_The impact of sustainability on valuations

As a chartered surveyor with a job that involves valuing houses (mainly for mortgage security) and having a personal interest in sustainability, being about to embark on building a new ‘eco house’ - I have been contemplating when we might see a house’s value reflect its carbon footprint.

It is a question and one that is going to become more pertinent as the UK pursues its ‘net-zero carbon’ by 2050 goal.

So, what are the drivers of value?

The valuations I do are ‘Red Book’ valuations. Following an inspection when we consider the property itself, its location, features and specification; we consider the market for it, and compare the property to others that have sold as close as possible to the valuation date. Everything must be based on evidence.

The sustainable credentials of a residential property are a small part of this analysis. Energy efficiency of the property is recorded in the Energy Performance Certificate (EPC), which provides an asset rating from A-F. The effect of this on value is currently very small compared with other factors; it is most critical if a property is a let investment, as Minimum Energy Efficiency Standards (MEES) apply and it is currently illegal to let where the rating is below E. However, the maximum expenditure a landlord must invest to obtain an exemption certificate is currently only £3,500 (although this is anticipated to rise to £10,000) and insignificant in valuation terms.

Above: Annabel King

However, there are other pressures - we are seeing some lenders not willing to lend on investment properties with F or G ratings; this trend will continue as the minimum level of energy performance increases (the Government has recently competed a consultancy exercise on this and further updates are due shortly) and banks pursue ESG agendas. The exemption register will provide some comfort, however this will not be the panacea in all situations.

For owner-occupiers, the situation is much more nuanced. As valuers, we have noted that premium prices can be paid for properties, which are built to an exemplary standard, where finishes and operational performance meet the expectation of sophisticated buyers. This can include a highly insulated building fabric, MVHR ventilation systems that filter air, ground and air source heat pumps that emit less whole-life carbon emissions than gas and oil central heating systems and solar panels, that link to batteries or power electric cars.

This ties into a growing ‘wellness’ culture, but again it is restricted to a small number of buyers and mostly at the top end of the market. That being said, it is not yet possible to attribute any specific ‘premium’ to the sustainable elements of these sales; and due to the high costs of implementing them they are not currently a high priority for most owner-occupiers who will see a more immediate return on other improvements.

Does the EPC rating affect Marketability?

Based on Knight Frank research there is no evidence, at present, to suggest that the EPC rating of a residential property influences its selling time, as shown in the table below, which looks at the average number of days between a property’s instruction date, to it going under offer by energy band since 2015.

EPC Rating Average Days on Market
A  - 181
B - 215
C - 174
D - 169
E - 189
F  - 210
G - 196

So, what will raise sustainability up the agenda for house values?

It is likely to be a matter of ‘carrot and stick’. Legislation is bound to set higher sustainability standards for all buildings, and financial incentives will need to be more user friendly and generous than the recently abolished Green Homes Grant, which had few supporters. Awareness raising and public information campaigns on the scope to improve the energy efficiency of homes will need to be hugely increased. As these factors take a hold, then even if we do not see a ‘green premium’ for properties that in their design and operation are sustainable, we might see a ‘brown discount’ and reduced marketability for houses, which are less sustainable.

We anticipate that the commercial sector might lead the way. Here, occupier and investor sentiment is increasingly driven by Net Zero Carbon and the wider ESG agenda - we have some evidence that ‘green’ offices, for example, can command premium rents. In addition, the energy efficiency, “green” criteria may include wider environmental and social and governance features, such as design and fit-out for the wellbeing of occupants, sustainable travel and climate resilience. By contrast, less sustainable buildings are anticipated to have higher vacancy rates and take longer to let.

As valuers we cannot influence the impact sustainability has on values, however we do need to be aware of the issues, educate ourselves and be alert to changes in the sector. We can ask questions of property owners on inspection, be prepared to signpost to specialist information and guidance; for example – Historic England is a great source of information, having published some very helpful advice on sustainability improvements that can be made to older houses – which reflects the majority of the stock we see.

It is interesting to note that in Knight Frank’s most recent sentiment survey of 500 clients; 40% of respondents said the environmental impact and carbon footprint of a home was more important, compared with only 5% of respondents saying it was less important.

These findings would therefore suggest that this is an issue, which will only rise up the agenda. Surveyors and estate agents need to gain more knowledge of the issues; and Government needs to urgently establish a new scheme to help channel this sentiment into actual carbon reduction measures, especially within the existing building stock.

With 30 million residential dwellings accounting for about 15% of total UK greenhouse gas emissions, this is a crucial area for action if the new carbon zero goal is to be met.

4-5 bedroom house for sale in Melrose Road, London, £2,350,000

A unique and contemporary low-built modern house in Wandsworth for sale, SW18. The house benefits from sustainable features including solar panels, a green roof and an electric vehicle charge point. Outside there is a sunny south-facing patio, gated off-street parking and a car turntable in the drive.