Originally published in Property Week 31 August 2022.
Experts say industry will need to think more creatively about ways of reducing energy usage within buildings.
On the up: energy cost inflation is a crisis for businesses as well as individuals
Understandably, much of the discussion about rising energy costs in recent weeks and months has focused on households. After all, the numbers involved are eye-watering, not to say terrifying.
Late last month, energy regulator Ofgem announced a new price cap, which will see annual bills rise to an average of £3,549 from October.
Energy cost inflation is a crisis for businesses as well – something that has received far less attention. So, how are occupiers likely to respond as their energy bills go through the roof? And what role do landlords have to play as the situation unfolds?
Certainly, businesses are worried. A survey conducted by the Confederation of British Industry (CBI) published last month, for instance, reveals that more than two thirds of companies expect their energy costs to rise in the last quarter of 2022, with a third stating higher bills would stifle investment.
Further energy price increases – all but baked in considering that businesses do not even enjoy the limited protection offered by the Ofgem cap – will push many otherwise viable businesses to the brink of insolvency, according to the CBI. And that, of course, would have knock-on effects on households: increasing unemployment helps precisely nobody.
“The impact of soaring energy prices on households is going to have serious consequences, not just for individuals but for the wider economy,” said Matthew Fell, CBI chief policy director, in a statement at the time.
“While helping struggling consumers remains the number-one priority, we can’t afford to lose sight of the fact that many viable businesses are under pressure and could easily tip into distress without action. The guiding principles for any intervention must be to act at speed, and to target help at those households and firms that need it most.”
Of course, it is not yet known what additional support will be forthcoming from the new prime minister. Both the remaining candidates in the Tory leadership campaign, Liz Truss and Rishi Sunak, have said that they will act, at least on behalf of households, but no detail has emerged and is unlikely to do so until the new PM is revealed on Monday.
Whatever happens, it seems likely that landlords will come under pressure to improve the energy efficiency of their buildings – something that Chris Brigstocke, a real estate partner at law firm Winckworth Sherwood, who co-authored a paper with the Investment Property Forum last year on achieving net zero in commercial leases, believes could provide the silver lining to the current crisis.
Positive side effect
“It’s a positive coming out of a negative because one of the things that’s not been a strong driver of [environmental improvements] has been the cost of energy,” he says. “It’s been relatively low and it’s not been a big overhead for occupiers. So, I suspect rising costs will increase the pressure on tenants to find energy-efficient buildings.”
The speed with which landlords respond, however, is a different matter. Brigstocke points to several household names, including the likes of Landsec and British Land, that had already prioritised energy efficiency well before the onset of the energy crisis and “are setting a good example”.
However, Brigstocke says that the majority of landlords have not been so responsive, largely due to the fact that energy costs are seen as a problem for occupiers. In the short term, he doesn’t see that changing, although he notes that all landlords may have to start prioritising energy efficiency in the face of any upcoming lease events.
Going green: some experts believe the energy crisis could move the dial when it comes to energy efficiency
“Effectively, energy costs are a problem for the tenant, not the landlord,” he says. “But they will be a problem for the landlord when it comes to re-letting their premises. I can’t predict exactly how the market is going to react, but to some extent it will increase the pressure on landlords to comply with existing obligations but also potentially to make improvements that go beyond pure compliance with the regulations.”
Others are more hopeful the current situation could move the dial when it comes to energy efficiency. John Macdonald-Brown, chief executive at Syzygy Consulting, draws a distinction between the industrial and logistics and office markets. With the former, occupiers are used to dealing with energy themselves.
“With offices, it’s very different,” he says. “Landlords generally buy the power, so suddenly they’ve got a big responsibility to procure cleverly. I think there’s a big argument to say that landlords historically have not really procured power very well. Maybe that’s being a little bit simplistic, but I think that’s really changed. Some have got teams of people who are working really hard to try and manage [the situation].”
Tactical approach
Richard Tice, chief executive of real estate investor Quidnet Capital Partners, says many landlords face the prospect of tenants going bust and “thus no rent and empty rates”. He says Quidnet is spending around £2m on solar panels for its industrial units and then offering tenants power at discounted rates.
It is also offering to fix the price of electricity at lower than market rates at its only office development. “I think proactive landlords will attract and retain occupiers with such tactics versus those who adopt an old-school approach,” says Tice.
Mark Bruno, partner at consultancy Ampersand Partners, agrees that surging energy costs will prompt action. He is currently acting as chief ambassador for CUBE, a 12-month-long competition that pits landlords and occupiers against each other in terms of improving buildings’ performance.
CUBE launched in France around six years ago but was only introduced to the UK in March.
At that time, Bruno says the motivations for companies that wanted to be involved were largely around their own net zero ambitions and a desire for greater collaboration between landlords and occupiers. In retrospect, however, he believes that the UK launch was “perfectly timed” and expects participants in next year’s competition to be motivated by the energy crisis.
After all, the efficiency savings that have already been demonstrated are substantial.
“Last year’s cohort in France saved 15% and some of the top performers were saving upwards of 40% or 50%,” says Bruno. “And these are not crappy old buildings. It’s just that they weren’t being used in the way that they were intended to be used. It’s as simple as that. After six months in the UK, we’re seeing similar sorts of figures there. We’re on track for about 15% average savings.”
So, nobody is doubting that the energy cost crisis is anything other than alarming, for households and businesses alike. And yet, it seems likely that it will also prompt a strong response among both landlords and occupiers – something that will reap rewards for both businesses and the planet.
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