Investing in Sustainable Property

In an effort to maximise their returns, successful property investors routinely keep an eye on market trends and how tenants’ preferences are changing. One of the most important trends in recent years has been increasing awareness of environmental sustainability, and a steadily growing customer demand for homes that are well insulated, energy efficient and cheap to run.

It’s sometimes easy to dismiss such movements as a fad or media hype, but research suggests that this one is very real and well-entrenched. A May 2019 survey by Citizens’ Advice Scotland found that energy efficiency was an important consideration for 84% of those seeking accommodation in the private rental sector.

Also in 2019, British newspapers reported the results of a YouGov poll that found that Britons were more worried about the climate crisis than the economy, crime or immigration. At the time, only public health and the ongoing Brexit discussions were accorded more significance. Now that the European question has been answered, sustainability has very probably become the second most important issue in Britain’s collective psyche.

The Guardians Report - 'Public Concern Over Environment Reaches Record High in UK'

The Independent's Report - 'General Election: Voters Care More About the Environment than the Economy'


Sustainability Awareness by Age

A notable feature of the YouGov report was that concern was most evident amongst younger people; those who have the greatest stake in the long-term wellbeing of the planet. Amongst this demographic, levels of awareness were highest and feelings ran strongest about the need for improvements in areas including public policy, energy, transport and housing.

This strength of feeling is important for property investors because the younger sections of the population represent some of the country’s most reliable and profitable rental markets. Younger people are those most likely to rent, they are the ones most likely to be migrating between cities in search of work, and, of course, they also make up the vast majority of the student rental market.

More generally, younger people also represent the future; they have been the generation hardest hit by the relative unaffordability of housing and, amongst this group, aspirations for homeownership tend to be the lowest. In other words, they have become what some journalists have referred to as ‘Generation Rent’; for many of them, renting accommodation looks set to become a lifelong choice, much as it is in many other European countries.

Younger people represent a substantial proportion of the UK rental market. According to the latest figures published by ONS, the UK population reached an estimated 66.4 million in the summer of 2018 and over 11 million of those residents were aged between 18 and 30. By the age of 23, more than 50% of these young people had left home.

Landlords would therefore do well to listen to their concerns and develop their investment plans accordingly. As this section of the population ages and successive generations follow, their housing choices and their attitudes towards sustainability are likely to become established as the norm. This could be good news for property investors who can provide the sorts of resource-efficient, sustainable housing that such tenants demand. Conversely, of course, it could tend to drive out those landlords who continue to let out old, low quality housing stock with poor levels of energy efficiency.

Legal Changes

It isn’t just changing public attitudes that will drive the shift towards greater sustainability. The government – like those of most developed nations – has set itself carbon reduction targets that will demand a shift in public policy. In the public rental sector, housing associations and local authorities are spending countless millions on improving the energy efficiency of their housing stock, and the concept of ‘fuel poverty’ is now regularly discussed at industry conferences, and by campaigners, architects, journalists and ministers.

Likewise, a mix of targets, regulations and policy means that new homes must be built to certain minimum standards for energy efficiency; sustainability is a major consideration when developers and their supply chain partners bid for new work. Many new homes now include features such as solar photo-voltaic panels, partly as a result of contractual obligations but also for very common-sense commercial reasons: because it helps to attract the many buyers for whom sustainability is an overarching concern.

Against this changing landscape, resource efficiency has become a much more visible issue, and prospective tenants are increasingly aware of why it matters. They know that poor insulation and homes with energy-hungry heating systems can translate into much higher living costs and, therefore, less money in their own pockets.

For private landlords, too, the playing field is changing. As we noted in a recent blog, all rental properties must now have an Energy Performance Certificate, which measures energy efficiency with respect to electricity, gas and hot water systems. Scores range from A to G, ‘A’ being the most efficient.

Since 2018, it has been essentially illegal to rent out a property that has an EPC score lower than ‘E’. Currently, this applies to both new lets and renewals. Gov.uk has published a guidance report on 'Domestic private rented property: minimum energy efficiency standard - landlord guidance' to allow landlords to keep up to date with their EPC score.

That is the law as it stands but it’s easy to see how that threshold could change in the next few years in an effort to push higher standards and to reduce the impacts of fuel poverty on people living in poorly-performing properties. Higher scores might eventually be required, or the basis for EPC calculations might change. The Energy Saving Trust notes that “the government is likely to increase the minimum standard incrementally from E, to D, then C in the future.” 

This can only be speculation at this stage, but in the face of so much public and political pressure, standards and regulations are only ever likely to be pushing in one direction. To illustrate the point, landlords currently only have to make improvements to cold homes before new tenants move in or if they extend their tenancy agreement, but from 1st April 2020, the law will change and landlords will have to improve F & G rated homes even if the tenant is staying in place.

Sustainability Improvement Measures

Faced with an evident shift in customer preferences, most commercially-minded landlords will want to consider what they can sensibly do to maximise the appeal and rental values of their properties. The answer to that depends, of course, on many factors, not least of which is at what stage of the investment journey the landlord has reached.

Those who are considering the acquisition of a buy-to-let property have the greatest freedom of choice. The options for those who already own older housing stock will be constrained by the nature of the building itself, but there is still plenty that can be done. Some investors actively seek out older properties, knowing that they can be bought cheaply and then refurbished to a much more marketable standard.

For example, improved energy efficiency can be achieved through investment in better insulation, glazing, heating systems and appliances. The return on such measures can only be calculated on a property by property basis but some of the measures that produce the quickest return on investment include:

  • Draught-proofing doors and windows
  • Fitting thermostatic radiator valves
  • Installing loft insulation up to the recommended thickness
  • Fitting low energy lighting systems
  • Replacing baths with showers.

Here are some quick tips on improvements in managing the energy efficiency of your home: https://energysavingtrust.org.uk/home-energy-efficiency

Additionally, resource efficiency can be improved by fitting a new boiler, new glazing, cavity wall insulation or (for those without cavities) external wall insulation. These improvements should be worthwhile in the longer term, though they require more up-front expenditure and the payback period is likely to be longer.

However, it’s important to recognise that turning an old house or flat into a sustainable, resource-efficient property can be challenging, even for an experienced developer. What’s more, there may not be any real certainty on costs because older properties can sometimes throw in unexpected challenges such as the presence of asbestos, lead pipes or faulty wiring. Consequently, for those investors who are not already committed to a purchase, a simpler, clearer option might be to look at a new development.

New Sustainable Property

In Britain, newer properties must comply with the latest standards and regulations and, as a result, they tend to be comparatively energy efficient. They often use more sustainable materials, they are well insulated and they adhere to designs that have been shown to deliver warmer, damp-free homes. What’s more, newer properties will tend to be covered by warranties and builders’ guarantees, so if anything does fall short on performance, the investor needn’t always be the one picking up the bill.

One popular form of new property investment is purpose-built student accommodation (PBSA). As the UK university student population has grown in recent years, so there has been increasing competition amongst accommodation providers. This is a potentially very profitable sector so developers have made great efforts to attract tenants on the strength of their properties’ designs, facilities and energy efficiency. Faced with a choice between a damp, poorly-maintained terrace bedsit and a modern, WiFi-enabled PBSA development, discerning millennials are voting with their feet.

But ‘new’ needn’t always mean new, exactly. Some of the most attractive property investment projects on the market today include off-plan conversion projects. Typically, these will entail taking a vacant office building, stripping it out to the shell, and then creating from it an entirely new residential development. Common in urban areas, these produce attractive, town and city-centre properties that are especially well suited to the needs of young people and small families.

Often available off-plan, these conversion schemes are specifically designed to appeal to modern tenants, which means taking account of their preferences from the earliest design stages. Important considerations include safety, security, build quality and – of course – sustainability. Investing in such properties is an easy way to secure an energy efficient property that is essentially ‘future-proof’ – likely to maintain its appeal and offering far greater certainty on both costs and returns.

Sustainability and Competitiveness

Another compelling reason to invest in sustainable property is simply to gain a competitive advantage. According to research carried out by insurers in 2018, there was a ‘shocking’ degree of ignorance amongst British landlords about the sustainability of their properties. At the time, only 30% knew their EPC ratings, and only 5% had made any effort to measure or improve their energy efficiency. Perhaps unsurprisingly, then, more than 64,000 rental properties had an EPC rating of E or worse.

Even if landlords have upped their game since the introduction of the Minimum Energy Efficiency Standards (MEES) in April 2018, this still indicates a pronounced mismatch between the views of landlords and tenants on matters of sustainability and energy efficiency.

Historically, the most successful entrepreneurs have been those who have been quick to recognise changing customer preferences, and quick to offer something that those customers wanted. In the private rental sector, one of the biggest changes now taking place is fast-rising demand for more sustainable properties and, with that, all the attractions of warmer, damp-free homes, lower bills and a generally better quality of life.

Sustainability and Property Investment Returns

Ultimately, there is a very simple argument behind all of this, and it’s a matter of human nature. People want good quality homes and if their current property doesn’t meet their needs, then they’ll keep looking to relocate until they find somewhere that does. For landlords with inefficient properties, this will usually translate into a higher churn of tenants, longer void periods, slower capital appreciation and more time on the market if and when the investor chooses to sell up.

There are interesting lessons to be learned here from the social housing sector. Early in 2020, the housing provider Places for People published a video describing the results of a major energy efficiency pilot scheme in Padiham, Lancashire. The estate in question had suffered from a high churn of tenants, numerous void periods and dissatisfaction with the inefficiency of the heating and insulation systems. The poor performance of the properties meant that many tenants were spending the majority of their weekly incomes on heating. 

However, by investing in new insulation, glazing and heating systems, PfP transformed the performance and popularity of the properties. In the space of less than 12 months, it had turned a ‘problem’ estate into a popular location that now has long waiting lists for tenants. The difference was purely a matter of sustainability; of improving living conditions and appealing to tenants on the basis of reduced utility bills.

Of course, there are costs associated with making energy efficiency improvements, but faced with a changing regulatory landscape and clear customer demand from tenants, such work is likely to be both necessary and worthwhile. Those who invest in more sustainable property should see stronger demand, improved tenant loyalty, fewer voids and more rapid capital appreciation. Moreover, landlords with better quality, more energy efficient properties should be in a position to command higher rentals, particularly as awareness of EPC ratings improves.

Improvements can be made gradually, as funds allow, but the Energy Saving Trust recommends that, where possible, landlords try to take a whole-property approach in order to benefit from economies of scale. It notes: “Undertaking a single whole-house retrofit, tackling insulation, windows and heating system … in one go is likely to be cheaper than a series of upgrades.”

Summary

Public awareness about sustainability is growing fast, and this has important implications for property investors. It’s a global concern and it’s here to stay, so a ‘head in the sand’ strategy is unlikely to pay off.  Landlords who continue to rent out inefficient homes could see customer demand and regulatory pressures acting against them. On the other hand, those who invest in new, more energy efficient modern properties and those who act now to improve their existing portfolios, should reap the rewards in terms of higher rents, stronger demand and greater customer loyalty.

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If you would like more information about investing in sustainable property, please talk to one of our professional advisers. Call us today on 01244 343 355.

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