Real Estate –
A changing climate for property – are you prepared?
Although economic uncertainty abounds across the UK, the residential property market is one asset class which has really outperformed expectations.
The temporary stamp duty holiday and the release of pent-up demand after lockdown 1.0 were perhaps the biggest drivers of performance in the residential property market. Despite a good year for residential, many are predicting a cautionary in 2021 with Brexit and a potential new-year lockdown coming into play. With such volatility comes opportunity for property investors. Whether private or institutional, there is real potential for healthy returns for those who do their research.
While the short-term macroeconomic dynamics affecting the property market seem fairly obvious, there are a number of pressing issues which will provide longer-term challenges as well – mostly around climate change and the environment. The issue is that many investors overlook these details. At Arbuthnot Latham, we are starting to consider some of these longer-term factors when underwriting mortgages and funding for the development of purpose-built student accommodation, private rented sector and build-to-rent.
According to the UK Green Building Council, the building environment contributes to around 40% of the UK’s total carbon footprint, with half of this from energy used in buildings and infrastructure. We are concerned about the impact that real estate has on our planet and as a lender to real estate businesses and individuals, we want to play our part by being a socially responsible lender.
Flood risks for property investors
Proximity to the nearest river, or even the elevation of your home (if buying in a coastal location), is one of the factors people consider when buying a property. In recent years, there have been numerous news reports with horror stories of continued heavy rain causing river banks to burst, flooding people out of their homes. Many investors overlook something just as important though: ground water levels. You could be three miles from your nearest river, but still be susceptible to flooding if the water table in your area is high. This is of increasing concern due to the damper winters we’re having. According to the Met Office, since 1998 we have seen six of the ten wettest years on record and February 2020 was the wettest February on record.
Investors may need to consider additional capital expenditure to include pumps, suspended floors or indeed raising the existing floor. Sustainable drainage systems or SuDS are another way of modifying the draining of surface water to more natural rates and help reduce surface flooding.
Changes to the energy ratings of buildings
For landlords, the law is constantly changing, requiring increasing standards of energy efficiency in a home over time. It is a legal requirement to have a valid Energy Performance Certificate (EPC) when a building is sold, rented or constructed.
It’s currently the case that properties in England and Wales cannot be let if they have an Energy Performance Certificate (EPC) rating of F or G. An important consideration is also that properties with a current rating of E or even D (if assessed before 2011) can be reassessed and ‘marked down’ rendering them ‘un-lettable’ without improvements.
The Scottish government is going further, ‘grading up’ the minimum standard, so that all rental properties must have an EPC rating of D by 31 March 2025. There will be exemptions, but whether you’d want to go down that route is an important consideration before investing.
Also, for those looking to buy, renovate or build from scratch, the EPC rating doesn’t just save you money (potentially thousands over the years) – it also affects the desirability of your property.
The changing expectations of homeowners
Beyond the issues we’re immediately looking at in real estate finance, it’s really important to consider what the property of the future will look like. Are there charging ports for electric vehicles? It might seem strange, but the government has just pledged to end the sale of all non-electric vehicles by 2030 – that’s less than a decade away. Is the roof of the property reinforced for the potential addition of solar panels or even a green roof? Is the back garden totally paved or is there green space outside which allows for better rainwater runoff and ecological diversity? Just a few years ago, these might have seemed fanciful, but they are very likely to become the standard in the years ahead.
Perhaps the main change to our lives from 2021 onwards will be more people working from home, even after life returns to normal after the pandemic. With that consideration, does the home have office space or even an office in the garden? For smaller properties and flats, what ingenious solutions will emerge for those who need office space, but don’t have hundreds of square feet to play with? Finally, connectivity. For the moment, Wi-Fi is really important, but in the future, 5G and even 6G will mean we have superfast broadband everywhere, on-the-go. How do you keep properties well-connected and ready for whatever innovation comes around next?
The homes of the future used to be something almost unimaginable, but today the technology and the examples are here with us now. The astute property investor will take time to understand the trends and technology and ensure their property is ready for tomorrow and the future tenant.