Achieving sustainability in the private rental sector

Wednesday 23 November 2022

Cedric Author: Cedric Bucher

Cedric Bucher, CFA, CEO at Hearthstone Investments, explores how the backing of institutional capital is key to delivering more sustainable homes to rent.

 
As world leaders prepare for COP 27, we’re reminded of our long-term goals in tackling climate change and how, despite the challenges brought about by the current economic uncertainty, it’s important not to lose sight of these responsibilities. 

In the UK, decarbonising our housing stock is one of the biggest challenges we face in reaching our country’s net zero targets. And, as the cost-of-living crisis continues to take hold, the soaring bills faced by many households this winter means the need for energy efficient and sustainable homes is greater than ever.

The latest building regulations will have a big impact on the sustainability of future homes but improving energy efficiency across all housing stock is going to prove a significant challenge.

Growing demand

We know that people live in rented homes for all kinds of reasons – it might be because they don’t qualify for social housing but can’t afford to buy, or they need flexibility in where they live or simply want to try out an area before committing to a purchase.

Whatever the individual reasons may be, the private rented share of the housing market has nearly doubled since 2000, accounting for almost 20% of homes, according to the English Housing Survey 2021, with demand far outstripping supply, especially in suburban areas. 

And there’s certainly a demand among tenants for more sustainable homes to rent. According to new research from Shawbrook Bank, nearly three in five (58%) of renters say they would be less likely to consider a property with an energy rating of D or below.

As part of its efforts to improve the sustainability of housing stock, the government has plans to introduce requirements for all newly rented properties to have a minimum EPC standard of C. However, Shawbrook Bank’s research also shows that more than a quarter of landlords (26%) have little or no knowledge of the changes they would need to make to meet these regulations. As a result, it’s expected that many landlords could exit the market, leaving even fewer available properties to rent.

The role of investors

Institutional capital can deliver on ESG in the Private Rented Sector (PRS) in a way that private landlords simply can’t – including the creation of more energy efficient homes.

Suburban private rented housing therefore makes an ideal proposition for investors who are committing to more sustainable portfolios. Through investing in assets which meet ESG criteria (through developing sustainable homes, addressing under-supply of housing and creating new communities), investing in new private rental housing can help institutional investors meet their ESG aspirations.

For instance, focusing on the ‘E’ of ESG, institutional investment is supporting the delivery of some of the most sustainable homes in the country. New built homes typically achieve an EPC rating of ‘A’ and ‘B’, compared to the national average of ‘D’, with features such as improved insulation, solar panels, air source heat pumps, rainwater recycling systems and sustainable draining systems. Homes with low emissions that are cheaper for tenants to heat.

In terms of social impact (the ‘S’ of ESG), it’s well recognised that privately rented housing is often of poor quality and poorly managed – so much so that the government is seeking to address these issues through its recently published white paper, A Fairer Private Rented Sector. The negative impact of damp, cold homes on people’s health is among the reasons cited for needing new regulations. Institutional investors have the scale, capability and incentive to provide professional maintenance and tenant service, with quality controls that include regular tenant satisfaction surveys.

When housing is built or purchased with private rental in mind, the aim is to provide quality homes in locations where demand is greatest. Developments backed by institutional capital are professionally managed and maintained, which invariably leads to an improved tenant experience and a benefit to local communities.

For institutional investment in the PRS, the focus is on funding good quality, safe, well-maintained homes that are affordable to people on average incomes, in locations with good community infrastructure. Where tenants are treated like clients and their views are regularly asked for and acted upon.

A resilient option

As well as helping investors to meet their ESG goals, the PRS offers stability during times of uncertainty. 

Rental income tends to rise with inflation, offering inflation protection to investors, while the asset class has shown tremendous resilience over the past decade, including downside protection in times of market turmoil such as during the pandemic and during 2022.

Call it boring if you like, but investing in the PRS can provide excellent diversification in a mixed asset or bricks and mortar portfolio. In times of economic turbulence, investing in – or diversifying into – the private rental sector can provide institutional investors with a stable, long-term income, with potential for capital appreciation over time.

Essentially, institutional investment has the power to meet so many of the challenges that UK housing faces, providing increased choice and quality homes to people on average incomes. Both the tenant and the investor stand to benefit, all while helping to drive the transition to net zero housing.
 

cedric

Cedric Bucher, CFA is CEO at Hearthstone Investments

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