While the UK’s newly elected Labour government’s manifesto includes numerous commitments to achieving Net Zero by the midpoint of this century, the inconvenient truth is that decarbonising the British economy is proving to be exceptionally difficult. Around 40% of UK carbon emissions are linked to the built environment, and it’s obvious that our industry has a vital role to play if we’re to meet this target. There are no quick fixes, and it will take a multipronged approach, but one solution that can have an immediate impact is retrofitting.

Why retrofit?

The buildings in which we live our lives produce both operational carbon – emissions related to a building’s operation – and embodied carbon – emissions produced during construction. In the UK, the latter accounts for around 50m tonnes of CO2 emissions annually, over half of which is linked to the production of construction materials, such as cement, ceramic or steel.

Retrofitting refers to upgrades and enhancements made to a pre-existing building. This can be anything from minor changes focused on increasing energy efficiency and optimisation, to the large-scale regeneration and transformation of pre-existing structures into new homes. Recent research indicates that the carbon emissions generated by retrofitting an existing building can result in 50-75% less carbon than constructing the same building from scratch.

From a credit perspective, retrofitting also has some important benefits, particularly for financing existing structures.

Reducing operational carbon

The UK’s housing stock includes a considerable number of old buildings which are often poorly insulated, have outdated heating systems and haven’t been optimised to include the latest energy-saving technology.

Whether it be installing rooftop solar photovoltaic panels or simply changing a building’s lighting (LED lights can use up to 75% less energy than traditional bulbs), relatively straightforward upgrades can significantly lower operational emissions.

Reducing embodied carbon

Redeveloping a pre-existing structure is another, bolder form of retrofitting. First and foremost, this approach reduces the need for costly and polluting demolitions.
The skeleton of the building can then, at least partially, be used and built around, while in some cases the structural interior can be repurposed.

Many vacant commercial buildings are available for retrofitting, and planning authorities are increasingly supporting this approach. Ultimately, there’s no getting away from the fact that the embodied carbon associated with a new building is on average twice that of a deep retrofit.

In March this year, the government made significant changes to permitted development rights (PDR), to make converting existing commercial buildings for residential use more efficient. Relaxing certain standards and restrictions, such as spatial layouts and height, facilitates the regeneration of commercial buildings by simplifying the process of transforming these existing structures into new homes.

For developers, there is a financial appeal to regeneration too. Savings can be made on building costs because of lower preliminaries and less requirement for costly equipment like piling rigs or tower cranes. A shorter building duration and things like infrastructure, drainage, power supply and access roads already in existence mean there are significant cost-saving incentives for this type of retrofit as well, which non-bank lenders like us will also take into consideration.

The role of private finance

The government has so far struggled to develop a coherent policy roadmap for retrofitting, so much of the impetus for delivering this revolution, and by extension a decarbonised built environment, currently comes from the private sector.

While traditional banks have continued to retrench from real estate, non-bank lenders like us are able to offer bespoke, highly structured financing solutions which provide developers with the liquidity they need to realise what are often complex retrofit projects. The £76m in debt funding we provided to Great Marlborough Estates to finance the redevelopment of Empire House, a vacant office block on Chiswick High Road, is a prime example of this in action. The development makes use of pre-fabricated structures and components that are manufactured off-site, which reduces the scheme’s environmental impact, minimises disruption to the local community and reduces construction time.

The flexible financing we can offer is often also a better fit for smaller scale works that need to be done on an existing asset. Managers who want to upgrade their schemes to be more energy-efficient post-construction will naturally favour financial support which can be delivered quickly and efficiently. Fundamentally, non-bank lenders have less restrictive mandates than their bank counterparts. They can move with the times and offer tailored bridge lending products for these developments with environmental targets built in to help ensure developers meet their desired environmental goals.

That said, access to private capital will only get us so far. First and foremost, the new government needs to come up with a coherent strategy on how we support retrofit. The approach to date has consisted of a confused medley of legislation and taskforces and the Spring Budget was rightly criticised for lacking any discernible focus on retrofit. A reinvigorated strategy should have tax incentives and the removal of financial barriers at its core.

Secondly, there needs to be renewed focus on training. The dire shortage of heat pump engineers has been a long-running issue, while research from Architects Journal highlighted how one in eight architecture students are being taught nothing about retrofit. That isn’t good enough, and the industry and the government need to work in concert on creating high-quality apprenticeships and training opportunities so we have the skilled labour to deliver this transformation.

Retrofitting will continue to grow in importance for the simple reason that 80% of buildings that will exist in 2050 have already been built. But I think it’s important to recognise that in addition to the obvious benefit of lowering carbon emissions, it represents a major opportunity for non-bank lenders like us and the industry as a whole. It’s a real and genuine way of injecting fresh housing supply into the market at a time when the UK’s planning system continues to be singularly dysfunctional, while in London alone, it’s estimated that retrofitting and the jobs it will create could provide a £110 billion economic boost. Now that sounds revolutionary.