Increases to minimum EPC ratings have already been legislated in England and Wales, with all commercial properties to have a minimum EPC rating of E from 1 April 2023. Whilst no changes have been announced in Scotland yet, the direction of travel is clear, especially with future Government plans aiming to raise the bar to an EPC B rating by 2030. However, 52% of landlords surveyed believe these targets are unattainable for most commercial property owners.

Moreover, only 40% of real estate businesses reported having written plans and strategies regarding environmental, social, and governance (ESG) commitments, while 44% did not have any ESG strategies. Landlords cited the greatest hurdles to decarbonising the real estate sector as the lack of willpower to invest in green solutions (33%), the energy crisis (32%), and the dearth of cost-effective tech solutions (30%).

Paul Smith

Paul Smith, RSM UK’s head of specialist capital allowances services in Scotland, stressed that the age of property stock is a significant obstacle to decarbonisation.

He said: “Aside from the cash outflows for these capital works improvements, there could be considerable business interruption for tenants leading to compensation or rent reductions, renegotiated leases and right of access issues. A collaborative approach between landlord and tenant is therefore a must.

Mr Smith continued: “In Scotland, different rules apply for EPC ratings, with ongoing consultation expected to outline revisions in line with updated Minimum Energy Efficiency Standard Regulations (MEES) legislation. Should Scottish landlords bite the bullet and immediately aim for a ‘B’ rating (based on anticipated MEES updates), the question remains if that would be cash prohibitive at this stage.

“Alternatively, would a ‘green premium’ be chargeable for rents in an upgraded EPC ‘B’ rated property – providing better future cash flows? There is clearly a considerable amount to weigh up and with ever-increasing ESG obligations to consider, this is a challenging issue for the real estate sector.”

He mentioned that capital allowances, such as the £1 million Annual Investment Allowance (AIA) and the 100% full expensing first year allowance, could help to manage costs and incentivise early investment in energy efficiency measures.

Claire Monaghan

Claire Monaghan, partner and head of real estate and construction at RSM UK in Scotland, said: “EPC ratings are going to be critical to the rental market going forward and without investment by landlords we will start to see a black hole in the market.

“At present we are not actively hearing of landlords taking immediate action to address this issue primarily due to continued uncertainty as to where this benchmark will land but also due to lack of financial incentive to undertake retrofitting work to improve ratings.

“Government support is needed to provide such incentives if EPC targets are to be met and should be through allowances rather than through complex grant schemes which again are prohibitive.

“This also applies to the private rental market which has already been hit by the Scottish government rent cap legislation, further legislative requirements without financial support are likely to see many private landlords exit the market where shortage of supply is already a significant issue.”