24 January 2022
By Scott McKenzie
As investors in the housebuilding and construction industry we are now beginning to see a sea change in urgency with regard to tackling the carbon footprint in housing. Our recent site visits to housebuilders Vistry and MJ Gleeson confirmed that this is now translating to real changes on the ground , with newly specified innovations in technologies such as heat pump boilers and EV chargers set to become more mainstream.
These changes are being driven by the Government’s Future Homes standards which will ensure that all new homes built from 2025 will produce 75-80% less carbon emissions than homes delivered under current regulations, with no new home built under the standards to be reliant on fossil fuels. There will be an emphasis on improved ventilation and reduced energy usage. Prior to this we shall also see new building regulations introduced from June 2022 which target an initial 30% carbon reduction.
Residential housing accounts for around 15% of all UK greenhouse gas emissions (source : Statista) and engineering firm Arup in conjunction with RICS have calculated that more than 50% of the whole-life carbon emitted by a house is during the construction phase. This means that the construction of new homes is of critical importance in limiting the environmental damage done by housing in the longer term.
By far the greatest challenge facing housebuilders trying to reduce their carbon footprint is the slow pace of change in the supply base.
The infographic below analyses the carbon footprint of a typical new family home.
Source : MJ Gleeson PLC
It is worth noting how little is directly under the housebuilder’s control with only 7% of the total emissions coming at a scope 1 or 2 level. The dominant source of emissions comes from materials such as cement, bricks and tiling used in the construction of walls , roofs and foundations. The solutions to decarbonising such products are both complex and costly and remain several years away. Significant changes in the sourcing of energy supplies in particular present major challenges. Whilst there are government incentives to increase usage of materials such as timber this remains a fairly niche segment in the UK housing mix, despite strong takeup in regions such as North America.
As with the demand for electric vehicles it is important to put the demand for new housing into context. ONS data tells us that there are around 28 million households in the UK and this has been growing at just under 1% per annum in recent years. The current level of new housing completions runs at around 250,000 per year, less than 1% of the entire housing stock. This highlights the magnitude of the task in turning our homes green, both in terms of the technical and logistical challenges of retrofit and the significant costs for homeowners to do so. Current estimates for installing heat pump systems and EV chargers are in the region of £5-7k per home. A pretty big pill for the average householder to swallow.
Whilst these costs will inevitably fall as production volumes increase, it does suggest that we will need to see significant government intervention and subsidy for the 99% of the housing stock which is not new. We know that there is strong ongoing political support and funding for social housing as the UK continues to face housing shortages and affordability issues. At Amati we are already investing in the theme of social housing, which will have the dual benefits of addressing net zero targets whilst hopefully reducing housing inequalities. Our holdings in Vistry and MJ Gleeson play directly to such trends.
For the home owner looking to reduce their carbon footprint the message is clear. Be prepared to invest significantly in retrofitting your existing home or buy new and have it done for you.
This article is a financial promotion issued by Amati Global Investors Limited, which is authorised and regulated by the Financial Conduct Authority. It is provided for informational purposes only and does not represent an offer or solicitation to buy or sell any securities, and nor does it provide you with all the facts that you need to make an informed decision about the merits or otherwise of investing in any Amati funds or products. Please refer to the risk warning below.
Past performance is not a reliable guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amount they originally invested. Investments in smaller companies in particular can be higher risk than investment in more established blue chip companies. Prospective investors should always read the relevant fund or product documentation, which contains full details of the costs and charges as well as specific risk warnings.