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Commentary

Join the Retrofit Revolution

Collaboration on energy efficiency can tackle the crisis in the UK’s private rented sector, says Iryna Pylypchuk​​, Director of Research and Market Information at INREV.

Earlier this month, the RICS Residential Survey for May once again confirmed continuing expectations for rental price increases, alongside an imbalance between tenant demand and available supply. But when people can no longer afford to live in their homes and houses are not fit for purpose, do we need much more evidence to accept that the UK is facing a housing crisis?

Despite supply gaps being identified across the full spectrum of housing in the UK, for several years the private rented sector (PRS) has been badly affected. This has been caused by lagging housing policy that has failed to adequately react to significant shifts in socio-demographics.

Delays in family formation, rising divorce rates, and an increasingly mobile population have led to sharp demand increases for affordable, centrally located housing units or co-living solutions not only for sale but also for medium- to long-term tenure. And this demand has only been compounded as house price growth and high interest rates in the UK have constrained owner-occupation, particularly among younger or single households, and more recently broadening to middle-income households.

These factors, on top of population growth and rapid urbanisation have fundamentally changed demand for housing across location, tenure, and quantity. This is by no means a problem unique to the UK. Our recent research also highlighted a clear opportunity – and need – for institutional capital to positively contribute to the ongoing housing crisis across Europe. The excess housing demand on the continent requires the rapid acceleration of housing supply across all segments, especially the affordable intermediary PRS.

However, the free market in the UK means that it also has no form of rental regulation and weaker security of tenure – greatly exacerbating existing challenges. For instance, the National Housing Federation (NHF) estimates that approximately eight million have some form of housing need in the UK, and of these, 3.6 million require social or affordable housing.

Bridging affordability and sustainability  

Alongside supply imbalances in the rental market, there are ongoing questions about what should be considered ‘affordable’ rent. In the UK, this is broadly defined as homes let at least 20% below local market rents or let at rates set between market rents and social rents.

However, this unfortunately remains unaffordable to many in the UK and often leads to displacement of lower-income households from more central locations. Between 2012 and 2020, this ‘surburbanisation of poverty’ trend is estimated to have displaced one in nine lower-income PRS households.

Similarly, what is considered ‘affordable’ in the UK does not take cost overburden into account, ie whether a household’s total net income can sufficiently meet other required expenditure such as utilities and council tax.

Energy efficiency, therefore, has a crucial role to play.

As some 44% of housing stock in Europe was built before 1980, these homes are huge emitters of greenhouse gases – accounting for 26% of total emissions in the UK. Similarly, a lack of energy efficiency in these buildings negatively contributes towards poverty and inequality, with many facing higher energy bills on top of already significant rent and utility costs.

With the current cost of retrofitting older houses averaging £35,000 in the UK, there is a clear need for sustainable investment strategies that prioritise the PRS and help to reduce energy costs for tenants.

The long-term investment opportunity

Given the urgency of the climate crisis and the UK’s commitment to transition to net zero by 2050, regulatory change will soon require all homes to decarbonise at pace.

While, in its current form, the real estate valuation process does not account for this regulation or the many benefits associated with sustainable homes, institutional investors with a long-term investment horizon recognise the real and impending risk of assets losing value and becoming obsolete due to legislation.

The same investors also understand the vast benefits that come with retrofitting homes to net zero standards – not only for aligning with vital Paris Agreement commitments, but also reducing both operational costs and costs of occupation.

It’s therefore clear that there is a strong alignment between the objectives of long-term investors and the PRS. However, according to our recent research, investors believe the sector will only become truly fit-for-purpose through public sector intervention – particularly supply-side support and policy frameworks that will help incentivise investment and reduce the level of investment capital at risk.

By working together in this way, government, developers, and investors have a crucial opportunity to help build frameworks that create a viable market, meeting the urgent need for long-term, sustainable tenure, and tackling the UK’s housing crisis heads on.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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