Sustainability in property is increasingly moving from a “green premium” debate to a core question of mortgage financeability, long-term value and lender appetite, according to Richard Winder, UK Head of Sustainability at Handelsbanken. While the focus was once on rental uplifts, the shift is now towards how EPC ratings, retrofit needs and tighter standards are shaping how property is financed and assessed. In the analysis below, Richard explores why sustainability is becoming central to how landlords and advisers think about property value and lending decisions.
For years, property sustainability has tended to be framed in a narrow way: would more sustainable buildings attract a higher rent, or command a so-called green premium?
That is no longer the right question.
For landlords, mortgage brokers and property advisers, sustainability has moved from the edge of the conversation to the centre of long-term asset management.
The real issue now is not whether an efficient building can extract a little more rent today, but whether it will remain competitive, financeable and resilient over the next decade.
This significant shift is already visible in the market. Handelsbanken’s latest Property Investor Report found nine out of ten property investors increasing their spend on sustainability and energy efficiency features across their portfolios.
Such a high proportion appears much more than a grudging response to the regulatory direction of travel or merely meeting the next increases in minimum standards. It tells us landlords increasingly view sustainability as a key part of how they protect value, manage risk and future-proof stock.
Our research also reveals that 68% of landlords believe tenants are prepared to pay more for greener buildings – a figure down sharply from 92% last year.
Landlords clearly recognise their clients’ sharpening focus on immediate cost pressures, but the size of this annual shift also suggests that, for at least some parts of the market, basic climate resilience and energy efficiency have become hygiene factors.
The thinking has moved beyond the expectation of a neat, immediate premium for greener property, and towards a more commercial understanding of the long-term value sustainability-related measures deliver.
In practice, the focus for so many of the real estate professionals we support is on securing long-term portfolio positioning, rather than chasing present-day uplift.
The factors driving this maturity of outlook are only intensifying. Physical climate risks are beginning to crystalise in our daily lives, such as the recent heatwaves across the country; this throws a timely spotlight on future climate and insurability.
Energy costs remain centre stage, with the latest global shock underlining the costly unreliability of fossil fuel dependency. Clean technology costs continue to fall while efficiency rises. Tenants, and the new Renters’ Rights Act, are demanding better buildings. And energy efficiency and emissions standards continue to tighten towards the UK’s net zero target.
The most interesting thing for IFAs and mortgage brokers is that this is no longer just a compliance question. It is now increasingly a financing conversation.
Our report found that EPC C or above is now the single most requested sustainability feature by tenants, cited by 66% of respondent.
This tells us that energy performance is not just something landlords need to think about to stay on the right side of regulation; it is now a proxy for how occupiers judge quality, and therefore how lenders and investors are likely to assess long-term strength.
But it is also a finance conversation for another reason. In its guidance to the UK government, the Climate Change Committee has estimated that a total of £373n, or around £15bn each year, will be needed to bring the UK’s building stock up to net zero standard by 2050.
The lion’s share of this, between 65% and 90%, is expected to come from private finance. So, there will be an awful lot of financing required over the coming decades, and beneath all that, a widespread need for sound financial advice.
The question that investors, lenders and consultants will be weighing is whether a property is being managed in a way that protects its value, keeps it attractive to tenants, and avoids expensive remedial work later on.
Because there are now clear costs to delaying action, not only in forfeited market value and demand. Retrofit services are typically easier to access and upgrades cheaper to deliver through scheduled planned maintenance and asset management, rather than joining a latecomers’ rush to comply.
And here it is worth reflecting again on the strength of demand for properties that are EPC C or better, when the official minimum requirement remains EPC E for the rest of this decade. In other words, the market is already frontrunning future uplifts in standards by several years, and there is every reason to expect this trend to continue through to net zero.
Of course, it may still be possible to go too far, too fast, in terms of optimising portfolio retrofit investments. However, with the long-term transition roadmap increasingly settled, and the improved economics of more sustainable buildings falling in neatly behind, it now feels more reasonable to ask what the financial upsides of claiming an early portfolio-wide lead could look like.
We’ve worked with plenty of property investor customers who have opted to do just this, and in so doing have developed a strong feel for the combination of features that command the best premium in each segment of their portfolios.
For property advisers and those arranging finance, the upshot of all this is straightforward. Instead of exploring whether some or all of a client’s portfolio can justify a green premium, the question should be, “What do these assets need to look like to remain financeable, competitive and resilient in a market that is already changing?”.
