From some corners of the property market, cries of anti-landlord legislation are once again growing. This time, the source of alleged disenfranchisement is the government’s green agenda for housing and rules that will soon compel landlords to improve their properties’ energy efficiency.
Currently, private landlords in England and Wales need to have a minimum Energy Performance Certificate (EPC) rating of ‘E’, unless refurbishment costs exceed £3,500. By 2028, all properties will need to make the leap to ‘C’ and exemption costs will increase to £10,000.
Getting this done is a vital job, given housing contributes to a fifth of UK carbon emissions. A large part of the task involves cutting heat leakage, which is usually – and thankfully – possible via existing technology such as double glazing, better insulation and more efficient boilers.
It also comes with a large bill. The Department for Business, Energy and Industrial Strategy estimates between £35bn and £65bn will be needed to upgrade all homes, including owner-occupier and affordable housing stock, by 2035.
In practical terms, the English Housing Survey estimates moving from a ‘D’ to a ‘C’ rating – a task some 47 per cent of all homes will need to complete – will cost £6,472 on average. In turn, this will cut annual energy bills of £179 and remove the risk of a £30,000 fine. For houses that need to jump from ‘E’ to ‘C’, costs double, while average annual energy savings rise to £594.
The potential effects on property owners vary greatly. As the National Residential Landlords Association (NRLA) points out, the relative costs for a property in Shildon, County Durham, where average values are below £60,000, far exceed those of a £750,000 London home. But what is certain is that millions will be affected: according to Savills, just 39 per cent of the country’s 5.6m private rented homes have an EPC rating of ‘C’ or above.
As such, the estate agent expects the new rules to prove especially burdensome for mortgaged buy-to-let landlords. More than a third are yet to factor in costs, but even for those readying for the changes, liquidity and financing are likely to be key constraints.
These are all issues in need of fiscal or market solutions. As both the NRLA and think-tank Localis note, retrofitting properties in areas with low property values presents a particular challenge. But it is also fair to question 'payback times' as a sensible test of landlords’ incentives to upgrade.
For a start, a £10,000 insulation bill is less than 4 per cent of the average UK house price, or a rolling annual capital investment of less than 1 per cent until the 2028 deadline. For most landlords, this should be manageable. Fortunately, if higher efficiency standards lower tenant energy bills, landlords have a valid reason to raise rents and spread costs. In any case, all businesses are having to account (and directly or indirectly pay) for the energy transition; as an addressable source of emissions, the private rented housing market should not be exempt.
Most important is the assumption that an EPC rating upgrade is a hit rather than a capital investment. According to Savills, there is “currently limited evidence of a residential green premium that could incentivise improvements”. But if minimum energy standards are only likely to rise with the ambition for emissions reductions, then it seems likely a premium will eventually emerge.
Until this happens, cash-strapped landlords can always sell out and invest in PRS Reit (PRS), the private rented sector landlord, instead. “All of their homes are a minimum ‘B’ EPC rating so this issue doesn’t really apply to them,” says a spokesperson.
