With extensive experience of the real estate sector, Benjamin Thompson Kirk supports clients across Canada, the USA, and the UK. This article looks at the UK’s government’s Net Zero Strategy, and its implications for the real estate sector.
The UK government has made ambitious commitments to wean the nation off its reliance on gas as part of efforts to drive down carbon emissions. Nevertheless, it is clear that government investment will be crucial in terms of lowering costs and facilitating a transition to low carbon buildings.
The government has committed to a ‘levelling up’ scheme throughout the UK supporting the creation of 175,000 green-skilled jobs by 2030. It has also pledged to help businesses and homeowners in their transition to low-carbon buildings, phasing out replacement and installation of natural gas boilers by 2035, and reducing the cost of heat pumps by at least 25% by 2025, with the goal of making heat pumps as economical to install and run as gas boilers by 2030.
The government aims to drive huge growth in the heat pump market, supporting 600,000 installations per annum in residential properties by 2028. However, unlike other key areas such as the power sector or heavy industry, this target relies on individual homeowners opting to make substantial changes to their properties on their own initiative. With the average cost of a heat pump currently falling between £6,000 and £18,000, depending on the amount of heat required, this target seems very ambitious. Under the Boiler Upgrade Scheme, homeowners can apply for a capital grant of £6,000 towards the installation of a ground source heat pump, or £5,000 towards the installation of an air source heat pump. However, for many homeowners, the Boiler Upgrade Scheme proves little incentive, given that installing a replacement gas boiler is considerably cheaper.
The UK government pledged to improve energy efficiency in homes to ensure that as many homes as possible achieve EPC band C by 2030. On 21 February 2022, the government earmarked £67 million in funding under the Home Upgrade Grant scheme to improve the energy efficiency of more than 4,300 residential homes. Although this is welcome news, it falls far short of the Net Zero Strategy’s target of ensuring all homes meet EPC band C by 2035. In reality, approximately 15 million properties in the UK require energy efficiency upgrades in order to reach this target. With an average cost of £8,579 to improve energy efficiency in owner occupier homes, again, this goal is in jeopardy, with the cost savings conferred by improving the energy efficiency offset by soaring fuel prices. However, the government recently released £179 million in funding for distribution via local authorities to improve 20,000 social housing homes rating D or lower through the Social Housing Decarbonization scheme.
Other commitments pledged under the Net Zero Strategy include:
- Developing sufficient low carbon hydrogen capacity to power 1.5 million homes by 2030.
- Providing £337 million in funding to develop new heat networks zones, scaling up low-carbon heat network deployment by 2025.
- Launching a new policy framework to ensure products use less energy.
From a landlord’s perspective, key points to note are that gas boilers will be banned in UK new builds by 2025, with new and replacement boilers phased out in all households by 2035. Landlords who include utility bills in rent may find that gas becomes more expensive, while the cost of electricity falls. Although landlords will need to invest more in properties to attract tenants and comply with government regulations, the good news is that they can benefit from government programs like the Boiler Upgrade Scheme.
For investors, the Net Zero Strategy offers some reassurances. A study by BEIS indicates that properties that achieve an EPC rating of C or above attract an increase in value of around 5% compared with band D-rated properties. Shrewd equity investors favor developers with ambitious emission targets already in place, solidifying the green credentials of their property portfolios.
From a developer’s point of view, new building regulations effective from June 2022 mean that new residential homes and buildings in England must produce around 30% lower emissions than current standards. Developers will need to budget for modern heating systems, energy storage, and smart meters. Installing new heating systems in older properties could be particularly challenging and expensive. Developers will need to take a ‘fabric first’ approach with regard to new builds in order to realize low energy consumption targets.
The Net Zero Strategy suggests government reliance on a combination of state intervention, market growth in the private sector, and investment in the public sector to achieve its goals. Decarbonizing the property sector could have considerable benefits for the UK economy, supporting vulnerable and low-income housing and growing key markets for carbon heat. Industries from services to manufacturing could benefit from this boom. However, experts warn that political events, particularly increases in energy and cost of living costs, cast doubt on the achievability of goals outlined in the Net Zero Strategy.