How Valuations could assist Balance the Decarbonisation Investment Cost

There is an increasing amount of pressure from funders within the sector, for the valuation of securitised portfolios to include the associated costs of decarbonisation works. Whilst the Government’s most recent messaging on EPC and Net-Zero targets may have softened, we can be assured the sector will not overlook the importance and the need for more energy efficient homes and the benefits they provide the communities they serve. As a consequence, and rightly so, this investment is a necessity and one which will continue, with all actions focussed upon providing the best homes possible.

There is no getting around the fact that the level of capital expenditure required to fund decarbonisation, creates a significant challenge and putting these costs into valuations takes a huge amount of value out, however with some changes to loan security requirements, there may well be a part solution we can explore.

As Valuers, JLL are currently urging funders to adopt a ‘lotting’ approach to loan security valuations to help the sector’s stock decarbonisation efforts. ‘Lotting’ involves the allocation of different properties into groups according to factors such as tenure, size and geography, as well as other portfolio characteristics.

This is by no means a new approach to assessing value; it has been used in stock rationalisation sales for the past two decades as a means to generate demand. In turn this can often drive more value, by opening up sales to a wider audience and parties who may not necessarily be in a position to acquire an entire portfolio. It assumes the ability to purchase individual lots and is conducted with the support of a direct evidence base from previous market transactions.

Although this approach is adopted under commercial lending, for loan security valuations in social housing finance, valuers have not been permitted to use ‘lotting’. Funders currently instruct on a restricted basis of valuing units in a single hypothetical portfolio.

We would argue that the current restrictions are not maximising value, as it does not truly reflect how a lender would actually realise its security if there were a default. The value of ‘lotting’ is making valuations a truer reflection of the market into which the security would be sold. To provide some context, if valuing 1,000 units for loan security, we are currently assuming a single hypothetical transaction rather than four lots of, say, 250 units each, which is not how the market generally trades.

If funders were to allow valuers to overlay how the market actually operates, in most cases, albeit not all, you should be able to produce a higher value that is more reflective of how security would be realised. This additional value would then allow us to deal with a large part of the decarbonisation problem and its impact upon portfolio values.

JLL is actively lobbying the sector via various forums, providing the supporting modelling to demonstrate the positive impact ‘lotting’ can provide in meeting some of the current investment
challenges. As with anything new to the sector, it is an evolving conversation, but if anyone would be interested in finding out more, we would very much welcome the opportunity to share the discussion.

Richard Houghton – JLL Affordable Housing Valuation North
richard.houghton@jll.com