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TIME FOR FINANCE TO BE A DRIVER, NOT PASSENGER, IN TESLA’S REVOLUTION

By March 25, 2021 No Comments

When the first Tesla went on sale in Britain in 2009 – an electric sports car priced at nearly £100,000 – it was dismissed by motor industry insiders as an expensive toy with scant appeal outside the wealthy enclaves of Silicon Valley.

That view persisted for some time. For years rival carmakers made only tentative forays into electric vehicle (EV) technology, with others hedging their bets with the half-way house of hybrid vehicles.

Fast-forward a decade and a combination of Government incentives, falling EV prices and greater choice has unleashed an explosion of demand from carbuyers.

Last month EVs and hybrids accounted for 13% of all new vehicles sold in the UK, well over double their market share the previous February. Annual EV sales rocketed by 49% during the intervening 12 months; petrol car sales fell by the same amount.

In real estate, green finance is yet to have its ‘Tesla moment’. But it’s coming. And soon.

The need for green

The environmental case couldn’t be clearer. The UN Environment Programme estimates that the construction and operation of buildings together account for 38 percent of global energy-related carbon emissions. For the UK to have any hope of hitting its ambitious net zero targets, reducing emissions in the construction and property sectors is vital.

But in terms of the business case, right now the running is being made mostly on the supply side, rather than the demand side.

Forward-thinking lenders are busy looking at how they can steer the sector towards greener, more sustainable development.

Institutional investors, who provide the capital that underpins Atelier’s lending, are increasingly keen to see their financial firepower deployed where it will do the most good – delivering Environmental, Social and Governance outcomes as well as a strong return.

But the demand side of the equation is lagging behind. Despite residential developers’ obvious optimism and the strong demand for homes, many builders are focusing on what they know – conventional construction techniques – rather than newer, more sustainable technology they still see as riskier.

Collapsing construction time

It doesn’t help that there is no hard and fast, easily comparable ‘green premium’. Developers often assume that building green will automatically also mean building more expensively.

But modern methods of construction, such as modular, off-site technology, don’t just deliver uniformly energy efficient homes, they can collapse construction time – and thus cost – as well as energy used on site.

Then there’s the consumer. There is some evidence that people will pay more to move into a brand new ‘green’ house. But what about the secondhand buyer? The promise of ultra-low energy bills in a home fitted with green tech such as ground source heat pumps should make them more saleable for years to come, but there is no long-term data to go on yet.

Government incentives should help foster demand from homebuyers, just as they initially spurred the uptake of EVs. Sadly the Government’s flagship, £1.5bn Green Homes Grant has become mired in red tape and failed to achieve its aims – just 5% of the funds set aside have been claimed by householders.

Development lenders must step up

That’s why the property finance community has a role to play, too. The best development lenders are more than just passive suppliers of financial lubricant.

They can, and should, be facilitating change. Many lenders currently enjoy strong liquidity and there’s a widespread appetite to lend as residential construction comes out swinging from the torrid 12 months following the pandemic’s arrival in the UK.

As lenders recalibrate their attitude to the risk of building green – with upfront costs reducing and returns looking more certain – they should encourage developers to do likewise.

By developing and championing more responsive and attractive green products, the finance industry need not just be a passenger in construction’s Tesla revolution. It can be a driver too.

In real estate, green finance is yet to have its ‘Tesla moment’. But it’s coming. And soon.

By Chris Gardner, Atelier Capital Partners