With the deadline for changes to minimum EPC requirements looming, we examine new data revealing how landlords plan to fund improvements and how much they intend to spend. Will the PRS even meet these requirements in time, and what options do landlords have?
Interest rate rises and the cost-of-living crisis have understandably filled our headlines over the last few months. However, the Government’s planned legislation for all private rental sector (PRS) properties to meet a minimum EPC C requirement by 2028 (2025 for new tenancies) hasn’t gone away.
New research from Paragon Bank sheds light on how prepared landlords are for the legislation changes (although not technically law yet), including how they plan to fund the works and how much they expect to spend.
How will landlords fund EPC improvements?
According to Paragon’s survey results, the majority (60%) of landlords intend to use their savings to fund energy-efficient improvements on their BTL properties. 27% plan to increase rent, and 19% want to use Government grants and funding. Interestingly, only 8% intend to use further advance facilities, 8% other loans, and only 7% will release equity from their portfolios.
Of course, the most financially suitable option will vary hugely depending on your circumstances and portfolio. However, I find it surprising that such a small percentage of investors plan to utilise built-up equity within their portfolios to pay for the necessary works, especially considering the predicted cost per property (which I’ll discuss in a moment). I would encourage all landlords to consider property finance options such as capital raising, further advances, second charges or bridging finance before breaking into their own savings for these improvements. You can find out more about these options in our blog, here.
How much will EPC improvements cost?
Of the landlords surveyed by Paragon, 77% are willing to spend up to £3,000 per property, upgrading the EPC rating to C. However, the bank’s research suggests that the average cost of upgrades would be £10,560 per property – quite a difference! Perhaps this underestimation of costs is why many landlords surveyed plan to use savings. Richard Rowntree, Mortgages Managing Director at Paragon Bank, summed up the in-balance perfectly:
“The apparent disparity in what it is likely to cost to meet these standards and what landlords are willing to spend helps to illustrate the financial challenge the new regulations would pose to buy-to-let investors.
“There remains a lot of uncertainty around the proposals, so the sector needs some clear guidance from the Government. With this, my hope is that landlords will have a better understanding of how the new regulations would impact them and the resulting financial support they would require.”
Will the PRS meet the new EPC requirements?
Predictions from the letting and estate agent body, Propertymark, suggest that only 60% of PRS housing will actually meet the minimum EPC C requirement by 2028. In the eight years to 2020, the percentage of BTL properties that reached the new proposed threshold increased from 19% to 39%. According to the research, unless the pace quickens on improvements, 40% of rental homes will not meet requirements in time.
Currently, 68% of housing association properties, 61% of council homes and 42% of owner-occupied housing in England already achieve a minimum EPC of C, according to research from the English Homes Survey. The national survey commission is calling for the Government to do more and “move away from a one-size-fits-all policy in favour of energy efficiency proposals that consider a property’s age, condition, and size rather than its tenure”.
Frustratingly, Hamptons recently discovered significant “flaws in the assessment process” for EPCs. The research found that “In nearly [48%] of blocks of flats, properties are spread across three or more EPC bands”. While there may be some anomalies, you’d expect flats within the same block to receive relatively uniform ratings! This disparity is down to different EPC assessors using inconsistent assumptions about a property’s energy efficiency. The Department for Levelling Up, Housing and Communities have said they are looking for ways to improve the assessment system to ensure they are as accurate as possible – let’s hope so!
Given that the PRS makes up 19% of England’s housing stock (the second largest group), green improvements must be made to underperforming properties, especially if the UK wants to achieve net zero emissions by 2050. However, the Government should think carefully about how much pressure they put on landlords at this point. With over one million households on waiting lists for affordable social housing, the private rental sector is providing a much-needed crutch for the UK’s housing issues.
While this may all sound pretty negative, it’s not as dire a situation as it seems. Remember, the legislation still hasn’t gone through yet, and there are still details to be ironed out. Furthermore, there are funding options to help you with the costs of these improvements, and we can help you find the most financially suitable path. Give us a call on 0345 345 6788 or submit an enquiry today!
2nd August 2022