Energy Performance Certificate (EPC) requirements for buy to let property will change again as early as 2025. However, more than two years after the first announcement, the Bill still hasn’t passed law. What’s the latest? How are landlords preparing, and what do you need to do?
As part of the Government’s plans for the UK to reach Carbon Net 0 by 2050, Chancellor Jeremy Hunt announced that energy consumption from buildings and industry must reduce to 15% by 2030. Currently, residential property accounts for around 20% of the UK’s carbon emissions (OSB).
As part of the plan to tackle this, there’s a proposal to require private rental sector (PRS) properties with new tenancy agreements to have a minimum EPC C rating from April 2025 and all PRS tenancies from April 2028. First announced in December 2020, the Bill is yet to pass as law; in fact, it’s all gone a bit quiet, leaving many landlords and property investors in limbo.
Below we look at the latest landlord and tenant survey results about the issue, including the scale of the problem, how many landlords are aware of the proposed changes, tenant sentiment towards energy-efficient properties, the benefits and barriers for property investors and how you can finance green improvements.
How Big is the PRS EPC Challenge?
According to Shawbrook’s latest report, 38% of landlords have properties rated EPC D or below, approximately two million properties across the UK. This percentage increases to a staggering 58% in London. Needless to say, the scale of the challenge is colossal.
Encouragingly, 54% of UK landlords surveyed have made energy-efficient improvements over the last six months, increasing to 77% of landlords with London properties. However, landlords in some areas are less proactive; of those with property in the West Country, only 36% have made green improvements.
Of those property investors who’ve made changes, what’s motivated them? A significant 63% cited ‘inflationary pressures’ as a reason to bring upgrades forward, and 28% ‘would not have made changes without the cost-of-living trigger.’ Clearly, rising energy costs and general inflation are critical influences for UK landlords.
Are Landlords Aware of the BTL EPC Regulation Changes?
Positively, awareness about the issue is growing. Since Shawbrook’s last report, fewer landlords (11%) are completely unaware of the proposed EPC changes. 78% are aware; however, 37% only know ‘a bit’. Unsurprisingly, 73% believe the Government has not communicated these changes effectively.
One of the main issues surrounding the proposed changes is uncertainty about when the Government will pass it as law and, therefore, when the deadline for property improvements will be.
OSB’s Landlord Leaders Report found that 60% of landlords who are aware of the changes are awaiting confirmation of the regulation changes before making improvements. With the proposed deadline of 2025 for new tenancy agreements fast approaching, it seems increasingly unlikely (and unfair) the Government can stick to this. Regardless, a bit of certainty would be welcome!
Who Should Contribute to EPC Improvements?
Shawbrook’s survey reveals that the majority of tenants (58%) ‘would be less likely to look at a rental property with a rating of D or below’. Furthermore, 72% of 18–34-year-olds looking for rented accommodation would check the EPC rating before signing tenancy contracts. It’s likely spiralling energy prices have brought property energy efficiency to the forefront of many tenants’ minds, as taking measures to reduce household bills becomes a priority for many. Interestingly, just 52% of those over 55 would do the same.
However, with issues surrounding how to fund green improvements (more on that in a moment), who should contribute to the costs of rented properties: tenants and/or landlords?
The EPC survey reveals that 49% of landlords believe tenants should hold equal responsibility for making energy-efficient improvements, and 33% that the duty lies with both but more so the landlord. Some measures which landlords believe tenants can contribute to include low-energy lightbulbs (63%), water-saving taps (43%), smart meters (43%) and draught proofing (29%).
The Benefits of Energy-Efficient Buy to Let Property
At first glance, it appears that most benefits are for tenants: modern fittings and lower household bills. However, there are several benefits for you, the property investor.
First and foremost, many buy to let mortgage lenders now offer cheaper mortgage interest rates for properties with EPC ratings A – C. Sometimes, the better the rating, the larger the discount. We advise you to check your remortgage due date and, time and finance depending, complete green upgrades before then to ensure you have these options available. Around 18% of landlords are already utilising these options, and 59% would consider them for the future.
Please note that standard mortgage products still work out cheaper in some circumstances, so it’s worth speaking to an experienced broker to ensure you get the most cost-efficient deal.
While we may not have a set-in-stone deadline for the EPC legislation changes, we are confident they will come at some point in the next few years. Making green improvements will ensure the longevity of your buy to let investments and help you avoid potential mortgaging and legal issues once it is a legal requirement.
As discussed above, tenants are concerned about property energy efficiency, whether for moral or cost-saving reasons. Consequently, a good EPC rating will attract more tenants, reducing void periods and potentially increasing rent rates. So, there’s a financial benefit to you as well as your tenants (or whoever is responsible for the bills).
There is some evidence that making green improvements increases property value. Rightmove’s Green Homes Report ‘found that homes going from an F rating to a C rating added 16% to the value of the home.’ Sustainability Director at Legal & General Surveying Services, Trudy Woolf, believes that EPC ratings may have more sway on property values as the cost-of-living crisis and moral commitment to greener living deepens. However, given the recent market, several other contributing factors could lead to increased values, EPC ratings being just one.
EPC Improvement Challenges for Property Investors
44% of landlords cite affordability as the main barrier to making energy-efficient improvements to their BTL properties. For landlords with just one investment property, this increases to 51% (Shawbrook).
Under the existing regulations, landlords must spend up to £3,500 to bring properties up to an EPC E before claiming an exemption. This is in place partly because some older properties simply cannot attain higher EPC ratings, and because most landlords do not have limitless amounts of money to fix these issues.
The new proposals include raising the expenditure limit to £10,000 per property. 70% of landlords believe this is far too high, and the NRLA highlight that this blanket exemption limit isn’t fair regionally. £10,000 ‘represents a far greater proportion of £163,000 – the average house price in North East England – than £544,000, the average price in Greater London.’
The reality is this short-sightedness from the Government could increase the number of landlords selling BTL property. As tenant demand increases, the UK housing crisis will only worsen with fewer PRS properties available, and rents will increase further (great for landlords, not great for financially challenged tenants).
How Can Landlords Finance Energy-Efficient Upgrades?
Shawbrook’s research reveals that 57% of landlords have used cash savings to fund green improvements. 30% borrowed on credit cards, 24% took personal loans, 17% remortgaged, 16% took business loans or equity release, 14% utilised second-charge options, and 12% used bridging finance.
The Government has launched the ECO+ scheme, designed for middle-income property owners with properties in council tax bands A to D (approximately 70,000 homes). The scheme grants up to £1,500 to contribute 75% of energy-efficient upgrade costs per household, covering loft insulation, cavity wall insulation and smart heating controls.
Most importantly, this is available for PRS properties. Currently, the scheme will only run for three years from April 2023, with a one-billion-pound budget allocated. To find out more, visit the .GOV website here.
Given the restrictions of what the scheme will cover, this won’t benefit everyone. Therefore, we recommend you speak to us about what other finance options may be available to you. We can complete a full property portfolio review, free of charge, to see if there’s available capital to release, other property finance options or more cost-effective rates available for you.
11th January 2023