The global response to climate change is impacting all industries, and the real estate market is no exception. It is essential to find the balance between sustainability and commercialization.
An estimated 40% of UK carbon is emitted by households. No wonder, then, that the government has chosen the real estate market as a key regulatory target to achieve its goal of net zero by 2050.
There is currently a bill being discussed which could mean that, in April 2025, any property let to new tenants will have to have an Energy Performance Certificate (EPC) of C or higher. There could be fines of up to £30,000 if a property fails to comply.
If this becomes law, owners will have to act. It is estimated that three in five homes (58%) in the UK have an EPC rating of D or less, or 12.6 million properties. Clearly, investments will be needed nationwide to improve the energy efficiency and sustainability of residential properties.
However, we should not treat these renovations as a legal obligation. First, they are an important step in reducing carbon emissions and fighting climate change. Second, for owners and owners alike, it’s an opportunity to increase profitability and marketability.
With favorable “green” mortgage rates and a greater focus on energy efficiency among renters and buyers, landlords can do better to meet public demand for sustainable housing.
From exceptionally strong storms to international climate summits, recent events have highlighted the importance of making more environmentally friendly decisions to a greater extent than ever. Compounded by soaring energy bills, the appeal of energy-efficient homes to the public is likely to increase further.
In fact, a recent survey found that 42% of renters consider a property’s environmental impact before renting, while 82% of buyers said they would be willing to pay more for an energy-efficient property. .
These are encouraging numbers for homeowners who might find it a daunting task to improve a property’s energy efficiency. But, with a carefully planned timeline and source of funding, homeowners can spread the cost of the renovation over the next few years, lessening the impact of renovations on their purse strings. So what should owners prioritize?
Consumption of electricity
Improving a building’s electricity consumption is a good starting point, especially with regard to lighting and boilers.
The simple act of switching from old, inefficient bulbs to Energy Star qualified LED bulbs can result in a 75% reduction in energy consumption and will last 25 times longer. On the boiler side, new condensing boilers increase efficiency by about 34% over old ones and can reduce fuel bills by 30%.
As older boilers are phased out, the cost of repairs and parts will likely increase, making older boilers quite an expensive asset for the future. These simple changes will reduce tenant energy bills, as well as general maintenance costs that may be the landlord’s responsibility.
As 15% of tenants say they would pay more rent if an efficient boiler and heating system were installed in their home, these changes can allow landlords to charge more rent, increasing the profitability of the property as well as its durability.
This may be a more relevant renovation for homeowners and will likely cost a bit more. However, a well-insulated property will limit the use of a boiler or heating system in the first place, further reducing costs for tenants and increasing their purchasing power over rent.
For example, insulating walls alone can reduce the amount of energy needed to heat or cool a property by around 25%, with this figure increasing when windows are also fitted with more efficient fittings. In turn, this can also reduce maintenance costs, as the property will be less vulnerable to mold.
Indeed, 18% of renters say they would pay more rent if new windows were fitted, and homes with energy-efficient features are estimated to sell for a premium of £40,000. As such, improving a property’s insulation can increase profits when renting or selling – a win-win situation.
Positively, in his recent spring statement, Chancellor Rishi Sunak confirmed that the government is reducing VAT on energy efficient materials – such as solar panels, heat pumps and roof insulation – from 5% to zero , over the next five years.
Despite this, the Association of Residential Letting Agents believes that the cost of renovations under the new regulations may not be realistic and could drive many homeowners out of the market.
Known as ‘eco-privilege’, the proliferation of ‘green’ finance with favorable mortgage rates could mean that investors and buyers who cannot afford expensive renovations will end up with less good financing options. Thus, an already difficult affordability crisis could begin to worsen.
The bridge sector is particularly well placed to limit the effects of “eco-privilege”. Whether a homeowner needs to renovate a property purchased at auction before applying for a mortgage, or simply needs to borrow capital in addition to existing financing, bridging loans can bridge the gap between the start of a renovation project and the search for a “green” mortgage. As a result, a wider range of homeowners will be able to invest in durable features and access advantageous mortgage rates.
In the years to come, owners should carefully consider their financial options and establish a timeline for carrying out necessary renovations to improve the sustainability credentials of their properties. It is clear that those who do this successfully will be prepared for further regulation in the future and can expect to increase the marketability of their property.
Paresh Raja is the founder and CEO of Market financial solutions (MFS), a London-based specialist lender offering bridging loans and rental property loans. Prior to founding MFS in 2006, Paresh worked as a senior professional consultant at a top five management consulting firm and also established an independent investment group.