Are The Zombies Already Here...?

In the world of commercial property, April 1st 2023 is no longer April Fool’s Day. For this year only, it is Zombie Day.

In 2021 we wrote an article about the green timebomb and the introduction of Minimum Energy Efficiency Standards, or MEES. 

In April 2018, the government introduced regulations which stated that from April 1st 2023, landlords could not grant a lease to new or existing leaseholders if their commercial property had an EPC rating of F or G.

Greg Porter, co-founder of BDG Sparkes Porter takes up the story.

Do You Comply?

With Energy Performance Certification (EPCs) for office buildings moving to a minimum ‘E’ grade by 1st April 2023, many existing office buildings will no longer comply in terms of new lettings and lease renewals. 

Just so you are aware, in 2027 the MEES rises to C in 2027 and to B in 2030.

Considerable capital expenditure may be required by landlords to conform to the new regulations in order to legally let their properties, some of which are now stranded assets being dubbed ‘zombie’ buildings. This is a term that originally came from the US and it referred to small residential homes whose owners couldn’t keep up their mortgage payments and simply deserted the homes after being served foreclosure notices.

Today in the world of commercial property, property journalist and author Peter Bill writes that it means ‘half-empty, financially dead blocks, unviable to upgrade. There are thousands of zombie blocks with no obvious future. Obsolete space that will likely act as a drag anchor on Grade-A space for years to come.’

This coincides with occupier demand not only realigning to a preference for best in class office space. In addition, ESG - Environmental, Social and Governance - is becoming increasingly important to tenants and can no longer be ignored.

A Serious Problem for Landlords

This poses a problem for landlords who have owned properties for a considerable time and have not upgraded the building’s Minimum Energy Efficiency Standards. 

This may further impact landlords that have a large portfolio but lack the required liquidity to refurbish in order to comply with the new standards. There are a number of plausible solutions to this dilemma including debt, potential change of use or a sale, the latter having the age-old problem of Capital Gains Tax, particularly where the asset has been held for years.

What Can You Do?

In order for landlords to retain an asset in such circumstances, we can work with our developer partners to undertake a comprehensive, MEES-compliant refurbishment of your property if it’s vacant or when a tenancy expires. 

We can make a full financial appraisal of any office buildings your clients hold to firstly identify a solution to the EPC issues in terms of letting the premises, and secondly to illustrate how this could enhance rental performance and increase the property’s capital value. 

Investors and tenants are increasingly prioritising buildings with strong ESG credentials and are prepared to pay more for buildings that deliver the sustainability and green credentials that align with their own businesses. 

Partnerships of this nature keep your clients in control so they can retain the asset, either in a variable equity joint venture or a profit share for the developer based on a formal independent third party RICS ‘Red Book’ valuation on completion. 

Many of our partners are prepared to provide equity and share the risk on opportunities of this nature.

 If you have any clients with assets that may not comply with the incoming MEES regulations and are concerned they may have an unlettable zombie property that could sit empty for years, please get in touch with Greg Porter by email or call 020 7629 1088.

Time is quickly running out. It could be the most important call you make this year.