The ￡19 billion bill and circularity conundrum

London office stock and the ￡19 billion bill

Upgrading London's office stock to proposed minimum efficiency standards could cost up to ￡18.9 billion.

That’s the headline-grabbing number from our latest London Series paper, which addresses the implications for landlords if Minimum Energy Efficient Standards (MEES) for non-domestic buildings were to rise to EPC C by 2027 and EPC B by 2030, as proposed.

In total, nearly 100m sq ft, or 38% of London's office stock, could fail to meet these standards in four years, with another 70m sq ft at risk by 2030. The paper explores six scenarios with interventions to bring non-compliant stock up to EPC B, costing between ￡11.8bn and ￡18.9bn.

The broader retrofit theme aligns with the ￡13.5bn in value-add and development acquisitions which have occurred in London since 2020. The City of London Corporation approved a record 17 retrofitting applications last year and issued planning guidance requiring developers to conduct a detailed review of the carbon impact of their projects, considering refurbishing existing buildings rather than knocking them down and replacing them with brand new structures. Westminster City Council announced a similar intention in March this year, highlighting the importance of embodied carbon considerations in planning policy.

We are likely to see more reference to embodied carbon considerations and whole life-cycle analysis of development within planning policy. The UKGBC highlight this as one of their?policy asks for the next government.

Embodied and circularity

Beyond planning, we have previously spoken about the benefits of circularity within construction of buildings, yet how we measure embodied carbon and whether the upfront has the same weight as the operational over the lifetime is up to great debate.

Harriet Hix of Knight Frank’s ESG Consultancy team notes a growing client focus on minimising the carbon footprint associated with construction materials and processes during refurbishment or fit-out. This includes assessing the entire lifecycle of projects to optimise resource efficiency, and identifying opportunities for carbon reduction to ensuring compliance with evolving environmental regulations.

For commercial property owners, embodied carbon can indirectly affect value and liquidity. The EU Taxonomy compliance requires lifecycle Global Warming Potential (GWP) calculations and specified material reuse levels; whole life-cycle greenhouse gas emissions are noted within the updated European Performance of Buildings Directive, and materials used for construction or renovation are included within GRESB reporting and BREEAM assessments.

How do you value carbon saved today versus years to come??To assess whether to retrofit, repurpose or redevelop, developers are increasingly utilising an internal carbon price. In our ESG Property Investor Survey, just over a quarter said they had implemented such a measure although the cited levels were a wide range - from ￡25 to ￡150 per tonne. Last week, GPE announced a 60% increase in their carbon price, from ￡95 previously to ￡150 per tonne. This is to support an updated and more ambitious roadmap which covers 100% of their carbon footprint.

Alternative uses

The London Series paper ?also discusses alternatives to retrofitting, such as repurposing office spaces for residential use, hotels, or student accommodation. Residential conversions, especially under permitted development rights (PDR), have delivered nearly 23,000 homes in London since 2015, 7% of the total net dwellings built during the same period. Recent changes to PDR regulations have opened more opportunities for conversions.

The city’s vibrant cultural scene, historical landmarks, and business opportunities make it a prime location for hotels. Unlike office to residential conversion, planning consent is required but there have been a number of examples. An efficient redevelopment will typically be achieved with low to mid-range floor to ceiling heights; a strong locational driver; and flexible floor plates.

The idea of repurposing generally - and of retail specifically - was a topic of a panel I sat on at UKREiiF . Stephen Springham , head of retail & UK markets research at Knight Frank, wrote about this in his 2021 predictions highlighting how repurposing retail might seem a no brainer but the realities are very different. Three years on and the story stands.

In fact, eight years beyond the collapse of BHS and five years after Debenhams just 10% and 23% of stores have been repurposed, respectively, according to LDC. A further 7% and 37% remain vacant with no plans. As Stephen notes, not only is assessing the right level of supply for retail a challenge, but for those identified for repurposing, the piecemeal nature (fragmented ownership), planning, location and ultimately financial viability are big hurdles to overcome. The proposed changes to Permitted Development Rights may remove some barriers, yet many remain.

We will be exploring the wider theme of obsolescence and retrofitting of commercial property across the UK in coming months, make sure you watch this space for more.

What else I am reading

Knight Frank has secured approval for our emissions-reduction goals from the Science-Based Targets initiative (SBTi), the ambition being to achieve net zero across our operations and wider value chain by 2040.

National Grid to double investment in UK over next five years, US renewables expansion has bought $249 billion of climate and health benefits from 2019-2022, Governments and companies need?to spend an extra $34?trillion on the clean energy transition between now and 2050 to reach net-zero emissions, according to BloombergNEF - that's 19% more than what’s expected in its base case scenario. After?noting last month?that Switzerland has been ruled to be acting inadequately to address Climate Change, the?UK Government suffered a second High Court defeat?for not doing enough to meet its targets for cutting greenhouse gas emissions.