The Subplot

The Subplot | Green refurbs, Trafford Centre debt, Covid arrears

Welcome to The Subplot, your regular slice of commentary on the North West business and property market from Place North West’s analysis editor, David Thame.


  • Tricky sums: do occupiers really want to pay for top-specification refurbishments? Yes and no.
  • Elevator Pitch: your weekly rundown of who and what is going up, and who is heading the other way

Subplot Sponsors Logo 2022 (1)


Landlords think office occupiers with the biggest budgets want less, but better, floorspace. But bringing Grade B office stock up to standard is going to cost a fortune.

There are lots of good reasons for refurbishing offices. It is quicker, cheaper and greener than new-build, and there’s an interestingly exploitable 10% gap (often more) between the best refurbished office rents and the new equivalent. Savills’ prediction that refurbishing Grade B/C offices in 2022 will set new rental highs seems a safe one.

£63bn bill

But meeting the best-in-class standard will cost a packet. According to another raft of new research by Savills, it could cost UK landlords upwards of £40/sq ft to make the more demanding improvements required to hit energy targets effective from 2027, when a minimum EPC Grade ‘C’ rating will be needed in order to receive any further rent from tenants or to re-let a property. It goes up to Grade B by 2030. Only 10% of office buildings score a B today, implying a mighty £63bn bill to make the necessary improvements.

Appraisals up 5%-10%

Down at the level of building appraisals, Savills reckons that lifting an office block off the bottom (E to D, or D to C) would cost £10/sq ft-£15/sq ft, roughly 2% above the baseline refurbishment cost. So not too bad. But the fancier stuff required to push Ds to Cs, or Cs to Bs, comes with a larger price tag. New insulation, smart apps, facades, glazing, roof cladding could add between £16/sq ft and £40/sq ft, pushing baseline refurbishment costs up by as much as 10%.

Hands up, who wants to pay?

While landlords, developers and advisors concentrate on the number of occupiers prepared to pay more for better, it’s striking what a large proportion of business – even big ones, the kind that take Grade A space – aren’t. According to research by YouGov, prepared at the behest of law firm Irwin Mitchell, a third of all larger businesses are rethinking their office needs with the main aim of cutting costs.

No thank you

The figures are even grimmer for high-cost, deep-green refurbishments. Just 15% of respondents from large businesses said they were willing to pay higher rent for greener office space. 29% said they would pay more if there was some financial benefit as a result, such as a reduction in service charges or energy bills. A thumping 51% of small businesses said they would not be willing to pay more rent to follow the green agenda. “It looks like currently green decisions are still being driven by financial considerations,” said the Irwin Mitchell commentary, with what is presumably a heavy dose of irony.

Same for proptech

And all those fancy app-based management tools? Forget them. A resounding 68% of all businesses say they’re not willing to invest in proptech. About a quarter of larger businesses are prepared to entertain the idea if it helped with their sustainability agenda, which suggests thinking in the C-suites of the big firms isn’t far advanced from the less exalted herd.

Covering their ears

Unfortunately for landlords, the Irwin Mitchell results are not an aberration. Last summer, Knight Frank found that only 19% of occupiers said sustainability considerations would be the key influence on real estate choices over the next three years; the World Green Building Council put the figure at 27% but you get the point. This is not the news the property industry wants to hear.

Refurbishment is inevitably going to be an increasingly significant part of the North West office market in the years to come. Not everybody can afford the best, and even those who can don’t always want it. Those landlords who remember this will prosper.

The Subplot Elevator Pitch 07.12.21ELEVATOR PITCH

Up or down? This week’s movers

The chances of landlord-led compromises on pandemic-related rent arrears are racing to the top. Heading the other way are views of Trafford Centre debt.

Rent arrears settlements

The vexed question of the (perhaps) £10bn rental defaults racked up during the pandemic has been off the agenda for a while. Following royal assent last week for new laws requiring binding arbitration, and a new deadline of 24 September before landlords can start debt enforcement action, the issue is bouncing back.

The North West is by no means the tardiest payer according to Remit Consulting data for December (due to be updated for Q1 any day now). Even so, the debt pile is still building: in the North West as many as 13% of retail tenants have not paid their rent by the 35th day after it was due, says Remit.

Lawyers insist that the government’s arbitration plan is going to be slow, burdensome and expensive. There probably aren’t enough arbitrators any way, and because neither side can reclaim their costs the whole thing has a very “last resort” feel about it. Tenants on the brink of collapse have every reason to drag the official process out (they have nothing to lose) but landlords have the opposite pressure, and we can expect landlord compromises to come fairly rapidly.

Trafford Centre debt

More post-pandemic fallout, this time at the Trafford Centre. Earlier this week Fitch, the credit agency, downgraded the £636m securitised commercial mortgage on the centre in the name of Trafford Centre Ltd. You can read the Fitch analysis here. The gist of the Fitch concern is that it used to think that this kind of well-secured debt stood a chance of a happy outcome, almost whatever happened. Even if rethinking the centre and its tenants took a while there would be enough income to keep the mortgage lenders happy. They now think that’s not quite right.

“We estimate the market value and estimated rental value (ERV) of the Trafford Centre has fallen a further 15% since the last reported valuation in December 2020. Reflecting this and observed lettings, we have assumed an ERV of £60.3m, representing a 15% haircut to the December 2020 ERV,” Fitch said.

Slicing £10m off the rental income makes a world of difference to lenders, potentially. “In the relevant rating scenarios, projected cashflow is no longer sufficient to materially delay a liquidation, exhausting liquidity within a few years,” Fitch explains.

Fitch notes things are picking up, and says there’s not a problem with servicing debt, but it highlights the risks to landlords who cannot easily diversify away from the old shopping centre tenant mix and into new areas like build-to-rent or workspace.

Get in touch with David Thame: | 01544 262127

The Subplot is brought to you in association with Oppidan Life.

Subplot Sponsors Logo 2022 (1)

Sign up here if you’re not already a subscriber

Your Comments

Read our comments policy

You could get a lot of flats on the site of the Trafford Centre…

By two-step

Naive question – how much of the central Manchester/Salford stock built in the last 10 years is already compliant?

By Rich X

Related Articles

Sign up to receive the Place Daily Briefing

Join more than 12,000 property professionals and receive your free daily round-up of built environment news direct to your inbox


Join more than 12,000 property professionals and sign up to receive your free daily round-up of built environment news direct to your inbox.

By subscribing, you are agreeing to our Terms & Conditions and Privacy Policy

Would you also like to receive our free PlaceTech Weekly newsletter, covering innovation in property?*