Retrofitting Britain’s leaky homes does not need to cost the earth
Draughty houses make us poor, sick and miserable. Private sector investment into retrofit can help cut carbon and improve life for the poorest people, writes Anna Moore, chief executive of Domna
‘Benefits’ have been a sore word for ministers of late. But with the dust settled from the Spring Statement and the chancellor’s economic headroom shrunk, one sure-fire way to help would be slashing the £9bn a year UK households waste on excess energy bills – by retrofitting housing.
This is an obvious opportunity that is not currently being grasped as tightly as it could be. With more than six million UK households in fuel poverty, we need action now.
As with many issues Britain faces today, the crisis of fuel poverty – not to mention damp, mould and general housing decay – has been decades in the making. We have systematically underinvested in UK housing, from Victorian terraces to post-war developments to ’80s tower blocks.
Draughty houses make us poor, sick and miserable. What’s missing is a joined-up retrofit strategy across all government departments.
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The investment case is clear: Arup has estimated a 2.15x multiplier on every £1 spent on retrofit, reflecting lower healthcare costs and improved welfare outcomes, as well as savings for tenants and direct employment. Where else can the government get this level of return on spending and do so within this parliament?
The capital returns are also clear. Study after study have shown a ‘green premium’ for homes with a higher Energy Performance Certificate (EPC) rating – 15% to 20% on average for the least energy-efficient homes across the UK.
Some regions show far higher valuation impact. Recent work Domna completed in the Midlands showed an average 67% valuation differential for F to G-rated homes upgraded to EPC Band B to C, using transactions data and controlling for postcode, house type and size. The jury is in on the value creation case from retrofit.
The issue is the public purse. While the government has committed over £2bn a year to various energy-efficiency programmes – from Warm Homes: Local Grant to the Energy Company Obligation to the Boiler Upgrade Scheme – we need to spend at least £500bn to retrofit the 18 million homes in the UK that are rated below EPC C.
As with any consideration around improving hard or soft infrastructure – whether it be schools, hospitals, prisons, playgrounds or libraries – there is always a cost equation that politicians must weigh up over a given timeframe. With debt costs many times higher than five years ago (and rising), the question of where we spend money is becoming trickier.
Some advocate for government-backed development debt to fund retrofit of affordable housing, and this would certainly help bring in some of the significant private capital currently sitting on the sidelines.
Although social housing yields reflect more of an infrastructure-style return than residential property, the upfront valuation increases offer juicier returns that are nearer the levels that pension funds require. It would not require a huge amount of creativity for the government to create the right vehicles to unlock some of the billions in local government pension scheme capital we have to deploy.
As with many things, one of the challenges is the ‘A’ word: accounting. Just as we dealt with distressed loans on an inconceivable scale following the Great Financial Crisis, there is no reason why the current crisis cannot be addressed in a similar way.
“We need to spend at least £500bn to retrofit the 18 million homes in the UK that are rated below EPC C”
Securitising retrofit projects into separate vehicles can be done within existing regulated structures. Before-and-after valuations of improved stock are stark and significant, thus can be monetised.
Recent such deals have seen Hyde bring in the likes of M&G and AXA, while others such as the Pension Insurance Corporation and separately Barclays and Lloyds have ventures specifically targeting social retrofit. The two banks are delivering £1bn of retrofit lending enabled by guarantees from the National Wealth Fund, which will provide vital comparables for others.
At Domna, we retrofit more than 15,000 UK homes a year. This involves conducting before-and-after appraisals, assessing where best to allocate funds, securing grant funding and overseeing contractors, meaning we see first-hand the impact.
We know that, with very few exceptions, there is a significant amount of day-one upside from retrofitting old housing stock, with post-retrofit valuations improving potentially by two-thirds.
If ministers want their commitments to cutting carbon and improving life for the poorest people in society to be turned into a real legacy, we need them to get behind private sector investment into retrofit. The benefits couldn’t be clearer.
Anna Moore, chief executive, Domna
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