The Financial Implications of Poor EPC Ratings on Rental Values of Non-Domestic Buildings in the UK

If you own a non-domestic building in the UK, having a poor Energy Performance Certificate (EPC) rating could hit you right where it hurts: your wallet. The UK is serious about cutting carbon emissions, and one way they're pushing this agenda is through stringent energy efficiency regulations. For building owners, this translates into real financial consequences, especially if your building doesn’t make the grade.

First, let's get the basics straight. An EPC rating measures a building's energy efficiency, ranging from A (most efficient) to G (least efficient). From April 2023, all rented commercial properties must have an EPC rating of E or above. But that's not the end of the story. The government has proposed that by 2030, non-domestic rented buildings should hit an EPC rating of B. This is a big leap, and failing to comply means your building could essentially be taken off the rental market.

So, what does this mean for rental values? Well, buildings with poor EPC ratings are at a significant disadvantage. Potential tenants are increasingly aware of their environmental impact and energy costs. They prefer buildings with better energy efficiency because it not only aligns with their corporate social responsibility goals but also lowers their operational expenses. Simply put, if your building is stuck with a poor EPC rating, you’ll find it harder to attract tenants, and when you do, they won’t be willing to pay premium rents.

Poor EPC ratings also affect your negotiation power. Tenants are likely to use the rating as leverage to demand lower rents, knowing they’ll have to fork out more for energy bills. This reduction in rental income directly impacts your return on investment, making your property less profitable. And let’s not forget about the potential costs involved if you decide to upgrade your building to meet the minimum standards – a necessary investment to avoid even greater losses in the long run.

Moreover, buildings with poor energy efficiency are likely to face higher vacancy rates. As more companies adopt stringent Environmental, Social, and Governance (ESG) criteria, they’ll bypass buildings that don’t meet their sustainability standards. Higher vacancy rates mean your building could sit empty for extended periods, generating no income at all while still incurring maintenance costs.

But the financial pain doesn’t stop there. Poor EPC ratings can lead to a phenomenon known as "brown discounting." This is where buildings that don’t meet energy efficiency standards see a drop in market value. Investors and buyers are increasingly wary of properties that may require substantial upgrades to comply with future regulations. Thus, your building’s resale value could plummet, turning what was once a lucrative asset into a liability.

In conclusion, the financial implications of having a non-domestic building with a poor EPC rating in the UK are stark. Reduced rental income, higher vacancy rates, and decreased property values are just the beginning. As the push for sustainability intensifies, the cost of inaction is simply too high. Upgrading your building’s energy efficiency isn’t just about staying compliant – it’s about protecting your investment and ensuring its profitability in a rapidly changing market.

The first stage in the process is to get your building accurately modelled, and check the rating in both the standard SBEM software and the more advanced DSM (Level 5) software. MEES Solutions’ highly trained assessors will ensure that all available information is used in the assessment to avoid the use of ‘default’ values where possible, which will generally give a better (and more accurate) rating.

Once the building is modelled, that 3d model is retained so improvement scenarios can be easily modelled as a desktop exercise at any point in the future.

Call us today to find out how we can help you achieve the best rental values possible.