Sustainability attracts a huge deal of interest from investors, as well as individuals with no interest in financial matters of any kind – so, too, does housing. However, these twin preoccupations are often in opposition with one another.
Collectively, homes generate 20 percent of the globe’s carbon emissions, according to publisher TechNative. As much as we all need access to satisfactory housing, we also need a planet that remains inhabitable for a population of almost eight billion.
Increasingly, it has become clear that investing in sustainability and housing isn’t necessarily counterproductive. The global smart home market is predicted to be worth $622.6 billion by 2026, according to market researcher Fortune Business Insights, with growth driven by a rising tide of green projects. These projects are likely to gain additional financial backing, too, with research showing that properties with green certification yield a rental premium of 6 percent and a sales premium of 7.6 percent.
Technological innovation is ensuring that sustainable housing is no longer an oxymoron. Examples range from the pioneering to the prosaic. Dutch multinational firm Philips now offers Ultra Efficient light sources that consume 60 percent less energy than standard LED bulbs. In construction, electrochromic glass is being used to reduce a home’s reliance on artificial lighting. Whether it concerns insulation or automation, smart tech is fast making the sustainable home a reality.
“Real estate investors are really focused on technology that helps us manage our assets more efficiently,” says Sadie Malim, director at Moorfield Group, a leading UK real estate fund manager. “This includes technology built into the BMS [building management system], technology that gathers energy data remotely and analyzes how it is being used, and technology that oversees the customer journey.”
But if the market for sustainable homes was already growing under its own steam, it has received added impetus from recent challenges. The war in Ukraine has resulted in significant energy price rises in many markets, with governments around the world attempting to reduce their reliance on Russian gas. Fossil fuels may not be going away just yet, but the market trajectory is clear.
Sustainable, smart homes have a bright future. For now, real estate investors have some decisions to make. Do they want to buy or build green? And will government regulations ultimately make up their mind for them?
“Energy efficiency is one driver of demand for new-build stock, especially in light of rising energy costs, but also given tighter government regulations coming in”
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The market for sustainable homes is not only flourishing due to the heightened prominence being given to environmental issues, but because they can offer good returns, too. While it is true that smart building technologies typically lead to a 30 percent reduction in energy usage, as per TechNative, they also deliver financial benefits for real estate investors and construction firms (not to mention cost savings for occupiers).
“We are seeing strong demand for new-build residential, with Knight Frank new home applicant volumes up 50 percent in the first quarter of 2022 compared with the five-year average,” Anna Ward, Knight Frank senior residential analyst, explains. “Energy efficiency is one driver of demand for new-build stock, especially in light of rising energy costs but also given tighter government regulations coming in, which will eventually create additional cost pressures for owners of existing, older homes.”
Some of the new homes Ward is referring to include the Moda, McEwan in Edinburgh, a new 476-home development that uses technology to prioritize environmental and personal wellbeing.
The £215 million ($264 million; €251 million) build-to-rent property boasts wellness sensors in each home and communal space to collect real-time data on light, sound, temperature, and CO2 levels. It is the first residential scheme in Europe to receive a Fitwell three-star rating for its sustainable practices.
Outside of the UK, the regeneration of Paris’ Clichy-Batignolles “eco-district” has recently been completed at a cost of €505.7 million. The implementation of solar photovoltaic roofs and smart grid technology demonstrates that smart, sustainable homes are not merely a UK phenomenon.
Simon Heawood, co-founder and CEO at Bricklane, provider of the largest PropFinTech institutional investment platform in Europe, describes the market in stark terms. “Institutional demand for UK residential property is skyrocketing; institutional demand for unsustainable housing strategies is zero,” he says. “Investment in residential property simply has to be sustainable, and ESG remains front of mind for investors.”
While it may be too early to say with any certainty whether recent increases in energy prices will turbocharge the growth already being witnessed, residential real estate investors will no doubt be interested to see how this trend evolves over 2022 and beyond. Certainly, occupiers are already reacting to recent events, with figures from UK building society Nationwide suggesting 69 percent of households intend to make their homes greener. Eventually, this is likely to translate into a more pronounced shift in favor of energy-efficient new-build assets.
A smart evolution
The Coalition for Urban Transitions initiative estimated that 36.5 percent of emissions can be cut from residential buildings using proven technology alone. Many of these technologies, such as smart thermostats, are already well-known but have not achieved the necessary scale.
As of February 2020, the EU rated around 75 percent of its building stock as energy inefficient. Whether existing or novel technologies, more needs to be done to get them into homes.
“There’s considerable excitement about new technologies coming through alongside this surge of interest in sustainable housing – from smart meters through to heat pumps,” says Heawood.
“While the largest impact often comes from more traditional approaches, such as insulation and appliances, we see huge potential in these new technologies to improve the energy efficiency of properties.”
Partnerships like the recently-announced collaboration between Samsung Electronics and multinational technology firm ABB should help make smart home innovations more common. The two companies have pledged to develop a one-stop shop for Internet of Things solutions, integrated with some of ABB’s hardware portfolio, including renewable energy equipment like photovoltaic inverters and chargers.
Innovations that help developers and occupiers measure the sustainability of their properties are to be welcomed, but both parties also need access to solutions that can not only aggregate and analyze this information but also incentivize its use in tangible terms.
One example of the latter is the Carbonlite Challenge developed by Atelier Capital Partners together with the Royal Institute of British Architects. The pilot initiative encourages residential developers to build more sustainable homes by offering loans to qualifying developments where the greener the design, the more favorable the financial terms available. The scheme, which can potentially bring the annual cost of borrowing for residential development down to 4.99 percent, has already been employed for the construction of six energy-efficient homes in south London, with developers set to receive a rebate of over £200,000 following the completion of a post-construction assessment.
If, as forecast by market data firm Statista, the number of smart homes is set to almost double by 2025, smart solutions – both hardware and software – will need deployment on a wider scale. With the sustainability agenda unlikely to disappear, the demand for sustainable homes will eventually reach a critical mass. Investors looking for decent returns would be wise to back smart home projects with strong ESG credentials before the prices of related assets become prohibitive.
“Institutional demand for UK residential property is skyrocketing; institutional demand for unsustainable housing strategies is zero”
The scale of the challenge
While sustainability may provide a significant impetus across many markets, there are unique challenges in the residential real estate sector. One is cost – particularly where it concerns retrofitting older buildings to meet relatively new environmental standards. In the UK, for example, the rate of retrofit needs to be seven times greater than its current level, with Energy Performance Certificates (EPC) data suggesting that this could cost as much as £330 billion.
“The core challenge to making sustainability improvements in housing at scale is access,” Heawood notes. “In order to have a rapid, meaningful effect on the housing market, unlocking access to make improvements to the UK’s 5.4 million private rented sector homes that are already built is critical. The fragmented nature of the housing market has historically made this difficult, but a technology-led approach can help crack this granularity issue, and enable the rollout of improvements at a scale that would otherwise be impossible.”
As Heawood suggests, smart solutions can help facilitate the development of more sustainable homes but the returns for investors remain questionable. In the UK’s private rental sector, there are indications that landlords will soon face tightening environmental standards that will place an additional financial burden on private investors. What is more, the returns for retrofitting sustainable improvements are already limited. The payback period for energy improvement projects costing £6,472 to take a home from EPC grade D to C could be as high as 36 years, according to some estimates.
Alongside regulatory changes, governments could also look more closely at the role taxation plays in encouraging sustainable real estate investment. Tax changes, whether they serve as more of a carrot or a stick for investors, can deliver the marginal improvement in returns that push investors to support sustainable projects, whether for greenfield or brownfield development.
“At present, it’s hard to point at any evidence of tech-enabled sustainable assets securing any pricing premium specifically for that reason – it’s too nascent,” Malim acknowledges. “However, in our experience, the investors focused on future-proofing their assets are also the ones putting the most effort into the design, operations, and customer experience, so it’s all in the mix when it comes to achieving the highest institutional valuations”
Looking back to move forward
Undoubtedly, there is a great deal of momentum behind sustainable housing, driven, at least in part, by the emergence of new smart technologies. Around the world, 28 major cities have signed up to the World Green Building Council’s Net Zero Carbon Buildings Commitment but new builds alone will not be enough to reach their aims. “We expect to see increased institutional momentum behind the retrofitting of existing properties as a means of improving carbon and energy efficiency,” Heawood concludes.
Retrofitting existing homes with more sustainable solutions is already underway in some markets, of course. In New York, the historic Waldorf Astoria hotel has had 5,300 windows replaced and upgraded to offer modern thermal performance. London-based Q-Bot, which received £3.6 million of Series A funding from French multinational Saint-Gobain in 2019, uses robots to scan underfloor spaces, create a 3D map, and spray insulation material where beneficial. Evidently, investment potential does exist around sustainable, smart homes – even for older properties.
Relying on new homes to make housing stock more energy efficient could take decades but tech-enabled institutional investment in upgrading existing residential property can drive greater improvements at a much faster rate. With the regulatory space continuously shifting around sustainability, investors in buildings old and new may want to incorporate ESG into their strategies soon – if they haven’t already done so.
A proptech partnership
Last year, Moorfield Group and Bricklane entered into a £600 million joint venture with sustainability as one of its central pillars.
Highlighting the in-roads that smart solutions have made into the residential housing market, Moorfield Group, a UK real estate fund manager, and Bricklane, a proptech residential investment platform, announced a collaboration last year targeting a £600 million ($734 million; €698 million) UK portfolio of professionally managed homes for rent. The partnership claims to represent the “most significant technology-driven investment in the UK’s residential market to date.”
Both companies have strong sustainability credentials that are expected to be furthered through the joint venture. For example, Bricklane works with the California start-up Wren to ensure its entire property portfolio is carbon-neutral, while Moorfield says it plans to be operationally net-zero by 2030.