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07 December 2021

Lessons for the UK Real Estate sector – a review of the Heat and Buildings Strategy

by Agathe Kuhn & Patrick Rogers

On 19 October 2021, the UK government published its highly anticipated Heat and Buildings Strategy (as part of an economy-wide net-zero by 2050 strategy). Originally expected in Autumn 2020, it came amongst a number of late publications as the UK presidency made preparations for the COP26 climate summit in Glasgow this November.

The strategy itself lays out plans to cut carbon emissions from 30 million UK homes and workplaces (representing almost a quarter of all UK’s GHG emissions) in the 2020s and introduces £3.9 billion of new funding to decarbonise heat and improve buildings’ energy performance.

Phasing out fossil fuel heating

A key ambition of the plan is to increase the adoption of heat pumps and to end sales of new gas boilers. For buildings off the gas grid, the phase out in large non-domestic buildings will begin in 2024, while for homes and all remaining non-domestic buildings off the gas grid, the phase out will begin in 2026.

For buildings on the gas grid, the ambition is to have phased out the installation of new natural gas boilers by 2035. To support this transition the newly announced Boiler Upgrade Scheme (2022-2025, replacing the Clean Heat Grant) commits funding of £450 million in grants to incentivise households and small businesses to install air source and ground source heat pumps.

Boosting energy performance of buildings

In addition to the measures introduced to increase the share of renewable heating, the Strategy also contains proposals to boost the energy performance of buildings in the UK:

- Minimum Energy Efficiency Standards (MEES): Private rented non-domestic buildings must reach Energy Performance Target (EPC) band C compliance by 2027, which will serve to reinforce the pre-existing target of minimum EPC band B compliance by 2030. For domestic buildings, all homes are to meet EPC band C rating by 2025 for new tenancies, and by 2028 for all tenancies.

- Future Buildings Standards: Increased performance standards for new builds in the commercial and industrial sector will be dictated by conclusions from the Future Buildings Standard consultation (now closed, details forthcoming), which will come into effect in 2025, with an interim uplift expected by June 2022.

- Future Homes Standards:  From 2025, all new domestic buildings will have to comply with standards to make buildings ‘zero-carbon ready’: i.e., ensure their ability to become carbon neutral over time, as heat networks decarbonise. New buildings’ emissions are also required to be 75% lower than those built under current Building Regulations by 2025.

- Lending practices: There is a proposed target for mortgage lenders to reach an average standard of EPC band C across their portfolios by 2030. The timeline given for voluntary disclosures by lenders is 2022, while mandatory disclosure requirements are expected by 2024.

Our view

The strategy confirms the trend in the UK towards the tightening of energy performance standards in buildings and contains a considered mix of carrots (cash incentives), sticks (regulations and minimum standards) and tambourines (long-term goals). Yet, while the publication demonstrates that the government is grappling with the right problems, the total expenditure on energy efficiency signalled in the strategy (£5.2 billion, including previous commitments) falls short of the £9.2 billion, which was promised by the Conservative party in their 2019 manifesto.

Furthermore, the public spending strategy laid out mainly targets public sector buildings (£1.4bn), those in fuel poverty (£950 million), and social housing (£800 million), while leaving a noticeable gap around domestic owner-occupied buildings - the single largest tenure type. This is somewhat surprising given the space left by the discontinuation of the Green Homes Grant scheme in March 2021. It also signals the government’s reliance on green finance solutions from the private sector to spur homeowners to invest in performance upgrades.

A similar reliance is seen in relation to non-domestic buildings, a sector for which eliminating emissions is expected to cost approximately £20 billion. To spur such investment, the government proposed long-dated targets (e.g. EPC band B for private-rented buildings by 2030) to allow asset owners time to achieve compliance. The proposed mortgage lender requirement further shows that leveraging private capital will be key to achieve the objectives of the strategy.

Looking ahead, reactions from experts suggest that further tightening of built environment regulations can be expected. Jim Watson, energy policy researcher at UCL and member of the government’s advisory group on the Heat and Buildings Strategy stated that the plan was modest, with an insufficient focus on energy efficiency, meaning it will “need to be followed up by a ratcheting up of ambitions in the coming months and years if the UK is to stay on track to be a climate-change leader – and to meet medium and long-term targets”.

In this context, it is clear that property owners in the UK should plan ahead in preparation for increasingly stringent energy efficiency standards this decade.

Longevity’s experts are closely monitoring updates in the UK policy framework for energy performance of buildings. Our team can support you in understanding the specific implications these measures will have on your operations.