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Housing is responsible for over 18% of the UK’s carbon emissions and as the UK moves to a net zero carbon economy, both existing and new build properties need to be cleaner, greener and fit for the future.

The Government intends to implement its Future Homes Standard for new build properties by 2025 and recently announced a £5 million fund to help the financial services sector develop green home loan products. The aim is to incentivise home owners to either buy greener homes, or retrofit existing properties, but will builders or homeowners see a return on their investment? Anna Browne looks at whether; properties that are more energy efficient and sustainably built attract a premium to market value.

New homes – A ‘green premium’ for future homes?

The Future Homes Standard will require all new build homes to have low carbon heating sources and world leading levels of energy efficiency. Developers will be required to examine the materials being used as well as the construction processes employed to reach this standard, which is expected to result in homes emitting 75-80% less carbon than existing homes. A series of consultations are planned to inform the Future Homes Standard in terms of achievable energy efficiencies and anticipated costs.

Cost has undoubtedly been a barrier to the construction of energy efficient homes, but research published by RICS suggests energy efficiency is beginning to affect value and is likely to increasingly inform decisions by owners, occupiers and lenders. Individual property characteristics having an impact on energy efficiency, such as glazing, were found to be more influential value drivers than traditional measures like EPCs. A key factor in this could be the absence of quality data and good benchmarking for energy efficiency for purchasers. The REVALUE project found a green premium may be achieved through energy upgrades. Indeed, consumers may choose to pay a little more upfront, for the long term returns in reduced energy bills and green mortgage interest rates.

Existing homes – A ‘brown discount’?

Individual home owners and landlords don’t face the ‘push’ factors which builders and developers of new properties do. Only an estimated 3% of European residential stock is constructed to the highest energy standards. While it is long term owner occupiers who benefit from the resulting cost savings, a business case can be made for retrofitting on the basis of return on investment.

European studies have shown energy efficient properties may attract a ‘green’ rental premium for landlords. And if the ‘green’ rental premium isn’t a sufficient incentive, the possibility of a ‘brown discount’ / deduction on the value of their assets provides extra motivation. Buyers in future wanting to take advantage of lower rates of interest on green mortgages and recoup the benefit of lower energy bills, may not be prepared to pay as much for homes that will need substantial retrofitting. Homeowners will, as their properties age, feel the impact of these changes.

The reality is, not everyone will be in a position to pay a green premium.

“The challenge to ensure affordability of these homes and retrofitting will require funding and commitment from developers Government and funders to drive this change.”

A number of leading lenders now offer eco mortgages, which carry a lower cost of borrowing for energy efficient properties.

Views from the sector

A number of recent initiatives have emerged, such as the Coalition for Energy Efficiency of Buildings and Social Housing Environmental, Social and Governance (ESG) Initiative, which aim to encourage financing for net zero carbon and climate – resilient buildings in the UK and achieve consensus on an approach to reporting ESG metrics within social housing. These initiatives have resulted from an increased focus by valuers and funders on the correlation between values and energy efficiency.

Savills was the UK representative in the REVALUE project which researched the link between energy efficiency and property values. A weak link was found between energy costs and housing costs and hence with valuations. On the other hand, evidence from Europe is that canny buyers/renters do take it into account. As a result, RICS issued guidance encouraging valuers to take sustainability into account, and the impact is likely to increase over time as market evidence accumulates that energy efficiency influences prices.

JLL note that consumers are already considering the environment when deciding where to live and there is a growing preference for new homes as they are typically more technically advanced and cheaper to run. They feel it is highly likely that buyers will start to turn to new options even more as the UK gets closer to 2050.

Looking to the future

Research suggests that whilst a ‘green premium’ may exist for energy efficient properties, the more notable consequence of the Future Homes Standard could be the risk of a ‘brown discount’, for properties which do not align with market expectations of energy efficiency. This risk is significant for investors and funders who may be providing finance against properties with below average energy efficiency. The effect on values may become more pronounced as individuals and shareholders begin to closely examine the wider implications of their spending and investment habits on the environment. To achieve the large scale retrofitting required to prevent properties becoming ‘stranded assets’, the onus will be on developers to build better homes and on the Government and funders to make green finance accessible and affordable, to drive the change we need to see to meet the challenges ahead.

View points:
Guy Morrell, Head Of Real Estate Investment, HSBC Global Asset Management:
“Building sustainable homes and other property types should generally have a positive impact on their value. Both owners and tenants are likely to prefer accommodation that is more energy efficient and built to higher environmental standards. Over time this is likely to be reflected by higher rents and prices. Several countries have introduced minimum energy efficiency requirements, which are expected to increase as part of the new net-zero targets. As a result, sustainability requirements are likely to increase. Existing buildings that fail to meet regulatory standards could trade at discounted levels.”
Nick Whitten, Director of Research, JLL:
“It is unlikely that building greener will generate a premium. However, it is highly likely that it will help in maintaining values as it aligns with growing consumer awareness around the climate crisis and increasing consumer demands to improve our environmental footprint. The housing industry must ensure that all new homes can satisfy a triple bottom line test and provide positive economic, social and environmental results.”