Bridging the funding gap for social housing retrofits

The social housing sector is faced with a retrofit funding deficit of over £90bn, and so far, government grants and private sector investments are falling short. Tim Meanock of Tallarna explains how an ecosystem approach overcomes this challenge to deliver affordable warmth that pays for itself.

To meet the UK’s 2050 net zero targets, social housing providers must undertake the enormous task of retrofitting over four million homes. Not only does this involve building work of considerable magnitude, it also comes with an eye-watering price tag of £104bn. That’s almost the equivalent of paying rent for all social and private tenants in the UK over a 15-month period.

While the government has mandated such decarbonisation work, their financial contribution amounts to less than 10% of the total cost. The Social Housing Decarbonisation Fund (SHDF) and ECO grants combined only cover £7.8bn of the required finance. Obtaining private investment, therefore, is essential. However, this remains hard to achieve in a way that is mutually acceptable to both parties. Current financing options require security against assets (such as social homes themselves), as opposed to the cash flows generated from retrofits (savings on the bill). This is too risky for most landlords. And the reason for these terms? Investors’ lack of confidence in retrofit outcomes.

Bridging the uncertainty gap

Bridging the private sector’s uncertainty gap requires data and proof-points. One technology that plays a vital role in this early in the project development cycle is thermal imaging. It helps establish objective energy baselines without human bias or limitations.

Infrared thermal imaging surveys provide an accurate insight into properties’ energy efficiency issues – many of which would otherwise go undiscovered. These include missing or inadequate insulation, draughts, porous brickwork, and waterproofing issues.

Thermal imaging can be combined with open data sources and statistical analysis on archetypal building performance and enhanced by artificial intelligence (AI) to provide a clear retrofit pathway. This empowers social housing providers to understand which homes need to be addressed first, what measures carry the most risk, and whether a project is financially viable. Doing this early on optimises the balance between energy, carbon, and bill reductions.

Accurately predicting project outcomes is a key part of the decision-making process. Social housing providers need to know the ratio of cost-to-savings, what cash flows will look like post-retrofit, and how to structure projects across an entire portfolio. Only then will they be able to make the right choices.

But providers’ decisions can only be as good as the data they rely on. And, as investors are acutely aware, expectations are often different to reality. This is where risk quantification comes in. By using AI to understand the likelihood and magnitude of retrofit underperformance, project outcomes are guaranteed. This allows landlords to align retrofit measures with what will work in practice. And guaranteeing retrofits’ energy savings reassures private investors as well. Should technology defect or a shortfall in bill savings occur, they know they will be compensated.

Balancing the books

For ESG funders, insurance policies function as a safety net. Not only do they backstop underperformance, but they transform retrofits into financial assets. In other words, Energy Savings Insurance translates a piece of building modelling into a concept investors can understand and get behind. The result? Access to institutional funding at a higher loan-to-cost ratio which has the capability of being off-balance.

Blending private and public funding extends social housing providers’ existing budgets and makes deep retrofits possible. By connecting the
worlds of data analytics, engineering, insurance, and finance throughout the retrofit process, stakeholders can get on the same page, working towards the same pre-defined goals, in possession of the adequate funds. Such collaboration offers a streamlined approach to financially, socially, and environmentally sustainable retrofits.

While third-party funding enables project execution, it ultimately needs to be repaid. Using a ‘pay-as-you-save’ model, housing associations use a percentage of the realised energy bill savings to service this third-party capex. Up to 25% of the savings stay with residents from day one, providing insulation against future price hikes. This increases to 100% once repayment ends.

An ecosystem approach in practice

Joining the dots between each stage of the retrofit planning cycle is known as an ecosystem approach. Described above, this method can be seen in action in the partnership between climate tech company, Tallarna, and net-zero pathfinder, IRT Surveys. Their integration enables social landlords to identify, design, insure, fund and contract retrofit projects in one place. Crucially, they draw together the worlds of private and public finance – showcasing available grants and institutional funds to bridge the retrofit deficit.

If the social housing sector is going to reach its net zero mandates, it needs to get all building stakeholders around the same table, speaking the same language. Only then will retrofitting Britain’s 4 million social homes go from an uncertain aspiration to a funded reality.

Tim Meanock is CEO of Tallarna