Energy performance affects every market and every property

Article originally published in The Intermediary March 2024 – page 30

It is almost six months since the Prime Minister Rishi Sunak dropped plans to force private residential landlords to upgrade rented properties to a minimum band C by 2028.

Critics suggested the move was designed to woo landlords ahead of this year’s general election, the date of which is still to be confirmed. Indeed, many landlords were relieved at the news – the cost of energy efficiency improvements add up into the tens of thousands depending on the type of property.

Energy crisis

A 2017 study carried out by the Department for Business, Energy & Industrial Strategy (BEIS) estimated the average cost to install internal wall insulation would have been £7,900. Double or triple glazing was put at £6,400, cavity wall insulation at £750, loft insulation at £450, replacing a gas boiler at £2,000 and underfloor insulation at £5,800.

That was before the pandemic upended global supply chains, Russia’s invasion of Ukraine sparked an energy crisis in Europe and Brexit left companies with higher import costs.

Paying for those upgrades would likely cost considerably more today.

Despite the savings on offer to landlords, there were many who weren’t pleased at the decision to abandon energy efficiency policy. Across the housing industry there was considerable backlash.

Both the National Housing Federation and Energy and Climate Intelligence Unit (ECIU) warned it would leave households facing even higher energy bills in years to come.

NHF research claimed retrofitting homes would save social housing residents on average 40% on heating bills. Similar savings no doubt apply to all housing tenures.

There are several things to consider here. First is the cost of those upgrades – the deadline to make them in the private rented sector may have been scrapped (for now) but the cost is still sitting in that property. At some point, tens of thousands of pounds will need to be spent to make that home fit for purpose.

The second is the impact that low energy efficiency has on borrower affordability. Energy bills have rocketed over the past three years.

Low efficiency

Speaking in the House of Commons in November last year, the Secretary of State for Energy Security and Net Zero Claire Coutinho said: “In England, the share of households required to spend more than 10 per cent of their income on energy after housing costs was 21 per cent in 2021 and 30 per cent in 2022, following the invasion of Ukraine that year. That is significant for the majority of households.”

The third consideration is what happens to the condition of a property left without energy efficiency upgrades? Data collected by the Met Office show UK mean temperatures have been shifting over the decades as a result of human-induced climate change.

Based on provisional data, 2023 is on track to be Earth’s warmest year on record. Carbon dioxide concentrations in our atmosphere are at their highest for at least 2 million years. The five warmest years in the UK series from 1884 include 2022, 2023, and 2020 and the 10 warmest years have all occurred since 2003.

Wetter weather and higher temperatures can lead to a host of potential problems for all kinds of property – not just in the rented sector. Damp leads to mould and damage to the fabric of a building. Extreme heat can cause buildings to expand and then retract, putting undue stress on its construction. Higher rainfall affects soil’s properties, which can lead to subsidence or structural movement. Flood plains expand, coastal erosion accelerates, wildfire risk rises. Each of these climate risks presents a material impact on a property’s value.

Rebalancing risk

Energy performance affects every market and every property. The footprint of energy usage on lenders’ back books is almost certainly the largest Scope 3 emission they have to manage. Ignoring the problem simply delays the inevitability of having to address it at some point. What policy makes and lenders need to do is understand the scale of the problem and plan out what can be done in sensible bite size chunks. Assembling the right data and technology to support this will be a starting point.

The process of rebalancing risk of this sort cannot be applied sector by sector – buy-to-let, residential, development, new build, equity release are all equally exposed, albeit in different ways. We have invested, and continue to do so, in developing solutions for these markets which bring understanding to these complex risk issues. We are here to help.