Article originally published in Mortgage Introducer May/June 2023 – page 18
Landlords are under a lot of pressure. Property investment has been under attack from diminishing tax reliefs to regulatory changes for some time. But the standards required of rental properties are changing too. A recent report published by the House of Commons Library referenced an estimate made in the English Housing Survey that in 2021 some “23 per cent of privately rented homes did not meet the Decent Home Standard – around one million homes”. This compares with 13 per cent of owner-occupied and 10 per cent of social-rented homes.
“Whatever we think of how EPC’s may evolve , they’re here to stay and will inform lenders’ decisions when it comes to buy-to-let lending in the future.”
For the landlords who do a good job by their tenants, who respect their rights to tenure and who charge reasonable rents, these sorts of statistics provide yet another sleight to add to the long list levelled against landlords.
After tax relief withdrawals, tougher mortgage affordability standards, rising mortgage rates and now the need for mandatory minimum energy efficiency standards that will require thousands of pounds to deliver per property – it’s an onslaught. It’s also felt like the odds are stacked against landlords, especially when it comes to doing the upgrades necessary to meet the minimum EPC band C ratings by the due date.
There is a fair amount of research out there that suggests that, where landlords know about the oncoming changes, they are happy to invest in making their lets more energy efficient; they just don’t know how.
You can understand why. EPCs are a work in progress, and everyone has a view of what needs to be improved. By way of example, a report published by the Royal Institute for Chartered Surveyors in November last year highlighted the issues they had identified around the assessment of property energy efficiency. The report went on to state that the RICS wants three metrics used to assess EPC band: final energy use, carbon emissions and energy cost. The RICS has also argued for fabric energy efficiency, space heating demand, peak energy load and on-site renewable generation to be part of EPC band rating assessments.
The reality as it stands is that whatever we think of how EPCs may evolve, they’re here to stay and will inform lenders’ decisions when it comes to buy-to-let lending in the future. We are already supporting lenders understand their existing portfolios as well as informing data collation for new originations. Indeed, CoreLogic UK has its own accreditation scheme for EPC and Domestic Energy Assessors.
Many landlords feel stuck in limbo, not knowing what improvements to make that will up their properties’ band ratings. While it’s a very valid position, unfortunately it doesn’t matter – at least not for now. Lenders are under immense pressure from a prudential perspective to review their exposure to energy efficiency risk. EPCs are the tool they have to assess that, and so landlords must work with it.
Landlords should think seriously about making their improvements sooner rather than later. While the Department for Energy Security and Net Zero has decided to alter the 2025 deadline to 2028, the current upper limit of £3,500 expenditure on upgrading properties so they could be let post the deadline may also be extended to £10,000 meaning more landlords will face larger bills.
As it stands, the objective landlords must consider is whether upgrades bring tenants’ energy bills down or not. Notwithstanding the recent volatility in energy prices, there are steps it’s possible to take to deliver lower bills. Now, highly efficient gas boilers have the capacity to lower energy bills more effectively than installing air source heat pumps – particularly in properties that don’t have sufficient wall cavity and loft insulation. Landlords in many properties are installing light sensors to turn off lights when rooms are empty. It’s not a perfect solution long term, but it’s what landlords have to work with at the moment. There’s also a strong case for improving insulation, double glazing, and grey water recycling sooner rather than later.
These measures will help to reduce energy waste and thus cut bills for tenants. But in older properties some of the retrofitting that is required may be impossible. Where measures can be taken affordably, then they will reduce carbon emissions long-term. While we wait for clarity from the government, it is the best landlords can do for now. And those who do will be viewed favourably by lenders.
What is clear in countless surveys is that many landlords are not sure what to do and to make matters worse are holding off, expecting greater clarity around EPCs. This will create its own bottleneck if a demand for remedial works is created in advance of the deadline.
When it comes to the tricky business of property energy performance, one thing is certain. The issue will not go away. The carbon footprint of our residential property is too big to ignore and will not go away.