COMMENT Soaring inflation and sky-high energy bills have laid bare the need to urgently retrofit the UK’s housing stock, which is the oldest in Europe.
Analysis by Trustmark suggests 24m homes need some form of retrofitting, while Savills estimates the cost of bringing all of the UK’s homes up to modern energy efficiency standards to be in the region of £300bn.
Britain’s ageing housing stock not only poses a challenge in creating a genuinely net zero economy, but also negatively affects consumers through higher energy bills and poorer quality accommodation.
Energy inefficiency is especially a problem within the private rented sector, which out of all the tenures has the highest proportion of homes built before 1919 – long before insulation became a building regulations requirement in the 1980s. However, the vast majority of individual buy-to-let investors lack the knowledge or resources to meet incoming sustainability regulations.
Knowledge gap
According to a recent ONS survey, around half of private landlords (52%) are concerned about forthcoming legislative changes.
The same survey revealed that 22% were aware but didn’t understand the details of new energy efficiency requirements, while 15% were totally unaware of the incoming requirements. Nearly 20% reported not knowing their property’s EPC rating. Given 95% of landlords describe themselves as part-time, such figures are no surprise.
The Department for Levelling Up, Housing and Communities puts the average cost of retrofitting a private rented property up to a EPC C rating – the legally mandated minimum for new tenancies in 2028 – in the region of £7,650. Much like with upgrading housing to meet new fire safety requirements, the big question is who pays.
The most obvious solution would be for the government to foot the bill. But with Covid-19 having hammered the public finances, right now there is little political appetite for a taxpayer-funded mass retrofitting programme.
As with proposals to link council tax ratings to EPCs, the other option is to make property owners swallow a greater share of the cost. But in an age of mixed wage growth, rising taxes and high inflation, forcing households to pay to retrofit their homes would be a hard sell politically, and especially unfair on lower-income earners.
There is an alternative: harnessing the power of patient capital that is increasingly looking to enter residential real estate.
Institutional investors such as pension funds and insurers ultimately want the same things as buy-to-let landlords: a source of reliable income, without sacrificing stability of values and long-term growth.
Institutional investors are also driving today’s ESG agenda. As a result, they are on the hunt for investments that have a positive social and environmental impact as well as generating reliable returns. Herein lies the opportunity.
By investing in existing rental housing, 98% of which is highly fragmented individual flats and houses, institutions can access diverse assets that produce liability-matching income streams with defensive, counter-cyclical qualities. From a sustainability perspective, acquiring and upgrading standing stock is also less carbon-intensive than funding the development of new homes.
Rental roadblock
At IMMO, we are deploying the $2.5bn (£2.1bn) in capital commitments secured from leading global institutional investors to acquire, upcycle and rent 10,000 homes across Europe. Residents and local communities then benefit from our digital-first, professional “living-as-a-service” approach to management.
In the UK, we are aiming to acquire more than 3,000 homes and bring them up to a EPC C rating where possible by 2024. This could save households £25m, although with our plans to raise additional institutional capital, the end sum could be far greater.
Fundamentally, the unprofessional nature of the UK rental market presents a real roadblock when it comes to greening Britain’s housing stock. Policymakers need to urgently address the fact that most individual private landlords will be unable to rise to the net zero challenge. By taking advantage of the growing interest from institutional investors in residential for rent, and their increased focus on sustainability, we can help deliver modern, energy efficient homes – to the benefit of both people and the planet.
Anna Clare Harper is head of sustainability at IMMO
