Is Property Linked Finance the solution to Britain’s retrofit problem? 

Notoriously, the UK has some of the draughtiest and least energy efficient homes in Europe, while by some estimates around 85% of the country’s commercial buildings are falling short of incoming standards on energy efficiency. 

With buildings responsible for 23% of the UK’s annual greenhouse gas emissions – and roughly 80% of the buildings that will exist in 2050 already built – upgrading the UK’s existing building stock through green retrofit is a vital part of the country’s transition to a low carbon future. But this massive programme of retrofit comes with a hefty price tag: according to the Climate Change Committee, an estimated £360bn of investment is needed to upgrade the UK’s inefficient buildings by 2050. 

The Green Finance Institute believes that Property Linked Finance (PLF) can go at least some of the way in meeting this need. Last month, it published a report suggesting PLF has the potential to enable between £52bn and £70bn of private capital into upgrading 2.1 million EPC D rated and below owner-occupied homes. BE News caught up with Emma Harvey-Smith (pictured), programme director at the Green Finance Institute, to find out more. 

What exactly is PLF? Fundamentally, this financial solution enables property owners to fund up to 100% of energy efficiency upgrades upfront. The finance is linked to the property, rather than the property owner. This means the payment obligation transfers to the new owner when it is sold. Property owners would only pay for energy efficiency measures up until they sell their property, while new buyers benefit from a more energy efficient, potentially more valuable property, in return for continuing to make regular payments towards the upgrades. The mechanism would work both for homeowners as well as owners of commercial properties. 

Where is it currently being used? PLF is based on the US Property Assessed Clean Energy (PACE) model, which has enabled the investment of over $13bn of capital in making homes and commercial buildings greener and more resilient, according to PACENation, the US trade body. There are also versions of PLF, under the PACE model, in Canada, while in Australia the focus is on the commercial market with the potential to explore residential, with further schemes in development in South Africa and Spain. In the US, PACE has made over 325,000 homes and buildings more energy efficient, created 202,000 job-years and generated $21.6bn of economic impact. 

What is the key benefit of PLF? Energy efficiency is seen as increasingly important to consumers, but the upfront cost of carrying out the work is a significant barrier. GFI research published in September 2022 found that nine in 10 people considered the energy-efficiency of their homes to be important or very important, up from 83% before the energy price crisis. However, only 20% of individuals were likely or very likely to use existing types of finance to do upgrade works and around 50% were unlikely or very unlikely. PLF helps property owners overcome this upfront financial barrier. 

Can you give an example of how it works in practice? One case study from Amalgamated Bank in the US involved a family in Florida who didn’t qualify for conventional financing due to a low FICO credit score. Utilising PACE financing, they were able to obtain $38,000 through Amalgamated Bank for essential flood resiliency updates and energy efficiency improvements to their home. Without PACE financing these improvements would have had to be financed through high-rate credit card debt or other unfavourable terms. Utilising PACE, the homeowner was able to pay for 100% of the improvements over 30 years through bi-annual tax payments – the method used to link PACE to a property in the US – at a reasonable interest rate.

What are the differences between PLF and PACE? The UK’s property market and tax environment differs to the US market, so a PLF solution will need to be tailored to ensure it’s scalable and replicable across the UK. In the US, they use property assessed tax to collect PACE repayments, whereas a different collection mechanism would need to be designed in the UK. The GFI is developing a ‘greenprint’ for the implementation of PLF in the UK, which will explore the mechanisms to link the finance to a property, key financial considerations, the funding model, the target operating model, the customer journey, the regulatory position, the potential impact on the housing market, and the market opportunity. 

How is PLF different to the Green Deal? The continuing cost of living crisis means that it is critical that any new financial solution to support energy efficiency improvements is attractive and affordable to customers. One of the lessons learned from the failure of the UK’s Green Deal, an earlier retrofit programme that was launched in 2013 before being disbanded in 2015, was that if the price is too high or the borrowing amount is capped too low, consumers will not use it. Today, affordability is an even more pressing concern. Our research shows that PLF must be designed to overcome issues that impeded the roll out of the Green Deal. Development banks such as the UK Infrastructure Bank, Scottish National Investment Bank and Development Bank of Wales could play an important role in ensuring that early stage PLF market solutions meet that crucial affordability requirement. 

How would PLF impact the value of people’s properties? Energy efficiency improvements should lead to warmer, more comfortable homes with lower bills. Early data suggests that there is an uplift in prices for higher-EPC rated properties – Rightmove’s 2023 report suggests an average increase in sales values £56,000 more for homes that have improved from an EPC rating of F to a C, and Knight Frank’s research suggests around 20% uplift. We will have a clearer idea as more data is collected and analysed. The GFI will engage with key stakeholders as part of the design process for a UK model of PLF to ensure this solution has minimal impact on the housing market.

And PLF can be used for commercial buildings as well as homes? Yes. In the US, PACE has the has supported $5.2bn of investment in 3,100 commercial projects and created 65,000 job-years. Commercial property owners are interested in upgrading their existing stock due to the high demand from tenants for greener buildings. The government has introduced minimum commercial MEES regulations meaning that more inefficient buildings need to be upgraded to be let. A requirement for the EPC rating to be E or higher has already been in place since 1 April 2020 and it has been indicated that this will tighten again in the near future, with a proposal that commercial properties must have an EPC rating of C or higher by 1 April 2027, and B or better by 2030. From conversations we’ve had, there’s potential for a PLF solution across both residential and commercial property and we look forward to working with interested stakeholders to develop this. 

What are the next steps in bringing PLF to market? On the back of our research, the GFI aims to build a viable model for PLF that can be introduced to the UK, laying the groundwork for a thriving and scalable PLF market that can help accelerate the journey towards decarbonising the UK’s 28 million homes, as well as commercial and public buildings. We will do this in collaboration with the finance, retrofit, legal, property and other key stakeholders and aim to share a greenprint for UK PLF with the wider market in 2024. 

Is PLF alone the solution to the UK’s energy retrofit challenge? PLF will be an important part of the solution, however it will need to be combined with the right policies, regulations, retrofit technologies, consumer education and incentives to upgrade the UK’s built environment at the pace and scale required. PLF needs to be seen as one of many ways to fund the decarbonisation of the UK property market. But for the cohort of the market that is able to pay, may not be eligible for grant funding, PLF could prove an attractive option to help property owners to improve their homes by tackling the payback period barrier.