Summary

• There isn’t a premium for the most efficient new build homes yet.

• Demand for energy-efficient homes is strongest in younger households.

• Green finance, demographic shift, and pressure from investors mean we’ll see a green premium emerge in future.

We know that sustainability is rising up the agenda across the housebuilding market, but can you place a value on building a ‘green’ home? Currently, the cost of building more energy-efficient homes is higher, but the question remains whether a premium exists yet when it comes to selling homes.

Homes with an A-rated EPC use up to 32-kilowatt hours per square metre per year, compared to 33–65 for B-rated properties. For residents, this can mean hundreds of pounds in energy bill savings each year.

The new build divide

In the second hand market, the highest A-rated properties command a price premium of 6.9% over lower-rated properties, adjusted for size. But in the new build market, it’s the much more prevalent B-rated properties that see the highest area-adjusted value. There have not been enough sales of A-rated new build homes to show whether or not there is a premium.

A-rated properties make up a small proportion of stock – accounting for just 0.1% of all homes in London. This puts London second to the North West as having the fewest A-rated properties across England.

With so few A-rated properties being built, their lower value is also a reflection of their location. Most A-rated homes are in outer London. Over the last five years, 40% of A-rated homes sold were in just four boroughs: Barnet, Bexley, Greenwich and Bromley. And even then, they made up an average of just 0.4% of total sales in those areas. Lower land values in outer London make these properties more viable for developers, particularly if they are building houses (which 60% of A-rated sales in the last five years were).

Young Londoners lead the way in buying A-rated homes

Whilst the premium for the most efficient homes across the whole market is not hugely significant, the profile of those able to buy an A-rated home is currently limited to the more affluent.

Using Experian data, we have found that 39% of those buying A-rated properties have a household income over £75,000 compared to 21% of Londoners on average. But they also tend to be younger.

Whilst we have found in previous analysis that downsizers are particularly interested in the energy-efficient aspects of a new home, it appears that younger Londoners are leading the way in buying them. Across the UK, we found that it tended to be established families (41-to-60-year-olds with children) who were more likely to live in A-rated homes over B-rated. But in London, buyers aged 31 to 45, most of them without children, made up almost 60% of those buying an A-rated home over the last five years.

That means we can expect to see growing demand for A-rated properties. Demand for A-rated properties is strongest in younger households. As these environmentally-conscious households get older, their purchasing power will increase. That means more of them will be able to afford homes that allow them to minimise their carbon footprint.

Future demand

Whilst a green premium in the new build market may not currently exist in London, much of that is likely driven by the fact that A-rated homes being built are few and far between. A range of improvements such as boiler insulation or solar water heating could boost the rating of many B-rated new build properties. Three factors will drive growing demand for green homes: the introduction of green mortgage finance, demographic shift, and long-term planning from investor buyers.

While the nascent green mortgage market offers cost savings for buyers, the savings are not yet large enough to make a difference to affordability. A rate discount of 0.1%, typical for green mortgages, means saving around £23 per month on a £500,000 mortgage: less than a gym membership for many. But residents in efficient homes have lower and, crucially, more consistent energy bills. That means they are less likely to encounter a surprise spike in energy costs, which in turn leaves them less likely to fall into mortgage arrears – as shown by research from the Bank of England. When lenders reflect this difference in risk in mortgage costs, monthly savings for residents will be much higher.

We know younger generations are more environmentally conscious. As Generation Z graduates and starts moving into homes in London, we can expect to see them take a much closer look at each scheme’s environmental and social credentials. This is true for those able to buy, but also those looking for homes to rent, reinforcing the need for Build to Rent operators to prioritise greener buildings.

Finally, we know that Build to Rent accounts for a growing share of London’s private housing delivery. We predict their share will increase when the Help to Buy scheme ends, from 26% in 2019 to 33% in 2025. Funds and institutions operating in this sector have investment horizons spanning multiple decades. They will prefer to fund buildings with higher environmental standards now, rather than pay to retrofit buildings in the coming years.

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