In the residential sector, this ‘green premium’ or ‘brown discount’ is being catalysed by new minimum efficient energy standards. Since April 1 2018, it has been illegal to grant a new tenancy on properties with an Energy Performance Certificate rating of below E.
Since April 1 2020, it has been illegal to continue letting such property (unless exempted). This minimum standard is expected to increase over coming years, as the government strives to meet its legally binding commitment to achieve net carbon zero. Less efficient properties will be, and arguably already are, worth less.
Many investors want to build a legacy to pass on to future generations. Financial planners and tax advisers will focus on structuring as a way to minimise inheritance tax ‘leakage’. A more important point is to ensure that the assets you own will hold their value for years to come.
This is all about providing regulatorily compliant properties that people want to live in, where they want and need to live, at a price they can afford. Such properties hold their value better and are more resilient through market cycles.
More sustainable investments are less risky and feel good
Residential property attracts investors because the amount of risk (or perceived risk) for a given return is relatively small. There are two major sources of risk and future cost that can be avoided by investing in a more sustainable way. First, there are physical risks of climate change, such as flooding, so it may not be ‘sustainable’ to build in an area at high risk of flooding or coastal erosion.
Second, there are transition risks, largely associated with new regulations coming in so that the UK can achieve its net carbon zero target. More than 75 per cent of UK housing stock was built before building regulations required insulation, so a significant proportion has high transition risk. Focusing on properties that do not have this risk makes sense, since it is difficult to quantify the cost of transition, but it will undoubtedly be expensive.
Investing sustainably helps investors feel good and encourages more people to want to work with you. There is good karma and practical marketing benefits that make your life as an investor easier; all other things being equal, your investments will also be more profitable.
For long-term investors in UK residential property, the simple goal of profit maximisation is being replaced. Investments must increasingly be profitable as well as sustainable: economically resilient, with positive ESG metrics. Sustainable investments can make great financial sense by enhancing cash flows and values, reducing risks, and making investing easier.
Anna Clare Harper, is chief executive of property asset manager SPI Capital