Green Premium Emerges in the UK Property Market

In the realm of London’s real estate market, the impact of climate change is becoming increasingly evident in property prices and rentals. Recent data compiled by property broker Jones Lang LaSalle reveals that office spaces in the UK capital labeled as “green” due to their sustainability certification command a 20 percent premium compared to non-certified buildings.

Richard Manley, the chief sustainability officer at CPP Investments, the $570 billion investment arm of the Canada Pension Plan, points out that these price differentials are indicative of the corporate drive to eliminate greenhouse gas emissions, which will soon affect asset prices and investor portfolios beyond just real estate.

According to JLL, London office buildings with BREEAM certification, which assesses energy and water usage, pollution, and waste, recorded an average value premium of 20.6 percent and an average rental increase of 11.6 percent compared to non-certified properties. Similar findings have been observed in a study of 592 office investments conducted until December 2021, as reported by property adviser Savills.

The driving force behind the green premium is the growing demand for sustainable properties resulting from corporate efforts to reduce emissions. With London housing numerous service-based companies such as banking, asset management, and law firms, many of these organizations have publicly committed to lowering their carbon footprints. As Mr. Manley states, green buildings offer the easiest and most immediate way to fulfill this objective, leading to a structural shift in demand for environmentally friendly properties.

However, the supply of green offices in London is currently limited, with only around 3,000 buildings meeting the criteria, according to Knight Frank. Consequently, the green premium remains robust. Over time, as more buildings transition to cleaner operational practices, the market is likely to shift toward penalizing properties with poor environmental credentials, resulting in a “grey discount” for unsustainable buildings.

Mr. Manley believes that the market has yet to fully quantify and reflect the valuation impact associated with decarbonization. It is essential to develop a better understanding of the actual costs of decarbonization and how they translate into property valuation. He emphasizes that these trends will extend to most other industries, as businesses and business models adapt to operate within a carbon-constrained world.

Real estate serves as an ideal starting point for these changes, as buildings are responsible for approximately 40 percent of global energy-related carbon emissions. Despite the looming likelihood of re-evaluating businesses and securities based on their carbon footprint, most assets are currently assessed using traditional cash-flow projections. Mr. Manley asserts that this approach must change, as investors consider the costs of decarbonizing companies and question the stability of cash flows due to increased capital expenditures required for a low-carbon future.

As investors reevaluate corporate valuations, companies themselves will need to strategize how to thrive in this new world. The shift from being a laggard at risk of losing access to finance to becoming a leader with better financing prospects over the next decade will likely determine the dynamics of pricing, underwriting assumptions, and active management.

In conclusion, the emergence of a green premium in the UK property market signifies the increasing significance of sustainability in property valuations. This trend reflects the corporate push to reduce emissions and is expected to extend across various industries as businesses adapt to a carbon-constrained world. While the current supply of green buildings is limited, the market is anticipated to transition towards penalizing unsustainable properties with a “grey discount.” Valuation methods and investment considerations will need to evolve to accurately reflect the costs and benefits of decarbonization in order to ensure long-term stability and financial viability in a changing landscape.

Hunt’s Mortgage Rescue Deal Excludes Buy-to-Let Properties, Drawing Criticism 

Jeremy Hunt’s mortgage rescue deal with banks will not apply to buy-to-let properties, indicating a perceived shift in the Conservative party’s stance towards landlords, according to sources cited by The Telegraph. The official Mortgage Charter, released on the government’s website, reveals that the commitments made by lenders, such as increased repayment flexibility, do not extend to buy-to-let mortgages.

In the document’s foreword, Jeremy Hunt assures that the measures aim to provide comfort to those concerned about high interest rates and support for those facing financial difficulties. However, Rachel Reeves, the shadow chancellor, has expressed concern over the exclusion of buy-to-let mortgages from the rescue deal, warning of a potential snowball effect in the private rental sector as interest costs continue to rise.

Reeves wrote to the Chancellor, highlighting that approximately two million properties could be left out of the deal, potentially resulting in higher costs for renters, an increased risk of evictions, and a potential rush to sell buy-to-let properties that could further disrupt the housing market.

Critics, including Marco Longhi, the Conservative MP for Dudley North and a landlord himself, argue that the exclusion of buy-to-let mortgages signals a government stance that appears to be anti-landlord. Longhi points out that difficulties faced by tenants in paying rent can directly impact landlords’ ability to meet mortgage payments, creating a chain reaction that could lead to a shortage of available rental properties as landlords are forced to sell.

Jeremy Hunt brokered the deal with mortgage lenders in response to the Bank of England’s interest rate hike to 5 percent. The agreement allows homeowners worried about mortgage repayments to seek help from their lenders without affecting their credit score. Lenders have also agreed to offer options such as switching to an interest-only deal or extending the mortgage temporarily, with a six-month breathing space for borrowers to decide whether to revert to their original terms. Additionally, lenders must wait a minimum of 12 months before seeking repossession without homeowner consent.

In his foreword to the Mortgage Charter, Jeremy Hunt reaffirmed the government’s commitment to supporting households and addressing high inflation, highlighting the introduction of substantial support packages and pledging determination in tackling economic challenges.

Rachel Reeves’ letter to Hunt seeks clarification on whether buy-to-let properties are covered by the voluntary agreements with lenders in response to the mortgage crisis. The Treasury emphasizes its focus on driving down inflation as the most effective way to assist mortgage holders and renters, along with the provision of financial support to households for the cost of living.

The exclusion of buy-to-let properties from the mortgage rescue deal has sparked debate and calls for clarity regarding the government’s approach to supporting landlords and addressing the challenges faced by both homeowners and renters in the current economic climate.

John Lewis is making a significant move from the high street to the residential property sector by submitting initial planning applications for nearly 800 rental homes in London.

The proposed developments will be located in West Ealing and Bromley, with a site in Reading to follow. This venture is part of a £500 million joint project with abrdn, aiming to construct approximately 1,000 new homes across these three locations.

While concerns have been raised regarding the affordability of the homes, John Lewis has stated that more than a third of the properties in West Ealing and Bromley will be affordable and specifically targeted at key public sector workers. The exact rental costs are yet to be determined, but the company has assured that the homes in Bromley will be available at 100% London Living Rent, catering to key workers. These developments will feature public spaces, flagship Waitrose shops, improved pedestrian and cyclist access, as well as various amenities such as resident lounges, roof gardens, and flexible workspaces.

This strategic shift aligns with the growing trend of the build-to-rent sector in the UK, which seeks to address the housing crisis and meet the rising demand for rental homes, particularly as private landlords withdraw from the market. The move by John Lewis is a step towards providing much-needed housing and supporting key workers in the region. The company aims to have the first tenants move into these properties by the end of 2027, with the project expected to be completed in 2028.

UK house prices have surprised analysts by experiencing a slight growth in June, defying expectations amid a challenging market environment.

However, the annual prices have fallen at the fastest rate since 2009, indicating the impact of soaring mortgage costs on the housing market. Nationwide building society reported a monthly rise of 0.1%, reversing the previous month’s 0.1% fall and surpassing economists’ forecasts of a 0.3% decline. This pushed the average cost of a house in the UK slightly higher to £262,239.

Despite the monthly increase, prices were 3.5% lower compared to the same period last year, marking the sharpest annual decline since 2009. Nevertheless, this was a smaller drop than the 4% fall predicted by economists. The housing market has been adversely affected by the persistent surge in mortgage costs caused by the Bank of England’s half-point interest rate hike to 5% in June, aimed at curbing high inflation levels. Two-year fixed-rate mortgage rates have exceeded 6%, posing challenges for prospective homeowners and potentially forcing some sellers to accept lower offers.

Robert Gardner, the chief economist of Nationwide, emphasized that the sharp increase in borrowing costs is expected to exert a significant drag on housing market activity in the near term. Longer-term borrowing costs have risen to levels comparable to those seen after last year’s mini-budget, but the negative impact on sentiment has not yet been as severe. Gardner highlighted the strain on household finances, with mortgage payments consuming a higher share of take-home pay, and prospective buyers finding it increasingly difficult to save due to the cost of living crisis.

Despite the challenges, Gardner believes that a relatively soft landing is still possible, provided the broader economy performs as expected. The latest data from HM Revenue and Customs showed a 27% year-on-year decline in home sales in May, further indicating the cooling housing market. Transaction volumes provide a more accurate reflection of market health than property prices. Nationwide’s data revealed annual house price declines in all regions except Northern Ireland, which saw growth of 0.7%. The weakest performing region in June was East Anglia, where house prices fell by 7.4% year on year.

Industry experts, such as Jeremy Leaf, a former residential chair of the Royal Institution of Chartered Surveyors, noted that properties are taking longer to sell, with fewer buyers and more protracted negotiations due to mortgage upheaval and inflation concerns. Gareth Lewis, the managing director of property lender MT Finance, highlighted that properties are staying on the market for a longer period, as buyers are cautious about potentially buying at the peak of the market. The uncertain economic conditions and rising mortgage costs have made buyers more cautious and raised concerns about the sustainability of the current housing market trends.

London’s property market continues to show contrasting trends, with certain areas experiencing high demand and competitive sales, while others present opportunities for buyers to find bargains.

Recent research by market analyst PropCast has revealed the “hottest” and “coldest” property markets in the capital.

Walthamstow and its surrounding areas, located in east London, have emerged as the “hottest” markets for property sales. In the E17 postcode, 60% of properties currently for sale are already under offer or sold subject to contract. The popularity of Walthamstow has been on the rise as people migrated from Hackney and Islington in search of more space, leading to a surge in demand that has outpaced supply. The neighboring E11 postcode, covering areas like Leytonstone and Wanstead, closely follows with 57% of properties for sale under offer or sold.

Several other east London areas, including Woodford, Stratford, and certain South-east London neighborhoods such as Forest Hill, Honor Oak, and Crofton Park, also feature among the top ten “hottest” postcodes, where more than half of the properties for sale have already been snapped up.

On the other hand, buyers seeking more favorable conditions may want to explore some of the capital’s “coldest” property markets in inner London. PropCast’s research identifies Kings Cross as one of the coldest markets, with only 8% of properties for sale already under offer or sold. The W1 postcode, encompassing areas like Soho, Mayfair, and Fitzrovia, follows closely with 12% of properties under offer. Other “cold” markets include the City of London, Barnet, and St Johns Wood.

For first-time buyers, the buying agent London Central Portfolio suggests targeting areas like Bayswater, Notting Hill, and Holland Park. Those searching for discounts may find opportunities in Pimlico, as flat prices have decreased by 11.5% from their peak. However, the agent advises acting swiftly in Notting Hill, as the area has nearly recovered from its 2015 peak.

Previous analysis by PropCast highlighted the increasing popularity of London’s outer boroughs, with buyers willing to accept longer commutes for access to countryside areas and more affordable homes. This trend indicates that preferences are shifting beyond Zone 2, creating new opportunities for buyers outside the city center.