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Why net-zero ‘green red tape’ means the office downturn is just beginning

In April, The Telegraph reported that John Lewis planned to more than halve the size of its central London headquarters, after staff left their offices to work from home.

Canary Wharf residents such as Clifford Chance and HSBC have announced plans to leave the area as part of a downsizing, with the office vacancy rate in the docks now at 16%, the highest highest level in years.

The decline in office values ​​may seem abstract, but it has broad implications. Pension funds entrust their cash to fund managers who invest in property, meaning a fall in values ​​can lead to lower returns on your retirement cash.

You might think 2024 will bring some relief. Interest rates in Britain are expected to fall to 4% by the end of the year, easing downward pressure on prices.

But experts say new net zero emissions rules intended to boost eco-certifications for office buildings and the continued trend of working from home mean the outlook is bleak.

“Valuations have been extremely affected by uncertainty over future office demand and ESG considerations,” says Greenshields.

New rules came into force in April requiring all office buildings to have an energy efficiency class of at least E to be able to be rented. The minimum threshold will increase quickly over time, forcing many homeowners to invest more money in improvements.

A minimum rating requirement of C will come into force by 2027 under the new “green” rules, before increasing to B in 2030.

In London, only around 23% of all offices are rated A+, A or B. When the minimum E rating came into force, the letting of around 8% of all commercial stock was effectively illegal, according to BNP Paribas.

With the money needed to finance these improvements now much more expensive to obtain, there are fears that many investors will simply sell rather than fulfill the necessary conditions. This risks leaving London cluttered with empty properties that are not up to standard.

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