed or otherwise our politicians are to the sustainability agenda, or how much they tinker with deadlines for things like tightening up EPC regulations, the market, along with the rest of humanity, has decided that sustainability is a priority.

Commercial property investors ignore this at their peril.  It won’t be long before unsustainable commercial buildings will only be lettable at sub-prime rents, if at all.  The message is clear: don’t wait for the politicians, grasp the sustainability nettle now.