Do energy efficiency measures add value to property?

Author: 19/02/2015

We know that the value of property is a major preoccupation for many in the UK – particularly the majority who own their own home. We also like to invest in, and improve, our homes, and have a perceived and general notion that the money we spend is money well-spent and is ‘a good investment’. Somewhere along the line, we trust that it will manifest as an increase in value.

However, when it comes to matters of energy efficiency and sustainability, can we actually tell if investments make our buildings worth more? In theory, a home or office that is more energy-efficient and has cheaper running costs should be more attractive in the marketplace. Surely a car that does more miles per gallon is worth more to the purchaser than an equivalent that does fewer MPG?

Take technologies that pay feed-in tariffs: these could even be considered as cash generating because of the rate of financial return and the amount saves on electricity bills. If you bought a house that had a solar PV system installed two years previously then you’d also be buying an asset that would provide an income stream. It would seem even better if someone else had paid the up-front capital costs for you.

The potential effect of EPCs on mortgages

Research by the Wales Low Zero Carbon Hub indicates that, across a group of similar properties, fuel bills can range between £285 and £1,380 where the only significant difference is the building’s energy performance (as suggested by its EPC). The research only covers properties where there is sufficient continuity in bills over a period of time to allow mortgage companies to calculate the implications for a potential mortgage. The research also shows that those who borrow against a higher rated property could have £1,000 (£90/month) more disposable income compared with those in less efficient properties. This, in turn, could equate to an increased maximum loan of £15,600.

EPC

Estimated annual fuel bills (£)

Money not spent (‘unspent money’) compared to “low” EPC bills, per annum (£)

Amount of additional mortgage lending ‘unspent money’ could support, total (£)

40 1,380 0 0
50 1,107 273 3,892
60 833 547 7,797
70 559 821 11,703
80 285 1,095 15,609

 

 

 

 

 

 

 

For social landlords, the same effect could also be important i.e. the cheaper the landlord can make the running costs of a dwelling, the greater potential there is for the tenant to pay the rent.

But what about buildings that need money spent on them to achieve minimum standards?

The Department of Energy and Climate Change has just published regulations that will require privately rented homes and non-domestic properties that are tenanted to have a minimum EPC rating of E from April 2018. It is expected that Parliament will pass the necessary legislation in March 2015.

This will mean that in order to rent out such buildings, someone will need to invest capital to achieve the required minimum energy performance. For investors and owners, such buildings represent a risk if significant works are needed, so again, in theory, they should be worth less if they are on the market in an unimproved state.

There are, of course, many other factors such as location and scarcity which dictate the value of property. In short, there simply isn’t yet enough comparable market data to say for sure what the impact of energy efficiency measures is on the actual market value.

Part of the problem in assessing the financial performance of ‘green buildings’ is the difficulty in making a truly comparable assessment in the marketplace between ‘green’ and ‘non-green’ buildings. The variety of factors affecting value and the means by which ‘green’ is denoted make it hard to unpick.

The evidence relating to property values

In the US real estate sector research by Nils Kok indicates that an aggregate rental premium is in the order of 3% per square foot when compared with otherwise identical buildings. When considering selling prices, the same research identified an even higher premium of 16%.

Casting an eye to the California housing market, research indicates that having a green label adds 9% to the value of a property, although interestingly part of the rationale is that the locality characteristics of California correlate to a green ideology, which is manifest in other sectors - for example, the increased rate of hybrid vehicle registrations. 

So, in the UK, until Phil and Kirsty et al say it outright, we can’t quite put our finger on how much more your high energy-performing house will be worth.