In this article, Marcus Higgins, director and national head of project monitoring at Naismiths, discusses The Future Homes Standard, and what it means for development finance
With the Future Homes Standard (FHS) coming into effect in 2025, newly built homes must produce 75 to 80% less carbon emissions than homes built under the current building regulations.
While this is an essential step in helping to hit carbon reduction targets across the board, the additional costs associated with introducing suitable technologies such as air source heat pumps (ASHPs) bring a fresh element of risk for those funding the development.
Despite last autumn’s announcement of the watering down of the UK’s climate commitments, the march towards more sustainable and carbon-friendly energy sources has remained one of the key tenets of manifestos of all colours as we head toward a general election.
Sustainable heating technologies such as ASHPs and solar PV are increasingly being promoted as the carbon reduction agenda continues to be pushed.
However, their cost implications can impact project profitability, which is naturally a key concern for those funding developments.
While these technologies have advanced rapidly, moving away from more traditional heating and cooling methods brings with it uncertainty, and when it comes to financing developments, uncertainty is the biggest hurdle to climb.
Development finance during periods of economic strain and uncertainty will always be a challenge, and the turbulent economic climate—and the high-interest rates that have accompanied it—is still causing concerns in the market.
This is an issue on two fronts – not only are housebuilders and developers looking for finance finding it more difficult to come by, but those purchasing the developments are having challenges obtaining the mortgages needed to complete the deal.
How can the standards be met?
The introduction of the Future Homes Standard (FHS) feeds into these funding challenges.
Accommodating higher-cost, low-carbon heating and tighter fabric buildings will undoubtedly increase development costs.
However, several development finance “green loans” are in the marketplace. These types of loans reward efficiency, with better rates being offered for high SAP scores and EPC ratings. We have seen funders offer 2% discounts on loans for developments that achieve EPC A and slightly less of a discount for EPC B.
In 2024, house sales and buyer certainty will be the key to growth, but build-to-rent is also a housing model that many developers and investors are taking advantage of as private rental growth continues.
There’s a positive outlook—development finance is still readily available for experienced developers who can deliver.
Looking beyond the immediate impact of the FSH and at the wider agenda as decarbonisation plans come into play for the 2030s and beyond, there have been a couple of challenges that consistently crop up in conversations with our clients.
The first of these is the significant engineering skills gap that exists on two fronts – a lack of individuals wanting to get into the industry, and a lack of transferable skills for those already working as heating engineers.
The challenges in getting people into construction and engineering industries is well documented, but that secondary hurdle of ensuring that those already trained are able to transfer the skills they have with gas boilers – for example – to ASHPs is one that hasn’t fully been looked into.
The Gas Safe Register currently lists more than 120,000 engineers suitably qualified to work on gas boilers and traditional heating systems, but ASHPs requite a different skillset, and it’s not immediately clear how many of those now registered are willing and able to retrain for a different approach.
The knock-on effect is clear—if there aren’t people able to install and maintain ASHPs (or any other low-carbon system), developers are stuck between a rock and a hard place.
By complying with FHS, they are making their asset less saleable in the medium term, even if there is a sudden influx of trained engineers.
Meeting supply and demand
The second major challenge is in supply. A significant percentage of the components for ASHPs are made overseas, and you only need to look at the challenges in material supply posed by the conflicts in Ukraine, Gaza and the Red Sea in recent years – not to mention freak incidents such as the blockage of the Suez by the Ever Given container ship in 2021 – to know how fragile supply chains can be when relying on sourcing materials from far and wide.
We’ve had firsthand experience of this working with a developer who has been bringing forward the refurbishment of a series of high-end townhouses.
While they had the best intentions and specified the installation of ASHPs, the cost implications and unreliability of the supply chain have turned that decision into a costly mistake.
On a broader basis, we’ve seen both lenders and developers being more cautious, and although there has been a decrease in development finance deals in the past 12 months from our perspective, that’s potentially not a bad thing.
With stricter development finance criteria and longer processes in place, the market is avoiding a return to the days of the 2008 economic crisis. However, that is not to say there isn’t ample opportunity for the right projects, provided the risks are balanced properly.
