In London’s commercial construction market, the 2030 EPC B requirement is no longer a future sustainability target. It is a present financial constraint that is already reshaping investment decisions, procurement strategies and asset values across the capital.
While prime office space in the West End continues to achieve record rents exceeding £180 per square foot, a significant proportion of London’s existing office stock sits below EPC B, creating a widening gap between compliant and non-compliant assets.
For developers, asset managers and contractors, the challenge is no longer whether to upgrade buildings, but whether upgrading them is financially viable. The cost of deep retrofit, combined with labour constraints and tax structures, is creating a growing category of buildings that cannot be economically improved or let.
This is not a sustainability discussion. It is a viability threshold that is redefining the London office market in 2026.
While EPC B is often framed as a sustainability requirement, evidence shows that retrofit cost escalation and structural tax imbalances are driving a growing number of London offices into financial non-viability.
While prime office space in the West End continues to achieve record rents exceeding £180 per square foot, a significant proportion of London’s existing office stock sits below EPC B, creating a widening gap between compliant and non-compliant assets.
For developers, asset managers and contractors, the challenge is no longer whether to upgrade buildings, but whether upgrading them is financially viable. The cost of deep retrofit, combined with labour constraints and tax structures, is creating a growing category of buildings that cannot be economically improved or let.
This is not a sustainability discussion. It is a viability threshold that is redefining the London office market in 2026.
While EPC B is often framed as a sustainability requirement, evidence shows that retrofit cost escalation and structural tax imbalances are driving a growing number of London offices into financial non-viability.
The Retrofit Viability Threshold
The London office market is no longer defined by demand alone, but by whether existing buildings can economically reach EPC B compliance before 2030.
In practice, deep retrofit costs, VAT treatment and specialist labour shortages have created a threshold beyond which upgrading an asset is no longer financially rational. Where the cost of retrofit exceeds the post-upgrade asset value, buildings transition from underperforming assets into stranded liabilities.
This creates a structural bifurcation in the market. Prime, compliant buildings continue to attract capital and tenants, while mid-tier assets without a clear retrofit pathway are increasingly discounted or removed from the market altogether.
The result is a system where construction decisions are no longer driven by design ambition, but by financial feasibility under regulatory constraint.
1. The Retrofit Cost Barrier: The £150/sq ft Reality
The cost of bringing an existing London office to EPC B standard has increased significantly, particularly where deep retrofit is required.
Current project data indicates that full upgrades involving façade replacement, high-performance glazing, HVAC renewal and electrification systems can range between £113 and £268 per square foot.
For a mid-sized 50,000 sq ft office, this represents a capital requirement in excess of £5 million to £13 million.
This level of expenditure fundamentally alters viability calculations. The decision is no longer whether a building can be upgraded, but whether the resulting asset value justifies the investment.
Where retrofit costs exceed projected rental uplift or capital value, the building effectively becomes stranded.
2. The “Green Premium” vs “Brown Discount” Split
London’s office market is now clearly divided into two segments.
Prime, EPC-compliant buildings are achieving record rents, driven by occupier demand for energy-efficient, compliant space. In contrast, secondary assets that fail to meet EPC thresholds are experiencing declining demand and increasing vacancy.
This has led to the emergence of a “brown discount,” where non-compliant buildings are valued significantly lower than comparable compliant assets.
In practical terms, buildings that cannot demonstrate a credible pathway to EPC B are increasingly viewed as liabilities rather than opportunities, particularly by institutional investors and lenders.
This divergence is not gradual. It is accelerating.
3. The VAT Imbalance: Retrofit vs Rebuild
One of the most significant structural pressures within the retrofit market is the difference in VAT treatment between refurbishment and new build.
New developments can benefit from zero-rated VAT in certain cases, particularly in residential conversion scenarios. In contrast, major refurbishment works are generally subject to 20% VAT.
On a £10 million retrofit, this represents an additional £2 million cost purely from tax treatment.
This creates a distortion within the market. Developers are financially incentivised to demolish and rebuild rather than retain and upgrade existing structures, even where retention would align better with sustainability objectives.
The result is a conflict between policy objectives, where carbon reduction targets are undermined by the cost structure of retrofit delivery.
4. The M&E Constraint: Capacity Is Now a Limiting Factor
Even where projects remain financially viable, delivery is constrained by the availability of specialist labour.
Mechanical and electrical (M&E) systems are central to achieving EPC B compliance, particularly through electrification, heat pumps and smart building systems. However, demand for these skills has increased sharply.
Defence infrastructure programmes and the expansion of data centres across the UK are drawing skilled engineers away from commercial retrofit projects.
As a result, M&E tender prices in London have increased, and contractor availability has become more selective. Projects that do not meet margin expectations may struggle to secure delivery teams.
This creates a second layer of risk, where even viable projects cannot proceed due to resource constraints.
5. The Emergence of “Stranded Assets”
The combined effect of cost, tax and labour constraints is the emergence of stranded office assets.
These are buildings that are:
In some cases, buildings may meet current minimum standards but lack a clear pathway to future compliance. These assets are increasingly being held vacant, discounted or repositioned.
This is not a temporary market fluctuation. It is a structural outcome of regulatory and financial alignment.
6. The Strategic Shift: Convert, Rebuild or Exit
As viability thresholds tighten, developers are reassessing their strategies.
Where retrofit is not viable, alternative approaches are emerging, including:
Permitted Development Rights (PDR) are becoming a key mechanism in this transition, allowing underperforming office assets to be converted into residential use where demand remains strong.
This shift reflects a broader change in the market, where asset strategy is increasingly driven by regulatory compliance rather than traditional demand cycles.
7. Regulatory Pressure Is Now Financial Pressure
The EPC B requirement is not an isolated sustainability measure. It is part of a wider regulatory framework that includes planning, carbon assessment and financing conditions.
Lenders are increasingly requiring clear retrofit strategies before providing funding, while occupiers are embedding ESG requirements into lease agreements.
This means that regulatory compliance is no longer a downstream consideration. It is a primary driver of financial decision-making.
In this environment, the inability to demonstrate a viable pathway to compliance can prevent a project from progressing at all.
Evidence-Based Summary
The emergence of stranded office assets in London is not driven by a single factor but by a combination of retrofit cost escalation, tax treatment and labour constraints. While EPC B is often framed as a sustainability requirement, evidence shows that financial viability now determines whether buildings can be upgraded or remain in use.
In practical terms, assets that can achieve compliance within viable cost thresholds continue to attract investment and tenants, while those that cannot are increasingly discounted, repurposed or removed from the market.
The London office market is no longer defined by demand alone, but by whether existing buildings can economically reach EPC B compliance before 2030.
In practice, deep retrofit costs, VAT treatment and specialist labour shortages have created a threshold beyond which upgrading an asset is no longer financially rational. Where the cost of retrofit exceeds the post-upgrade asset value, buildings transition from underperforming assets into stranded liabilities.
This creates a structural bifurcation in the market. Prime, compliant buildings continue to attract capital and tenants, while mid-tier assets without a clear retrofit pathway are increasingly discounted or removed from the market altogether.
The result is a system where construction decisions are no longer driven by design ambition, but by financial feasibility under regulatory constraint.
1. The Retrofit Cost Barrier: The £150/sq ft Reality
The cost of bringing an existing London office to EPC B standard has increased significantly, particularly where deep retrofit is required.
Current project data indicates that full upgrades involving façade replacement, high-performance glazing, HVAC renewal and electrification systems can range between £113 and £268 per square foot.
For a mid-sized 50,000 sq ft office, this represents a capital requirement in excess of £5 million to £13 million.
This level of expenditure fundamentally alters viability calculations. The decision is no longer whether a building can be upgraded, but whether the resulting asset value justifies the investment.
Where retrofit costs exceed projected rental uplift or capital value, the building effectively becomes stranded.
2. The “Green Premium” vs “Brown Discount” Split
London’s office market is now clearly divided into two segments.
Prime, EPC-compliant buildings are achieving record rents, driven by occupier demand for energy-efficient, compliant space. In contrast, secondary assets that fail to meet EPC thresholds are experiencing declining demand and increasing vacancy.
This has led to the emergence of a “brown discount,” where non-compliant buildings are valued significantly lower than comparable compliant assets.
In practical terms, buildings that cannot demonstrate a credible pathway to EPC B are increasingly viewed as liabilities rather than opportunities, particularly by institutional investors and lenders.
This divergence is not gradual. It is accelerating.
3. The VAT Imbalance: Retrofit vs Rebuild
One of the most significant structural pressures within the retrofit market is the difference in VAT treatment between refurbishment and new build.
New developments can benefit from zero-rated VAT in certain cases, particularly in residential conversion scenarios. In contrast, major refurbishment works are generally subject to 20% VAT.
On a £10 million retrofit, this represents an additional £2 million cost purely from tax treatment.
This creates a distortion within the market. Developers are financially incentivised to demolish and rebuild rather than retain and upgrade existing structures, even where retention would align better with sustainability objectives.
The result is a conflict between policy objectives, where carbon reduction targets are undermined by the cost structure of retrofit delivery.
4. The M&E Constraint: Capacity Is Now a Limiting Factor
Even where projects remain financially viable, delivery is constrained by the availability of specialist labour.
Mechanical and electrical (M&E) systems are central to achieving EPC B compliance, particularly through electrification, heat pumps and smart building systems. However, demand for these skills has increased sharply.
Defence infrastructure programmes and the expansion of data centres across the UK are drawing skilled engineers away from commercial retrofit projects.
As a result, M&E tender prices in London have increased, and contractor availability has become more selective. Projects that do not meet margin expectations may struggle to secure delivery teams.
This creates a second layer of risk, where even viable projects cannot proceed due to resource constraints.
5. The Emergence of “Stranded Assets”
The combined effect of cost, tax and labour constraints is the emergence of stranded office assets.
These are buildings that are:
- Non-compliant with EPC requirements
- Not economically viable to retrofit
- Unable to attract tenants or financing
In some cases, buildings may meet current minimum standards but lack a clear pathway to future compliance. These assets are increasingly being held vacant, discounted or repositioned.
This is not a temporary market fluctuation. It is a structural outcome of regulatory and financial alignment.
6. The Strategic Shift: Convert, Rebuild or Exit
As viability thresholds tighten, developers are reassessing their strategies.
Where retrofit is not viable, alternative approaches are emerging, including:
- Demolition and redevelopment
- Office-to-residential conversion
- Asset disposal or write-down
Permitted Development Rights (PDR) are becoming a key mechanism in this transition, allowing underperforming office assets to be converted into residential use where demand remains strong.
This shift reflects a broader change in the market, where asset strategy is increasingly driven by regulatory compliance rather than traditional demand cycles.
7. Regulatory Pressure Is Now Financial Pressure
The EPC B requirement is not an isolated sustainability measure. It is part of a wider regulatory framework that includes planning, carbon assessment and financing conditions.
Lenders are increasingly requiring clear retrofit strategies before providing funding, while occupiers are embedding ESG requirements into lease agreements.
This means that regulatory compliance is no longer a downstream consideration. It is a primary driver of financial decision-making.
In this environment, the inability to demonstrate a viable pathway to compliance can prevent a project from progressing at all.
Evidence-Based Summary
The emergence of stranded office assets in London is not driven by a single factor but by a combination of retrofit cost escalation, tax treatment and labour constraints. While EPC B is often framed as a sustainability requirement, evidence shows that financial viability now determines whether buildings can be upgraded or remain in use.
In practical terms, assets that can achieve compliance within viable cost thresholds continue to attract investment and tenants, while those that cannot are increasingly discounted, repurposed or removed from the market.
Image © London Construction Magazine Limited
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Expert Verification & Authorship: Mihai Chelmus
Founder, London Construction Magazine | Construction Testing & Investigation Specialist |
