EPC Ratings: Future Considerations for BTL LandlordsMonday, October 24, 2022
EPC Ratings: Future Considerations for BTL Landlords
The Energy Performance Certificate is vital to selling, buying, or renting a home. Giving housebuyers a view of the energy efficiency of a property is very important. The house buyer will be able to see how efficient the property is on a scale from A to G, with an A rating being the most efficient. Apart from listed buildings; all homes need to have a valid EPC before they can be sold.
Following recommendations to raise a home’s EPC rating
With an EPC evaluation, a property’s EPC rating is determined, and the owner is provided with a set of recommendations on how it can be improved. Some of the typical things that can be done to a property to raise its EPC rating include:
- Installing double-glazed windows
- Insulating the walls and loft of the property
- Replacing the boiler with a more energy-efficient one
- Fitting solar panels to produce green energy
Once the homeowner has worked to improve the rating of their home they can enjoy lower running costs thanks to the better energy efficiency of their home.
New targets for EPC ratings
Following a consultation in December 2020, the UK government has proposed changes to the Minimum Energy Efficiency Standards for England and Wales. Under the new proposed rules, all newly rented properties will be required to have an EPC rating of ‘C’ or above from the year 2025. This is an increase from the current legislation that requires an EPC rating of 'E' or higher. Existing tenancies will have until 2028 to bring themselves up to the standard of the new rules.
The rules are slightly different in Scotland where the minimum EPC rating required is ‘D’. This requirement was brought into force in Scotland from the 1st of April 2022 when a new tenancy starts, and by a backstop date of 31 March 2025, all private rented properties with an EPC will need to meet this standard.
The proposed change in regulation is part of a wider plan to make homes more energy-efficient and reduce carbon emissions, as part of the government’s target to be net-zero by 2050. We must stress that all of these changes are still at the proposal stage at there is every likelihood that for the parts of the UK where the law hasn’t yet been brought in, these dates could be pushed back.
Landlord exemption eligibility
While a lot of work is happening in homes across the country to improve EPC ratings, landlords receive exemptions for bringing buildings up to standard.
Once a property has been assessed to establish its EPC rating, landlords are given a set of recommendations for improvements they can make to raise the EPC rating to an acceptable level. If the cost of installing the cheapest improvement measure exceeds more than £3,500, the government grants landlords a 5-year period of exemption from improving the rating. If, after five years, the improvements can’t be made for the same reason, another exemption will be granted.
Delaying the inevitable
Given the climate of rising costs and inflation, it’s safe to assume an improvement that was too expensive five years ago would be too expensive today. The rules in their current form means there is less accountability required of landlords to improve the EPC ratings of their property portfolios at the moment.
With many landlords taking advantage of the exemption, there seems to be hesitation to bring homes up to a standard that is more environmentally friendly.
Portfolios to be unloaded?
62% of rental properties currently hold an EPC rating between 'D' and 'G' meaning they would be legally required to upgrade by 2030. Some landlords could face bills in excess of £10,000 to meet the new requirements, giving an indication of the scale of investment required.
This means that landlords could consider either offloading properties (20% are considering this option), or passing on the cost of property improvements in the form of increased rents (27% have said they would tackle costs this way).
It presents yet another issue for the PRS where rents are all ready being pushed up by rising energy costs and the demand for housing is outstripping supply. Which points towards negative ramifications for tenants in an already challenging rental environment.
As for the homebuyers who might snap up the properties being offloaded by landlords, they will likely incur costs where the homes they buy will have a poor EPC rating. These might manifest through higher heating costs or the cost of undertaking the necessary work to bring them up to a higher rating standard.
New builds are being snapped up
Due to the costs of upgrading homes to meet EPC regulations, many landlords are opting to circumvent the problem by buying new build properties that more easily meet the minimum requirements. Research has demonstrated that 15% of landlords would opt to buy a home that was built in the last 15 years to avoid the challenges brought on by the new EPC regulations. With as much as 36% of housing stock held by landlords being built pre-1940 where homes typically need extensive and costly upgrades to bring them up to an EPC standard between A-C. This is an issue that disproportionately effects the rental market as private rental properties are on average older than those which are owner occupier.
UK finance data has revealed that an increased proportion of newly built homes have been bought by landlords for private rental. 4.09% of mortgaged new builds were bought for letting purposes in 2020 – this has increased to 4.78% in the first 6 months of 2022 an upward trend we expect to see continue moving forward.
What the future holds for landlords
The data above indicates a growing trend in UK landlords choosing to buy new build properties. We think this trend is likely to continue as landlords may choose to sell their older properties in the future to avoid costly EPC updates.
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