Emma Harvey, programme director at the Green Finance Institute, has identified an innovative financial solution being used overseas that could benefit the UK market.
Against a backdrop of increased concern about the energy efficiency of our homes, we are seeing clearly that the market will need to provide an array of different products to support able-to-pay UK residents. Homeowners are currently challenged by a lack of options to pay for upgrades and this is undoubtedly causing paralysis. The Green Finance Institute (GFI) recently commissioned research, launched in September, that clearly demonstrates this increased consumer interest in energy efficiency, and an appetite for different and attractive financial solutions to make their homes efficient and comfortable.
Property Linked Finance (PLF) – an innovative financial solution that is not currently available in the UK – has the potential to meet this growing consumer interest in energy efficiency. Based on successful mechanisms developed in the US, Australia and Europe, this new type of product overcomes a key challenge of efficiency upgrades known as the “payback period barrier”, whereby homeowners looking to move in the near- to medium-term are deterred from efficiency upgrades as the energy bill savings are not deemed sufficient to make it worthwhile. With PLF, unlike existing forms of finance, the investment is linked to the property, rather than the owner, and installment obligations are transferred to the new owner when the property is sold. This means whoever owns the property and is benefitting from the energy efficiency measures continues to pay for it – akin to an ongoing service charge.
PLF offers investors – likely to be institutional in nature – the ability to aggregate and then securitise cashflows, offering a long-term and predictable form of income. The potential market is huge: the Government estimates nearly 60% of owner-occupied homes in the UK have an EPC rating below ‘C’.
For the nascent retrofit supply chain, Property Linked Finance is, similarly, a product that could present a significant opportunity and a stable pipeline, a solid reason to accelerate the implementation of the training and upskilling we will need to roll out upgrades at the speed and scale the climate needs. In the US and Australia, a similar product termed ‘PACE’ has been managed by state- and local authority-level bodies, with tailored marketing, sale and installation programmes, benefitting local economies.
For all its benefits, Property Linked Finance does not yet exist in this country. The finance sector is putting increasing attention on helping customers to make their homes more comfortable and cheaper to run, as they look to futureproof their lending books. The Green Finance Institute is leading on the development of PLF, bringing together the innovation and expertise of leaders in this area, along with those in the legal, installer and property sectors, and local, devolved, and central governments, to build a prototype product that works for homeowners of all types. It expects to release the first details of this in 2023.
- The views of contributors are not necessarily shared by the Council.
