The Real Estate Race To Net Zero

The UK Government has committed to reaching net zero carbon by 2050. Towards the end of last year, in the run up to COP26, it published several documents including the Net Zero Strategy, the Energy White Paper and the Heat and Buildings Strategy. These contain details of the measures the government intends to introduce to help meet the net zero target. With buildings accounting for nearly a quarter of UK greenhouse gas emissions, it is not surprising that a major focus of the government’s strategy is on decarbonising the built environment.

Heat and Buildings Strategy

The Heat and Buildings Strategy recognises that virtually all heat in buildings (commercial and residential) will need to be decarbonised if the net zero goals are to be met. The strategy focuses on delivering a decarbonised power system by 2035. To achieve this, the strategy strongly favours the use of electric heat pumps. Gas boilers will be banned from new builds by 2025 and new gas boilers will no longer be available for sale by 2035. A decision on the use of hydrogen gas in heating systems has been delayed until 2026.

Under new regulations from June 2022, carbon emissions from new build homes must be approximately 30% lower than current standards and emissions from other new buildings, such as shops and offices, must be reduced by 27%. London based developers will already be aware that the London Plan holds them to an even higher standard. New developments must therefore include modern heating systems, smart meters and energy storage in order to help reach the government’s targets.

The challenge of retrofitting new heating systems into older buildings is a separate issue. Building improvements are labour-intensive and involve highly skilled jobs, so will be costly for investors and landlords. However, decarbonisation measures do result in lower operating costs, in particular where heating and cooling are concerned, so ultimately retrofitted buildings should be attractive to tenants and command higher rents.

Minimum Energy Efficiency Standard (MEES)

Building owners will be aware that since 2018 (subject to certain exemptions) a landlord must not grant a new lease (or renewal lease) of a commercial building without a valid EPC rating of ‘E’ or above. Failure to comply risks a fine of up to £150,000 for the landlord. From 1 April 2023, this requirement will extend, so that (again, subject to exemptions) a landlord cannot continue to let a commercial building under an existing lease unless the building has an EPC rating of ‘E’ or above (for domestic properties this rule has applied since April 2020).

The government’s ultimate intention is to raise the minimum EPC rating for domestic properties to a ‘C’ rating by 2028 and for commercial properties to a ‘B’ rating by 2030. However, some commentators believe that the proposed changes will still not deliver the results that the government hopes for and so additional regulation or removal of exemptions could be required, posing further challenges in future.

Electric Vehicle Charging

The Net Zero Strategy includes a £1.5bn commitment to fund the installation of electric vehicle (EV) charge points on streets, motorways and at workplaces and homes. Given the government’s plan to end the sale of new petrol and diesel cars in the UK by 2030 and the relatively slow installation of EV charge points compared to the increasing demand for electric cars, this new investment is essential.

New regulations in force from June 2022 require new homes with on-site parking to have an EV charge point; and new non-residential buildings with over ten on-site parking spaces to have at least one charge point and cable routes for one in five spaces. Also, there are requirements for residential and non-residential buildings undergoing major renovation with on-site parking to have a certain number of EV charge points and cable routes. These regulations will make considering the installation of EV charge points unavoidable for many landowners and developers, as is already the case for many developers in the capital who are subject to the London Plan.

The Race

The government’s net zero target and the policies that the government intends to implement to achieve this target mean that changes will be forced on developers, landlords, lenders and occupiers. In the past, the real estate sector has been slow to adapt to the demands of the environmental agenda, but like many other industries the sector has no option, but to get up to speed now.