The Future

Source: Knight Frank Research

The future effects of certification are keenly anticipated by all within the property industry, not only in terms of their ability to reduce property’s share of carbon emissions but also their impact on market dynamics.

As certification increases so will its impact on commercial buildings. Within ten years from introduction, it is likely that all commercial buildings will be subject to EPCs or DECs, with a widespread awareness not only of energy efficiency but also of its potential value. As such, tenants may begin to bring the energy performance of a building into rental negotiations, although this will depend on the balance of demand and supply within the market at the time of negotiation. In a market with an excess supply of stock, a property with lower than average energy rating could not only take longer to let or command a lower rent, but suffer also from reduced capital value. In addition, the way the standard Full Repair and Insurance (FRI) lease is structured towards limiting landlord’s risk may result in occupiers becoming increasingly sensitive to the additional costs of refurbishment as landlords seek to make their buildings increasingly energy efficient.

Potential changes over time in energy certification and building regulations legislation.

Other than certification and the ongoing enhancement of building regulations, it is likely that financial incentives could be used to encourage tenants to occupy energy efficient buildings. One such possibility is that business rates might be revised to reflect the energy efficiency of the building, the higher the energy efficiency of a building the lower the business rate, potentially offsetting the higher rents that might come to be associated with green buildings in the short and medium term. Another prospect is the development of an index measuring the financial performance for sustainable buildings, with the possibility of the introduction of an IPD4GOOD index likely in the near-future. The arrival of such an index would enable investors to track the performance of green buildings and if it was shown than such buildings provided superior returns it would undoubtedly enhance investment demand.

In addition to the introduction of green business rates, it is thought that additional fiscal measures may be necessary to galvanize stakeholders into developing, occupying and investing in green buildings. Possible incentives include widening the scope of enhanced capital allowances on energy efficient plant, a lower rate of VAT on refurbishment and sustainable building materials as well as stamp duty land tax exemption for green buildings.

Potential short, medium and long term impacts of energy certification on key stakeholders