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Energy efficiency in property valuation - what the future looks like

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After sharing the research conclusions, the REVALUE project partners took the opportunity to talk with some key stakeholders about the role of energy efficiency in the European housing sector, both now and moving forward.

 

1. An interview with Martin Schoenberg – Energy Efficiency Project Coordinator, UNEP FI

 

What are the trends and initiatives in the market that we should be paying attention to?

Martin Schoenberg. Green tagging – in the most common definition understood as attaching environmental information, such as an EPC, to the loan portfolios of banks- is one to look out for. It allows for not only a retrospective analysis but also, looking forward, a prediction of the impact of energy efficiency on credit quality.

 

There are three main drivers for improved risk profiles:

-Credit taker quality: there is a hypothesis that a loan taker who engages in energy efficiency improvements will be more diligent and therefore, have a lower probability of defaulting

-Potential impacts on value

-More disposable income through energy bill savings

 

Disentangling them and finding out which one is the main driver can be done by conducting a systematic analysis of “tagged” loans – a mortgage portfolio-wide analysis at financial institutions on the impact on risk profiles. This can then inform financial regulators considering a green supporting factor.

 

I would emphasize two trends which will lead to increased demand for energy efficient real estate. Green mortgages are a great initiative because ongoing projects such as eeMAP will continue driving product development by financial institutions. They contribute to awareness-raising, and can potentially lead to a lower interest rate being offered to clients. Increased demand for energy efficient real estate is a key driver for ensuring that energy efficiency is reflected more strongly in building value. Demand can be stimulated through EE mortgages – also because banks will be able to use their strong client relationships for distribution. This would be a strong incentive for credit takers to prioritise EE and increase the demand in the market for EE real estate and thus affect valuations in the medium to long term.

 

What is currently standing in the way of increasing EE investment?

MS. Better availability of data is a key consideration. This relates to technical and financial risk. This is why the DEEP platform for the technical de-risking of EE is a great initiative. It essentially provides benchmarking data using and comparing the energy performance and payback period for 10 000 European energy efficiency projects. This is helpful because banks normally understand financial risk and not technical risk which is what makes energy efficiency such a tricky challenge for financial institutions.

 

Meanwhile, in terms of financial risk, regulators commonly require 5 to 6 years of solid data. When it comes to demonstrating that EE improves a mortgage’s risk profile, there is a lot of raw data, but it hasn’t yet been analysed and energy efficiency data needs to be matched with financial data through tagging.  Once it’s analysed, a potentially positive impact on capital adequacy requirements would be a significant incentive for banks to become more prominent in this market.

 

So what are the next steps?

MS. One key area is better and live data on buildings’ energy performance. We need to shift away from measuring energy based on design – we need to measure energy consumption per m² from an ongoing operational perspective. Building occupier behaviour evolves according to the type of use that the building is put to. A building passport could achieve this objective.

 

Another key focus is the standardisation of financial products. The Commission has appointed a technical group to come up with a sustainable finance taxonomy. This needs to drive a common understanding of what energy efficiency is. We really need a more solid definition of EE to inform investors, banks and financial regulators.  Financial regulation is there to ensure financial stability, and it has to accurately reflect risk levels. If standard risk formulas don´t capture the positive effect of energy efficiency on risk profiles, and a robust correlation between EE and default rates can be established, there could be a good case for a green supporting factor.

 

2. Insights from Derek Watters – Head of Environmental Sustainability, Places for People

As part of its Clean Growth Strategy, the government has introduced the concept of a minimum EPC label C – Places for People supports the idea, albeit with a few key caveats. To fully support reaching this target by 2030, it must also be affordable and cost-efficient. We also have to take into account the different challenges faced by different types of property when it comes to renovating – i.e. listed buildings. Energy efficiency means different things, depending on the context.

 

In the UK, a third of CO2 emissions come from domestic properties. Even if you refurbish a property to C label, you’ve still got to look at the fuel source. How do you reach that C with electric heating and new technology? Landlords want to move away from gas, but the alternatives remain an unknown quantity and health and safety is paramount. There is a knowledge gap – both landlords and tenants need a stronger understanding of new technology and energy sources.

 

Looking at the bigger picture, it’s worth remembering that in the UK, energy efficiency is predominantly about affordable warmth. It’s a question of tenant behaviour, energy supply and wider wellbeing.

 

It’s also a question of how to fund the renovation on the scale needed. For landlords and housing providers, there is little to no payback on energy efficiency investment. Providing a more energy efficient property means the savings go to the end user, it is not a shared benefit. Finding the mechanism to capture the efficiency to pay for the refurbishment is the primary challenge. It’s technically doable but fraught with legality.

 

Energy efficiency is considered an infrastructure project. It needs to be built into the mainstream process, not just be seen as an add-on.

 

3. Insights from Jacqui Saw – Asset Manager, One Manchester

As mentioned in the project, one of the hurdles is the capital upfront cost that the housing providers have to cover. The social and health benefits and the long-term perspective, it all makes sense. But financial innovation is needed to bring that long-term benefit into the short term. Right now, there are various different possibilities under discussion. One idea is implementing a comfort charge plan – an additional service charge for the customer, as seen in the Energiesprong model, for ‘Energy Efficient’ measures.

 

Energy efficient products are more expensive, therefore we have to find a way to cover the extra cost.  The benefit goes to customer (from an ethical perspective that is correct), however, the Housing Association pays a premium and doesn’t see the benefit at an organisational level (although it has a wider impact on affordability, health & wellbeing and in that case, we do see a benefit).

 

Generally, EE renovations happen as ‘pockets of work’  and are not always evenly seen or distributed across the stock (so prioritisation and analysis of the ‘poorest’ key indicators are used).  There is also the issue of using tenants’ money to carry out work in other areas and often not to their own.