Article | Creating Resilience

Budget 2023 and economic competitiveness: the ‘net zero’ gap

March 17, 2023 7 Minute Read


The latest UK Budget saw £20bn of new investment in carbon capture and storage solutions, and a selection of other worthwhile ‘green’ measures. However, this spending is not a comprehensive plan of action in response to the Government-commissioned Skidmore Review, which was published only two months ago. This agenda-setting Review aimed to advise on how to achieve the UK’s net zero emissions target cost-effectively. It seeks to position that target not as a cost, but as a unique and powerful investment opportunity. In our view, the Review provides an action plan which, if implemented in a coordinated and timely manner, could attract significantly more investment into the UK’s net zero transition – and, by extension, UK real estate.

Normally, when the Government is enthusiastic about an external reviewer’s report, it publishes its response simultaneously with the Review’s conclusions. But in Skidmore’s case, this did not happen, suggesting a reluctance among Ministers to embrace it. The Prime Minister simply advised that the Government would respond to the Review “in the coming year”.

Given that the Review is about finance, investment and economic competitiveness (as was this year’s Budget), it comes as a surprise that the Budget document does not mention Skidmore’s work.

Instead, it now looks likely that the Government will address the Review’s recommendations later in March 2023 as part of the work they have been required by the High Court to do to revise the existing Net Zero Strategy.

Skidmore Review – implications for real estate

In our work with clients, we’re constantly asked to advise on the likely UK regulatory pathway to net zero. Real estate investors face significant costs in refurbishing or developing buildings consistently with net zero targets. So, it’s difficult to advise international inward investor clients that “we don’t know” or “the Government hasn’t decided” on key issues like when and if commercial buildings will become legally unlettable for poor environmental performance or what the (delayed) UK Green Taxonomy’s approach to real estate will be.

Real estate is a long-term illiquid asset, and UK buildings compete internationally for capital which can and does go elsewhere if the policy environment is uncertain. For example, CBRE’s research has shown how Brexit-related uncertainty had that effect. Because of the direct impact of climate change on real estate, and the scale of emissions from real estate, Government ‘net zero’ policies need to be stable and predictable over the longer term – even if they are challenging. So, Skidmore’s call for clarity, certainty and consistency as essential prerequisites for attracting investment and securing competitiveness is important to heed.

The green real estate opportunity

Skidmore argues that the challenge of addressing climate change is a huge opportunity for inward investment into UK real estate. Historically, the UK has been a leading international real estate investment destination, regarded as a ‘safe haven’ for investing, especially in core, prime stock. We see this confidence in our work with clients.

But increasingly, a building is arguably not a prime building unless it meets the environmental performance requirements of occupiers and regulators. And around the world, Governments are offering significant and increasing subsidies and frameworks for green industries, led by the US Inflation Reduction Act. So, there is a risk that UK real estate starts to become uncompetitive globally if the UK net zero regulatory framework does not provide as clear, certain, and consistent a framework as that of competitor jurisdictions. CBRE’s research shows that green buildings do now often attract higher prices, and that there are price discounts for buildings with poor environmental credentials which arise from them being ‘regulated out’.

So, although the Budget focuses on new green energy subsidies, investors also need to know what the regulatory pathway will be for buildings, real estate finance and investment vehicles. Skidmore’s principles need to apply across the whole range of Government tools.

If at first you don’t succeed, make sure you’re first to try

We should recognise (as Skidmore does) that in some respects the UK is already being more ambitious, with more challenging net zero interim milestones than either the US or the EU. But Skidmore argues that there is an opportunity to go faster.

This does not mean that the Government should proceed immediately on everything, nor does it mean Skidmore’s recommendations are perfect.

While Skidmore called for the Government to accelerate the implementation of its 2020 proposal (which many of our clients are already preparing for) to require leased buildings to meet an EPC ‘B’ standard by 2030, he didn’t mention the Government's more far-reaching proposal to supplement EPCs with operational energy ratings as the basis of regulation. Such ratings would be a complementary measure because EPCs often aren’t very representative of actual energy use. The Review also complicated matters by proposing residential EPCs be rebranded as NZPCs.

Similarly, Skidmore’s proposals on reorientating the land use planning system towards net zero will be complex to achieve in practice both politically and technically, as is illustrated by the recent furore over how the planning system deals with windfarms. And very low consumer take-up of initiatives like the Boiler Upgrade Scheme suggest further policy and communications work is needed to efficiently electrify the UK’s homes.

So, not every recommendation that Skidmore makes, or that the Government attempts, is going to work. Some ideas will take time to implement, and the UK’s policy needs to reflect the fact that our fate rests partly on developments in other jurisdictions, especially the EU. In some respects, the UK has a promising head start, which we must maintain for the benefit of our economy.