How the £300BN ‘Retrofit Revolution’ can benefit contractors and subcontractors (Pt 1)

PART 1 OF 4: INTRO TO THE £300BN RETROFIT REVOLUTION.

The construction sector is facing significant headwinds.

Painfully long lead times, expensive materials and cost-constrained clients make the hard job of construction even harder.

However, the net-zero agenda has produced a once-in-a-generation opportunity for construction professionals to expand and develop new businesses and business models with relatively low levels of outlay and retraining.

It’s called the ‘Retrofit Revolution’.

WHAT IS THE RETROFIT REVOLUTION?

The ‘Retrofit Revolution’ refers to the national need to retrofit the majority of existing homes (and commercial buildings) to EPC B by 2050.

That means 29 million homes must be retrofitted by 2050 and at least 15 million by 2030 (7 years).

Some regions are moving more quickly; London’s Mayor has declared that he wants London to achieve NetZero by 2030.

This means retrofitting 3.6 million existing dwellings.

It’s a big challenge and a big opportunity.

WHAT DOES RETROFIT MEAN?

‘Retrofit’ means upgrading the energy efficiency of a home or building. This can be achieved by doing one or a combination of the following things:

• Increasing the thermal efficiency of the building’s fabric by internally or externally insulating its walls. Cavity insulation is also an option.
• Swapping its gas boiler for an air source heat pump
• Installing solar panels (along with battery storage) so the building can generate a portion of its own energy.
• Installing solar thermal panels so the dwelling can create its own hot water using solar energy.

WHAT’S THE VALUE OF THE RETROFIT REVOLUTION?

BEIS (Department for Business, Energy and Industrial Strategy) estimate the average cost for a domestic retrofit could exceed £20,000. The final figure will depend on a number of factors including the size of the house and how energy inefficient it currently is.

Using these figures, the total cost to retrofit 15 million homes by 2030 will be £300bn (not accounting for material, energy and labour cost inflation).

WHO’S GOING TO PAY FOR IT?

The simple answer:

Homeowners and large landlords.

To date, the market has been urging the UK government to support the effort by providing grants or relaxing VAT measures.

A big package or plan hasn’t been announced to date. However, in 2022 the Chancellor scrapped VAT on solar panels (and batteries), heat pumps and insulation. Homeowners who install any of these ‘energy-saving materials’ will now pay 0% VAT.

This VAT cut, coupled with the energy crisis has caused google searches for solar panels to increase by 300% resulting in 3000 orders per week (+33% more than in 2020).
Some businesses can’t handle the explosion in interest. Clean energy company Egg saw enquiries for solar panels rise by 830%.

As a result, this has caused a bottle a neck and homeowners must currently wait 7 months to have their panels installed.

WHY ARE HOMEOWNERS INVESTING SO MUCH?

Each homeowner will have their reason but the most popular reason is the desire to reduce the cost of their energy bill.

Depending on the extent of your work. A good eco-retrofit can reduce energy bills by as much as 80%.

In January 2023 Legal and General (in collaboration with YouGov) published research which suggests that renters are prepared to pay 13% more for low-carbon homes and that for most buyers and renters, energy efficiency and EPC are more important than property size.

HOW CAN CONTRACTORS AND SUBCONTRACTORS PROFIT FROM THIS RETROFIT REVOLUTION?

The good news is that there are several ways that construction professionals can profit from the retrofit revolution. It all comes down to the scale of a firm’s typical project.

We believe that retrofit opportunities exist at three key scales.

• Small domestic, private
• Larger buildings, commercial / institutional
• Building Portfolios

Fortunately, these scales map well to the typical sizes of construction businesses. There is also a natural overlap that creates opportunities. Retrofitting large buildings isn’t as risky as constructing from the ground up. This difference should allow construction professionals to move up the contract value scale and work with clients with larger, and potentially more lucrative, construction needs.

DOMESTIC RETROFIT

Domestic Retrofit will be the most common type of retrofit and probably the easiest to secure.

Like any domestic construction project, it will start with engaging a homeowner. For smaller firms, these relationships will already exist and there is a good chance your previous clients are worried about energy and will be open to speaking to a builder about commissioning some energy bill reducing work.

If larger firms are able to engage with this market they will be able to diversify, expand their topline revenue and smooth out cash flow. Their main challenge will be in creating a list of domestic clients without spending time and money knocking on residential doors. One option for them is to partner with smaller firms that have too much work and use a platform like C-Link to subcontract additional work to vetted and trusted other companies.

LARGE BUILDING RETROFIT (COMMERCIAL OR INSTITUTIONAL)

The need for large building owners to retrofit their assets is two-fold.

• The first is energy bills. If they own and operate their buildings like a University then reducing energy costs will be a very strong motivator. If they lease their building then this is less of a motivator. However, they may still be interested because they’re aware that low-carbon (low running cost) buildings are attractive to prospective tenants who are cost and climate-conscious.
• The second is that large buildings with poor energy ratings (EPC lower than E) silently lose value each year. From April 2023 it will be unlawful to let or continue to let a commercial property with an EPC rating of F or G. By 2030 (7 years time) all non-domestic buildings must have an EPC rating of A or B. To give an idea of the scale of the opportunity. Savills estimates that approximately 87% of the UK’s offices have an EPC of C or below.

In London, Deloitte estimates that approximately 15 million sqft of office space will need to be upgraded/retrofitted by 2030. That’s 80% of all London office space.

C-Link’s data suggests that the average cost of a heavy office refurb is circa £140sqft to £180/sqft. This would place the value of the ensuing office upgrade works between £2.1Bn and £2.7Bn (or up to £385 million per year between 2023 and 2030). As previously mentioned, the good news for construction professionals is that these building owners must conduct these works or their buildings cannot be leased legally.

PORTFOLIO OWNERS

Portfolio owners such as Pension Funds, REITs (Publicly traded Real Estate Investment Trusts), Investment funds, and Housing Associations have the same problem as building owners but is it multiplied by the size of their portfolio. A few portfolio owners are already selling buildings which are unsalvageable and retrofitting the buildings which are.

However, most have not fully gripped the scale of the problem. Even fewer appreciate how difficult it will be to procure contractors when every homeowner and building owner is trying to retrofit their building.

WHO IS TAKING ADVANTAGE OF THE RETROFIT REVOLUTION?

C-Link is working with leading construction businesses that are taking advantage of this once-in-a-generation opportunity.

If you’d like to discuss how C-Link can help you do the same drop us a note here.

If you’re not ready but if you’re intrigued, why not check out our platform?

About Martin Prince-Parrott

Martin is an ESG Real Estate Developer and former Award-Winning Architect. He’s spent the last decade designing and developing a billion-pounds worth of mixed-use institutional-scale real estate. He’s worked with and for market-leading companies such as Gensler, Microsoft, Barratt Homes, Legal & General and Barclays Bank.