Navigating sustainable property development in a changing landscape

The current landscape

The UK property development market is at a crossroads. With a pressing housing shortage, evolving environmental regulations and changing consumer demands, developers face a myriad of challenges and opportunities.

In recent years, the UK has struggled to meet housing demand. In 2021 and 2022, only 233,000 new homes were delivered, far below the target of 300,000 per year. Factors such as the COVID-19 pandemic, supply chain disruptions and rising costs have compounded these challenges. Additionally, economic fallout events, such as Brexit and Russia’s invasion of Ukraine, have driven up costs affecting builders and developers, like labour and supplies.

All this is against a backdrop of the UK striving towards greener homes and the path to net zero. However, with the Government’s recent U-turn on minimum EPC ratings for new and existing private rentals, and a bolder but more fateful statement by Rishi Sunak that “we will never force any household to do it”, where does this leave developers? And are sustainable homes worth the financial investment alongside the obvious environmental benefit?

Green compliance and sustainable building

The government may have removed the deadline of the year 2025 for minimal EPC ratings for private rentals and 2028 for all rentals but its plans to relax nutrient neutrality laws were blocked by the House of Lords in September.

The removal may have given housebuilders a boost, loosening the restrictions and reducing planning delays. The Home Builders Federation (HBF), a voice of the industry, estimated up to 120,000 new homes a year, which is half of all planned new home construction, were being halted due to nutrient neutrality.

Alongside nutrient neutrality, other green measures such as the phasing out of gas boilers in favour of heat source pumps and EV considerations are crucial. Many new homes now come equipped with electric vehicle charging points. But all of these factors come at a cost so it can feel like a balancing act for developers.

Average house prices are softening but mortgage costs remain relatively high compared to historic interest rates. So, developers must carefully balance affordability for buyers while ensuring profitability.

Understanding Energy Performance Certificates (EPCs)

EPCs indicate a building's energy efficiency, providing a comprehensive rating of its overall energy performance.

When it comes to selling or renting a home, the EPC rating holds significant sway. Properties with higher EPC ratings can be more attractive to potential home buyers or renters. The more energy-efficient a home is, the less it will cost to heat and light.

An EPC rating typically ranges from A (most efficient) to G (least efficient) and remains valid for a decade. It's determined by assessing the amount of energy consumed per square meter and the level of carbon dioxide emissions generated in tonnes per year. It will give the owner suggestions on how to increase the rating by implementing energy-efficient improvements.

The importance of energy-efficient homes for the customer, and the future A recent study by the Mortgage Advice Bureau revealed prospective homebuyers are increasingly prioritising the energy efficiency of properties they intend to purchase.

It found among those planning to buy homes in the next two years, 74% expressed a strong preference for properties with high energy performance certificate (EPC) ratings of A or B. This signifies a growing awareness of the long-term benefits of energy-efficient homes, aligning with the broader trend towards sustainability in the property market.

For a property developer, this trend highlights the importance of not only meeting but exceeding minimum EPC standards. Homes with higher EPC ratings are not only more environmentally friendly but also more appealing to potential buyers. Embracing sustainable building methods and energy-efficient solutions can set your developments apart in a competitive market.

Our conclusion

The property development landscape is evolving rapidly, with sustainability firmly set within its new DNA. Developers must navigate changing regulations, market dynamics and consumer preferences to succeed.

If you’re embarking on your next project, Hodge is here to support your property development and investment funding needs.

To find out more about how Hodge can assist with property development and investment funding, please reach out to the Hodge commercial lending team: DevelopmentFinance@Hodge.co.uk or InvestmentFinance@Hodge.co.uk.