Calculating the value of a newly built property can be extremely complex, but it seems that high energy standards are increasingly creating a green premium – and buyers are willing to pay it.
Investing in a new-build often comes at a premium compared with buying an older property, due to the huge range of benefits they deliver, which is why many buyers opt to make their purchase off-plan – prior to the home’s completion – in order to maximise the property’s investment potential and get a better price.
Recently, a huge emphasis has been placed on the energy efficiency of our homes, by both the government and the public at large who have an understandably keen interest in keeping their energy bills down, alongside playing their part to help towards the climate crisis.
Today’s new-builds come with higher build standards, and the top energy efficiency standards in the property market, with the majority receiving the highest energy performance certificate (EPC) ratings. The average rating among the UK’s housing stock is currently D, while many new-builds are rated A.
The green premium is growing
In terms of pricing, there has always been a gap between new-builds and older homes, because of the fact that they are the most modern option with brand new features, fixtures and fittings, and better energy performance which leads to lower bills.
This higher price tag is often referred to as a green premium, with a higher value being placed on the ‘greenness’ of a property. On the flip side, there is an emerging ‘brown discount’ across the UK housing market, where homes with the lowest energy efficiency standards are becoming even less desirable, and cheaper.
New research from Alliance Fund has revealed the extent to which this gap is growing. Using Land Registry data, the report finds that the green premium in 2022 grew to 19.3%, up 1.1% from the previous year. The average new-build sold for £339,995, compared with the older home average price of £285,000.
The green premium is even more pronounced when looking specifically at flats, which are arguably the most energy efficient property type in general due to their smaller size and the fact that they are surrounded by other units, compared with detached homes, for example.
Last year, Alliance Fund found that the average new-build flat sold for a huge 56.9% more than flats in the wider market, and this was an increase of 4.5% on 2021, demonstrating a much stronger green premium last year.
There were also regional variations in the data, too, with the north east and north west being home to the largest green premium/brown discount gap, presumably because the existing housing stock in these regions already tends to be below the UK average.
Firing on all cylinders
Iain Crawford, CEO of Alliance Fund, said: “Despite the increasingly turbulent economic picture of late, the new-build sector has continued to perform resiliently. This is evident when it comes to the property price premiums that new homes are commanding over the regular market, even during a stint of record house price growth.
“While new homes are commanding a healthy premium across all regions of the UK, it’s the North East and North West that have been the frontrunners over the last year, both where new-build premiums and the growth of this premium are concerned.
“Proof, indeed, that the sector is firing on all cylinders and it’s not just London where developers are focusing their attention.”
Other analyses, such as one carried out by Santander, demonstrate the power of the green premium and the fact that buyers are more willing than ever to pay more in order to ensure the future sustainability and value of their property – and this applies to both homeowners and property investors.
The study found that, of 2,300 UK-based respondents, buyers placed an average 9.4% green premium on properties that had been retrofitted to reach higher eco standards. With average house prices of £283,000 at the time, this equates to an additional £26,600 that buyers are willing to spend.
Some estate agents reported buyers were willing to pay as much as 20% more for a greener property. As Timothy Bannister, director of data services at Rightmove, points out, energy bills are one of the biggest drivers behind the shift.
“The push to try and reduce bills has been brought into sharp focus over the last six months,” he says. “If people understand what energy efficiency features can do to reduce the cost of running their home it’s a big draw, which will filter through into the value of the home when they are looking to sell.
“A home that’s cheaper to run should be more desirable and give support to the valuation.”