Balance sheets are key to the drive for greener housing

Article originally published in The Intermediary December 2023 – page 17

Images of waves several metres high crashing over sea walls, cars abandoned submerged in standing flood water and the devastation caused by winds over 75 miles an hour have been plastered over the papers, online and social media for weeks.

November’s Storm Debi was the fourth named storm of this winter so far, and it’s likely there’s more to come. In fact Britain is getting wetter. The Met Office recorded the UK’s wettest day on record in October 2020. The highest monthly rainfall was in December 2015.

Changing weather 

It’s not just the wet that’s extreme. While this summer delivered less sunshine than last year, Met Office figures nevertheless showed that temperatures across England, Scotland, Wales and Northern Ireland in June 2023 were the highest in a series since 1884.The highest temperature ever recorded in the United Kingdom was 40.3°C in Coningsby, Lincolnshire in July last year.

According to the UK’s national meteorological service, climate change impacts mean the chance of observing a June beating the previous joint 1940 and 1976 record of 41.9 degrees Celsius has at least doubled since the 1940s.

Whether or not you believe that rising temperatures and rainfall are the fault of humanity or not, the science shows our weather is changing rapidly. Amid the cost of living crisis, political instability in the cabinet, a looming general election and severe disruption to energy supplies, the urgency of sticking to the country’s net zero plans has receded.

Indeed, in what was interpreted as a bid to win traditional Conservative voters back, the current prime minister Rishi Sunak rolled back net zero deadlines significantly. However, even if there has been a temporary hiatus in the political will to drive the UK’s transition towards reducing carbon emissions, the environmental reality remains. While the deadlines to meet net zero milestones may move out, tackling the resilience of our housing stock must remain a priority for today.

A document collated by the Office for National Statistics recently cited a Public First survey for the Making Climate Adaptation Matter report, commissioned by the National Trust. It found that almost half, 45 per cent of UK adults thought the country was “not at all prepared” for more hot summers.

Feeling the heat

Just under a third felt they themselves were not prepared, while just over a third felt the same for their home and garden. It is estimated that in the current climate, around 55 per cent of the UK’s housing stock would fail the “bedroom overheating” test, according to an Arup report commissioned by the Climate Change Committee. That means 15.7 million homes across a range of representative home types in Britain see nighttime temperatures in bedrooms over 26°C.

In the 2020 to 2021 English Housing Survey, 1.9 million households in England reported that at least one part of their home got uncomfortably hot, and 51 per cent of these experienced overheating in bedrooms. The Office for National Statistics’ latest energy efficiency of housing in England and Wales figures show that for all EPC records up to March 2022, homes in England and Wales had an average energy efficiency rating equivalent to band D. Wales’s score is joint lowest, along with Yorkshire and the Humber, when compared across Wales and regions of England. Even in London and the South East, which had the highest average energy efficiency scores, we are talking band D.

The evidence that the risk presented in UK housing stock is changing is compelling. And it means the momentum for going green will grow, driven by lenders as they reap the capital savings that result from a better understanding of their balance sheet exposures, origination strategies and how well these properties perform.

Changing weather

Flood risk, soil shrinkage, extreme heat; these environmental factors all take a toll on British homes – and not all in the same way. Mortgage lenders are acutely aware of the financial implications for asset security and capital value as a result. So, for that matter, are investors.

As more housing stock deteriorates due to its exposure to the changing climate, concerns are rising.

Environmental risk is an increasingly critical component in the valuation of securitised mortgage assets. And without a robust granular understanding of the physical assets therein, funding will become scarcer.

Interoperable data sources and systems are critical to delivering that, and we’re already demonstrating the value it adds. It matters because ultimately, capital positions will depend on it.