UKSIF calls for capital allowances to support retrofit, alongside long-term rent plan

“Both housing associations and local authorities have been hindered by repeated changes in government policy relating to rent ceilings over the last decade, which has created uncertainty around projected rental income, the report, published on Wednesday (20 March), said.

“More broadly, cuts to local authority funding have created huge spending pressures, resulting in many local authorities deprioritising expenditure on retrofitting social housing.”

The publication also draws attention to the gulf between the £3.8bn earmarked by the government for its Social Housing Decarbonisation Fund, and the predicted costs of retrofit.

Analysis by Savills and the NHF in 2021 established a “base case scenario” of £36bn for bringing the 650,000 homes owned by English associations that are below Energy Performance Certificate Band C up to this level, and a “central scenario” of doing so while ensuring no change in residents’ fuel costs and comfort at £49bn.

Private capital will therefore be “critical to bridge the gap”, UKSIF said.

Capital allowances for private investors

The report also cites NHF research from 2020 which highlighted that funding was the biggest barrier to green retrofit for housing associations. It proposes that the UK learn from low-income housing tax credit schemes seen in the US, which reduce tax liabilities for private sector investors into social housing. This, it said, could unlock a “significant amount of investment and enable housing associations to build more homes while retrofitting their current housing stock”.

Although tax receipts would reduce in the short term, the policy would provide long-term benefits, it notes.

“If introduced in the UK, policymakers would need to balance short-term Exchequer receipts with the longer-term benefits of making a tangible improvement to the energy efficiency of the nation’s social housing stock, which in turn helps the UK achieve its net zero by 2050 target while also reducing renters’ energy bills.”

It adds: “In the US, low-income housing tax credits have cost £6.3bn in forgone revenue to subsidise the costs of building and retrofitting more than 107,000 homes each year. Adjusted for population, with all else equal, an equivalent programme in the UK would cost £1.3bn, leading to the construction and renovation of 21,000 homes each year.”

According to the report, 93 per cent of large UK real estate businesses believe tax incentives could unlock investment into social housing. Meanwhile, 87 per cent of decision-makers at these kind of firms believe that introducing capital allowances for private investors in social housing would have a “positive impact” on companies investing in sustainable real estate in the UK.

And more than two in five (41 per cent) said that access to private capital for decarbonising projects is a barrier they have faced in the real estate sector in the UK.

UKSIF also draws attention to the widely called-for need for more rent stability and certainty, through a long-term, CPI-linked rent ceiling for social housing post-2025.

Referring to the seven per cent rent cap in place for rents in the current financial year (ending 31 March), it acknowledges the “strong and understandable policy rationale for protecting existing residents from the worst effects of high inflation”, but adds: “Over the long term, if social housing providers cannot raise enough revenue in line with or above inflation, then that will have an impact on the amount they are able to invest in decarbonising their housing stock. We note that prior to this decision, most housing associations and local authorities were not minded to raise rents up to the permitted rent ceiling of CPI + 1%.”

Supporting the NHF’s call for a long-term CPI-linked rent settlement, it says that this would better enable housing associations and local authorities to make “long-term investment decisions”. 

Local authorities

Finally, the report calls for the Department for Levelling Up, Housing and Communities to “encourage local authorities to take up opportunities to retrofit homes cost-effectively”. It cites as an example the Energiesprong scheme from the Netherlands, which sees money that would be spent on higher energy bills directed to paying for the retrofit. 

UKSIF said: “The risk of this investment to local authorities is minimal. As long as their properties are occupied, tenants would be paying a fixed-rate energy bill while using less energy as a result of the retrofit, allowing local authorities to offset the surplus they make against the initial investment they make to retrofit the homes.”

Commenting in the report, Chris Taylor, head of real estate at Federated Hermes, said: “It is critical that we take immediate steps to unlock the private capital needed to decarbonise the UK’s housing stock and achieve our net zero ambitions. The scale and complexity of this challenge demands a tailored approach that considers the unique characteristics of the sector and supports the role of private investment in driving this transition. 

Political certainty will be vital to providing investors with the confidence needed to invest long-term, patient capital into major new residential developments. Whichever government succeeds in winning the forthcoming election will hopefully grasp the importance that private investment plays in delivering relevant and resilient residential projects, aligned to the country’s decarbonisation goals.”

Heather Buchanan, chief executive at Bankers for Net Zero, said: “This report highlights the substantial investment that could be unlocked if the sustainable policy landscape improved. It is crucial to leverage green finance tools, such as tax incentives, to unlock the potential for sustainable housing. The positive shift seen with mortgage lenders offering green mortgages is encouraging.

"While awareness of these products is currently low, collaboration between the government, lenders and brokers to promote and encourage green mortgage options can further drive investment, fostering a more energy-efficient future for all.”