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The Net Zero Transition Across the UK’s Healthcare Investment Market

Investor interest in the UK’s healthcare market remains robust thanks to upward demand pressures for newbuild stock, compounded by a continuous supply shortage of fit-for-purpose beds.

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Sara Hartill

Sara Hartill

Associate Director

Proposed care home development scheme in Billericay, Essex


Since the pandemic, developers and investors have been forced to diversify their priorities to remain competitive, and sustainability has officially risen to the top of the agenda with a clear quantitative goal.

ESG (Environment, Social and Governance) and net zero targets are considered key indicators for investors within the sector, with financial markets increasingly demanding compelling sustainability initiatives.

It’s encouraging to witness how care operators are embracing the opportunity to implement environmental improvements; a trend that is particularly prevalent in the newbuild market as global regulations and expectations expand.

Multiple closures of older homes, increased standards from the CQC, and supportive demand demographics suggest that the UK care home market upgrade is far from over, with 2023 simply marking a year of change and progression as we path the way to a zero-emission era.

I spoke to Luke Harris, Director of Construction at leading healthcare developer, Frontier Estates, and Catherine Williams, Partner at Addleshaw Goddard LLP, about the shift in building regulations and the future impact of ESG throughout the funding market as key players seek to diagnose their current sustainability positions.

The majority of us are aware that Part L compliance centres around the requirement for new and existing buildings in the UK to become more energy efficient, but what are the specifics that all developers should be aware of? 

Luke: “For new buildings, Part L compliance requires a building in the UK to generate less CO2 emissions and use less energy than a benchmarked target set by the controlling body. The target has been adjusted numerous times since its release to ensure progress towards net zero buildings, in 2006, 2010, 2013, and in 2021. The specific requirements within Part L cover; building fabric efficiency, air permeability, heating, hot water, ventilation, cooling, lighting, limits on solar gain through glazing, low carbon and renewable technology, metering, monitoring, and recording. For existing buildings, Part L generally sets minimum standards for the efficiency of systems that are being replaced to ensure that new elements of those buildings follow a similar pathway to reduced energy and CO2 emissions as new buildings.”

The regulations directly relate to the Future Homes Standard which takes precedence in 2025, targeting a net zero goal by 2050. Is this realistic? 

Luke: “The Future Homes Standard is indeed the target; however, we feel the release by 2025 is still very much just a target. If we consider that the approved Part L document did not get amended between 2013 and 2021, despite talk about an update being scheduled for way back in 2016, then further changes by 2025 from the quite fundamental 2021 regulation changes are likely to be quite soon. That being said, the Government is likely to be under increasing pressure to act as we draw nearer to 2050.”

How do the regulations impact build costs, and what are the long-term benefits for developers and operators? 

Luke: “The change in regulations from 2013 to 2021 can have quite an impact on development costs, depending on what route you take as a business. If you take the view to retain gas for a development and make other energy efficiency changes, then the cost increases are less significant, however, if an all-electric solution is required for funding, then Part L compliance for an all-electric solution can add circa £250K-400K to a scheme (subject to network infrastructure availability in the local electricity grid).”

What are the most common Part L compliance/implementation issues?

Luke: “The biggest issues tend to be electric capacity in the local network (local networks are already stretched), space and noise issues around adding Air Source Heat Pumps to a building, CAP-ex costs, increases in energy bills when compared to a gas solution, increase in radiator sizes due to the new Part L requiring lower heating flow temperatures.”

The cultural shift in acknowledging the importance of ESG has been undeniable, with the new Part L building regulations primarily focused on the net zero challenge. With businesses already facing inflationary pressures and rising interest rates, will ESG remain a key priority for 2024/25?

Catherine: “Yes, undeniably. We only need to look at IFRS S1 and S2, announced recently, and how they develop over the rest of this year, to see the ESG focus areas, or more importantly a business's readiness for regulatory and market changes relating to ESG. Where a business isn’t ready, it’s going to have a balance sheet impact. Investors want to understand that balance sheet impact, so it will be an audit/financial reporting feature from 2024 onwards.

“Where it becomes interesting for us as lawyers is what businesses need to do to be ready to comply with IFRS S1 and S2 and other ESG-related laws. Many will need to revisit their operational procedures and contractual frameworks, and potentially revisit data and confidentiality. This is where we add value for our clients; spotting the ESG reporting challenges on the horizon and helping them to navigate the regulatory and contractual positions to ensure that they are best placed to deliver the strongest narrative. Businesses should be under no illusion, that the details that they disclose will be used by investors and funders when making decisions about where to invest or to fund.  

“Borrowing costs will be higher for those with more perceived ESG financial risk compared with those without, and equity investment could start to move away from such a business, which would negatively impact the valuation of the business overall.

“So, the next stage where we are advising clients, across all sectors, goes beyond the readiness to report. It’s looking at how, when faced with those macro financial pressures, a business should prioritise certain ESG matters over others. Which, essentially, means working with clients to say, ‘This is where your focus in this financial year, on ESG issue X (and not ESG issue Y) will have the most positive impact on your balance sheet.’"

Is there any impending legislation that will further solidify the importance of real estate businesses integrating ESG within their growth plans?

Catherine: “We’ve mentioned IFRS above, as one example. The landscape is increasingly evolving both in terms of regulations and more ‘soft laws’ (e.g. industry-driven frameworks where compliance is expected by the stakeholders whom you share with your competitor).

“It’s important for businesses not to see ESG as just a compliance issue. If they are only focussing on what’s on the horizon from a regulatory perspective, they’re likely to be playing catch up. Our mantra at Addleshaw Goddard is that ESG needs to be ‘strategic, stakeholder-focussed and balance sheet additive’. We help our clients by accessing various data sources and applying that stakeholder lens to hundreds of ESG touch points to help them identify where they should focus their limited time and resources. Clearly, compliance is essential for any business, but what matters to your stakeholders now is likely to be what becomes regulated in the future. So, it becomes strategic, not just compliance.

“We also steer a ‘don’t adopt a wait-and-see attitude’, and, to business leaders, whatever your own view is on climate change, whatever the outcome of the US elections in 2024, whether you’re a stakeholder capitalist at heart or see this as ‘woke capitalism’ is all largely irrelevant. ESG is about demonstrating to your stakeholders that there are no latent sustainability risks and that you are tackling challenges which those stakeholders care about most, and in the right order.

“This is all about your balance sheet and ultimate business growth and, dare we say, survival. The time to act is now or risk being left behind.”

Aside from ESG, what do you believe will be the key influences on value and growth across the real estate sector over the next five years?

Catherine: “Clearly the economic environment and changing approach to how we all live our lives is going to influence every part of the real estate sector, where we live, work and play.

“The pace of technological progress, particularly in relation to generative AI, will undoubtedly lead to a once-in-a-generation reshaping of the global employment market. It could lead to shocks in parts of the sector, but we’ve been seeing the direction of travel for a good few years now - for example, retail was hit hard and now it's pivoting and re-shaping.  

“We’re fairly pragmatic that every challenge will throw up new opportunities. Change of use, redevelopment, retrofitting, and even more regeneration in the most attractive places where a smaller, more tech-savvy world chooses to live, regardless of where they ‘work’. Many real estate businesses are already alive to these opportunities and that’s throwing up some fantastic deals which our clients have turned to us to advise on.”

For more on the healthcare investment market in the UK, contact Sara Hartill: / 07783 811 138

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