With changing building standards on the horizon, we are regularly asked the question of whether new eco-homes achieve a premium and how much more they cost to build. The answer has an impact on how much developers pay for land or have to accommodate in their margins. In this latest analysis, we find that there is typically no premium for smaller homes, and a premium of 12% above similar standard new build for larger homes. However, the homes cost more to build – sources estimate that an additional 4–8% is needed to meet the Future Homes Standard or an additional 10–14% to build to net zero in operation (assuming the national grid is decarbonised).

Developers need to account for the additional cost without necessarily getting it back through the selling price. And landowners, promoters and developers need to be aware of the extra costs in order to secure sufficient grid capacity needed to deliver sites with more electricity-hungry homes.

Net zero requirements for new homes

In the drive toward net zero, from 2025, all new homes in England will need to be built to the Future Homes Standard. This requires new build homes to emit 75–80% less carbon than homes built to 2013 standards, meaning that they need to be future-proofed with low carbon heating and high levels of energy efficiency. In practical terms, there is no defined means of achieving this standard, as the government is keen to encourage industry innovation in developing new solutions, but is likely to include thicker walls and triple-glazed windows for greater insulation (lower U-values), as well as heat pumps instead of gas boilers, and ventilation systems with heat recovery. Alternative low-carbon, non-fossil fuel heating systems could include infrared, geothermal and hydrogen, with district heating systems more suitable in some locations and home types.

Even today, higher standards are being implemented through local authority planning policies so that new homes are net zero carbon (in operation). Practically, this means that rooftop photovoltaic panels are likely to be needed to balance energy consumption and generation, and therefore meet net zero carbon targets.

Even where it is not yet required, some builders are choosing to build to higher energy-efficiency standards ahead of the deadline. This is shown in the increase in the proportion of homes with an EPC rating of A and those with electric heating. Both of these measures have more than doubled in GB in the last five years, with 6% of new homes in the last year rated EPC-A and 28% of new homes completed in Q1 2023 in England and Wales having electric heating.

What’s the cost?

As there is no set way of meeting the Future Homes Standard yet defined, the additional costs of getting to the standard will vary depending on the type of home, the approach taken and the scale of the development. Various sources have attempted to estimate the costs. The Future Homes Hub estimate that to meet the 2025 standards it would cost an additional £5,600 per home above those built to the 2021 standard, based on better insulation, triple glazing and an air source heat pump. It would be an estimated £11,600 more with infrared heating and PV to achieve a similar reduction in carbon emissions. Others have estimated costs to reach the standard are £5,000–10,000 per home. This equates to a 4–8% increase in build costs for a typical house.

To reach net zero emissions including heat recovery systems, and extensive PV, as well as air source heat pumps and thicker insulation, the cost could be closer to an additional £20,000 per home according to the Future Homes Hub. This, and other sources including the Passivhaus Trust, indicate that this is equivalent to a 10–14% increase in costs. As these technologies become more widely used, the costs are expected to reduce.

Is there a premium?

There continues to be more interest in sustainability, with a sharp increase in the number of people who have adopted a more sustainable lifestyle in the last year, according to Deloitte’s 2022 sustainability report. But cost is a barrier; 52% of those surveyed by Deloitte said the primary reasons for not adopting a more sustainable lifestyle are related to cost. Running costs are the most important reason for choosing a low-carbon home, according to a separate survey by L&G in 2022. This means that if the running costs are lower, a more efficient home will be more appealing to buyers and renters, but the upfront additional cost may be prohibitive.

Our latest analysis, examining the largest eco-village in the country, shows that new moderately sized energy-efficient homes do not achieve a premium, but larger homes do. We find that at Elmsbrook (the eco-village at Bicester) the new highly efficient homes between 800 and 1,050 sq ft (typically small two- and three-bed houses) achieve the same values as those on the standard new build development nearby (0.4% premium). However, homes between 1,200 and 2,000 sq ft achieve a premium of 12%.

By looking at the values achieved on large highly efficient homes on smaller schemes, we also find they achieve a higher premium of typically between 10 and 20%, albeit the other high-quality features in these bespoke schemes also contribute to the premium. As we have found previously, it is the affluent eco-conscious who are able to pay more for more efficient homes, but the mainstream market is constrained by affordability.

There are steady shifts towards increasing the affordability of energy-efficient homes. Green mortgages, for example, factor in the running costs associated with these types of properties. However, until factors such as these are at a scale enough to help buyers stretch their budgets to pay for such homes, we will continue to see low levels of participation in the mainstream market.

What’s the impact?

For housebuilders, this means that they will need to absorb the additional cost of meeting these higher standards for the majority of their homes, but may be able to offset some of the additional build costs on the larger homes. To do this they will either need to squeeze their margins or account for the additional cost in the price they pay for land, the latter being something they are generally already doing. The design of homes also needs to be considered to ensure there is space for thicker walls with greater insulation, and equipment such as water cylinders and batteries are accommodated into the internal layout and heat pumps are located appropriately outside new houses.

For landowners, this means that they will need to ensure that the developer buying their land has accounted for the additional build costs when accepting their offer to ensure they don’t need to renegotiate later in the sales process. It also means that if a landowner wants highly efficient homes to be delivered on their land, they may need to accept a lower land value to ensure the site is deliverable.

The switch away from gas heating will mean more electricity is needed for the new homes and greater grid capacity will be required. Due to the nature of the grid and the pressures it faces with decarbonisation, a lack of grid capacity in some areas is already impacting the delivery of developments. Landowners, promoters and developers will need to engage early with Distribution Network Operators (DNOs) to secure the grid capacity needed to deliver their sites successfully.

In the future, we would expect these more energy-efficient homes to be in greater demand due to their lower running costs, meeting the higher standards needed to let homes and the ESG pressures on lenders. This is likely to mean a more significant difference in value appears between less energy-efficient homes and those with greater energy requirements.

To get in touch with our Sustainable Design team or Energy, Renewables and Infrastructure team contact Dan Jestico or Thomas McMillan, respectively.

More on this topic from previous publications:

• Is there a green premium for new homes?
• Why London’s new homes come in different shades of green