New official guidance, to be launched in summer 2011, will make sustainability features a core consideration in the valuation of homes. This may have real benefits for house builders, landlords and homeowners wondering how to finance green measures for homes – the subject of two conferences we are running in June.

The draft guidance 

The draft guidance by the Royal Institute of Chartered Surveyors (RICS) tasks valuers to be aware of and consider demand for sustainability features in the housing market. This follows similar guidance (RICS Guidance Note VIP 13 150909) on the subject for commercial properties. Features noted include insulation, drainage to reduce flooding, the adaptability of homes for future needs and the use of renewable technologies like solar panels.

Research supporting the new guidance suggests that values in for energy efficient homes may increase by 2-3%. The new guidance may be a crucial turning point for a market where despite growing demand, vendors have long struggled to capitalise on green investments.

Homeowners, developers and investors have complained that while Government has pushed for more sustainable homes, the market has failed to pay for them. Sustainable homes may cost more to build, be more comfortable, cheaper to run and more desirable, but this has not been formally recognised by valuers. Mortgage providers have in turn been uneasy about lending for higher purchase prices, hindering market demand.

New guidance will support the Green Deal, FITs and RHI

The change comes at an important time. The Government committed this month to reduce carbon emissions to 50% of 1990 levels by 2025. This is to be driven by an ambitious plan to stimulate market demand for energy efficiency and low carbon energy through the Green Deal, feed in tariffs (FITs) and the renewable heat incentive (RHI).

With housing organisations increasingly reliant on a slack market, confidence in return on investment will be vital. This new guidance for valuers will give the market another boost following a Government announcement this week that the Green Investment Bank will support home energy efficiency with lower finance costs.

The guidance will also help landlords who have taken the initiative to understand the best routes to investment in green measures in their stock (something that Sustainable Homes have helped with).

Evidence suggests higher returns and lower vacancy rates for low energy homes and offices

The RICS guidance for residential property, which concluded its consultation period this month, and is expected to be published later this year follows several studies into the value of sustainability features on the market and guidance published last year for the commercial sector.

A RICS study On the economics of EU energy labels in the housing market (2010) found a strong correlation between energy rating and value. The study concluded that, particularly in areas of high support for the green agenda, energy performance certificates were being used to gain a market edge. Across the country properties with ratings of A, B or C were found to be selling at a premium of 2.8%.

In commercial real estate a study of sale prices and in the US in 2007 showed lower vacancy rates & higher rents in buildings certified to the US environmental and energy standards LEED and Energy Star. A forthcoming paper by Wiley, Benefield and Johnson of offices in 46 metropolitan USA markets identified a 15-18% rental premium for LEED / 7-9% for Energy Star.

Guidance to become part of a global framework

Consideration of sustainability has now become part of the RICS global valuation guidance outlined in the official manual for valuers – the RICS Red Book. It seems it won’t be long before the same happens for residential property and not a moment too soon.

Credits:  Jim Green, Technical Director at Envos provided much of the background information and references for this article.

Sustainable Homes are working with the Energy Saving Trust and SHIFT members  to run two leading conferences - How to finance green homes, Manchester 8^th June, London 15^th June.