The cost of improving the UK’s industrial, manufacturing, logistics and warehousing stock – even just in terms of MEES – is gargantuan. While each building is different, we have undertaken analyses of the current built environment and costed implementing the minimum recommendations required. The estimated total cost for achieving the 2030 MEES requirement for industrial stock comes to £30.5 billion, at an average cost of £334,000 per building.
Changes in Building Regulations, or MEES rising to an EPC grade A let alone actually net zero industrial real estate would add significant extra cost. Improvements to meet higher sustainability requirements typically require more invasive and expensive structural improvements, as well as high-tech additions such as on-site renewable energy generation facilities.
Source: Avison Young, DLUHC
BUILDING PROOFS
Each building will have its own challenge. In order to highlight the necessary investment needed, we have modelled three hypothetical buildings with characteristics typical of their particular strata of the industrial real estate landscape. Through conducting detailed EPC modelling with Arbnco, we are able to provide case study examples of what’s required to improve the industrial stock.
All three buildings used the same building archetype as their base: a typical single-storey storage warehouse with a 50,000 sq ft footprint including usual office and WC provisions and a repeating pitched roof. The three models were then assigned certain roofing, cladding mechanical and electric characteristics specific to buildings of their built year periods – 1960s, 1980s and 2000s.
Arbnco’s modelling program is able to provide retrofit outcomes for buildings, including the potential impact on the EPC grade, the cost of the upgrade and the time taken to recoup the initial investment through cost savings (the payback period).
For the purposes of our analysis, we have included those measures which would be exempt due to the seven-year payback rule. The exemption is expected to be amended in the future as it means a considerable proportion of the built environment will not get up to the level required to achieve the UK’s 2050 net zero carbon target. Including these measures therefore helps to understand what it will take to get the industrial built stock to meet net zero requirements, beyond achieving current MEES regulations.
With all properties achieving a grade B or above, these maximised measures provide some reassurance that the industrial sector could bring its properties in line with the UK’s net zero target, albeit requiring significant investment.
UNDERSTANDING THE SCALE
The outcome of the modelling confirms that there is a considerable price tag associated with improving the industrial built environment to comply with the 2030 MEES requirements. Firstly, none of the case study models met the MEES without additional works.
The 2000s building had the highest EPC rating at the start and required between £8,000 and £10,500 worth of retrofitting work to meet the grade B level. The 1980s and 1960s properties, which started from worse EPC ratings, required between £98,000 to £127,000 and £332,000 and £611,000 in efficiency improvements respectively. Although neither of these buildings would achieve an EPC grade B through these improvements, further changes such as improving the window glazing, replacing the fluorescent lighting with LEDs, adding wall insulation and installing solar panelling would exceed the seven-year payback period and hence would currently be exempt.
These figures not only highlight the cost of complying with the approaching MEES, but also the fact that the current legislation will not be sufficient to transition the built environment to a net zero compatible standard. The 1980s and 1960s buildings, under the current legislation, would only achieve an EPC grade C – short of the grade B.
We have also modelled the maximum EPC rating that could be achieved by each property, and the costs that this would entail. The 2000s building achieved the highest rating of a grade A for a cost of £459,000 to £468,000. The maximum energy efficiency level that the 1980s and 1960s buildings could achieve is grade B. In order to improve the 1980s building to grade B would cost between £657,000, and £732,000, but this increases significantly, to between £1.1 million and £1.7 million, for the 1960s building.
With all properties achieving a grade B or above, these maximised measures provide some reassurance that the industrial sector could bring its properties in line with the UK’s net zero target, albeit requiring significant investment. Achieving this mass-retrofitting of the stock would likely need considerable financial support from the government, as well as legislative requirements to do so.
This is particularly apparent given the regional variations in property value. Even in the 2000s model, which required the least amount of retrofitting work, achieving its maximum energy efficiency would require a greater investment per sq ft than prime industrial properties achieve in annual rents across the majority of the market, with London and the South East being the exception. The same is true for the 1980s model. However, the cost for retrofitting the 1960s building to maximum energy efficiency (which was only an EPC grade B) was greater than the annual prime rents across all regions.
Source: Avison Young, DLUHC
Although the cost and scale of the change required to improve the UK’s industrial stock is significant, there is a huge opportunity to inject value into the built environment.
With yields in the sector having seen significant downwards pressure, the ability to establish a further green premium will be welcomed by the UK’s leading industrial landlords. However, for the majority of stakeholders, the need to asset manage at such a scale provides significant risk.
Additionally, although the need for retrofitting works will immediately benefit the construction sector, there will also likely be growth in the supply chain and construction-adjacent industries. This includes the more localised production of sustainable building materials and modular construction facilities, helping to deliver further sustained demand within the UK’s industrial sector.