Meeting the challenge of funding retrofit

There are a myriad of considerations for Landlords when developing credible plans to retrofit their existing assets to meet net zero carbon targets and aspirations, says Rebecca Harlow.

Early focus has been on building an accurate picture of the existing asset base that can be overlaid with a programme of capital works that will improve condition and the performance of that stock. This exercise invariably throws up a significant number and a host of challenges around residents in occupation, supply chain and energy transition to name but a few.

For those with significant stock, the key issue is quickly turning to how to finance retrofit programmes at the pace and scale needed to meet legislation and organisational commitments. As an industry we are grappling with understanding what options exist, how well they suit a range of different asset owners and what the optimal funding solution possible may be.

From a social housing perspective, the need for private finance to tackle the retrofit challenge is clear. Firstly, there’s a necessity. While public funding is enabling progress for pilot schemes, there will not be funding programmes at the scale required to tackle the entire UK social housing stock.

At the same time, we are seeing a real appetite from investors who want to help deliver carbon reduction schemes. This drive comes with a need to ensure money is being directed towards viable and assured delivery programmes which definitively deliver carbon savings as well as financial returns.

The necessity in identifying different funding routes and desire from investors to step into this space combined with the cost of living crisis create an environment where the role of private finance will increasingly take centre stage in solving the retrofit crisis.

While the case is compelling for the private finance of retrofit there is no established solution currently in the market and the pace of progress will be dependent on the abilities of parties to come together to work through respective needs and requirements.

We believe that key considerations from both a lender and borrower perspective can be summarised into 6 areas which need to be considered to deliver an optimum deal:

• Potential to pay back: While retrofit focuses on social and environmental good -it is fundamental that both parties are clear on how the loan will be serviced. Whether diverting income from an organisation rent roll, and managing the implications of wider spending, to exploring ‘warm rent’- where once retrofitted an organisation takes a portion of lower energy bills, to being clear on the expected maintenance spend reduction, it is fundamental that this is understood and quantified.
• Lending terms must be preferential rates for this to be different: Without the ability for funds to be accessed at low rates and favourable terms the incentive to move forward with private funding dissipates. The quantification of the full ESG benefit retrofit will be deliver along with the ability to measure this will be key to this. However other factors to create favourable terms should not be overlooked- this could include the ability to bring scale through partnering with other Local Authorities or Housing Associations.
• Must deliver the idented benefit: For lenders, owners and tenants the ability to identify benefits, assure that funds deliver the expected programme of works in timeframes agreed and ultimately reduce carbon and cost is fundamental. This ability to deliver benefits will affect future lending arrangements, future retrofit interventions needed and creating confidence for residents.
• Must be at scale and must be deliverable: To ensure funding interest there must be a certain quantum of properties and spending need however just as importantly there is a need to ensure funds can be spent predictability. A clear and robust delivery and procurement plan is needed to provide confidence and navigate limited supply chain and skills capacity.
• It must minimise future rework: For tenants and owners especially, programmes put forward need to ensure that solutions make a significant improvement with minimal disruption required in the future. The effort and time cost needed to engage residents and deliver large scale retrofit should not be underestimated and therefore for a value for money perspective programmes put forward for funding should be as futureproofed as possible.
• Ultimately, there must be a focus on the end user- From a benefits, understanding and delivery approach perspectives the ability to empathise and plan around residents will be pivotal in delivering retrofit at pace and with maximised benefits.

If all these elements are put together, the results will certainly benefit all parties and tackle the retrofit funding challenge.