The Department for Business, Energy and Industrial Strategy (BEIS) is considering proposals to increase the energy efficiency (EPC Rating) requirement for private rental sector properties to a C rating for all tenancies by 2028. Some landlords see this as by far the biggest threat to the buy-to-let market. It’s not far off and with all the other legislative changes, issues surrounding non-payment of rent due to the effects of the pandemic and changes to tax laws; will landlords now start to exit the PRS?
From April 2020 it became illegal to rent out a property with an EPC rating of less than E and it’s about to get a whole lot tougher. Latest surveys show that only 2% of homes currently have A and B EPC rating, with approximately around 85 per cent having either C or D rating. Of the 4.5 million private rented homes in the UK, it is estimated that 1.7 million properties will never achieve an EPC rating of C or higher.
As well as the proposal to raise the minimum EPC rating for private rental property to grade C, the new legislation could see private landlords facing fines, imposed by local Councils, of up to £30,000 for non-compliance.
Mortgage Deals – Are they in abundance?
Perversely, on the face of it, it appears that it has never been easier for landlords to access finance for their businesses. Buy to let mortgages are more readily available than at any point throughout the pandemic. Lots of new products are emerging and even 20% deposit loans have been reintroduced. Current mortgage deal numbers have risen to in excess of 2,700, according to Moneyfacts, increasing by nearly 1,000 from March 2020. Attractive rates of 2.49% on a 2-year fixed deal and 2.99% on a 5-year fixed deal are available.
However, many of the new deals on the market are increasingly so-called “green deals” which means that they will only be accessible for properties that hold an EPC rating of C and above.
Furthermore, one of the proposals the BEIS is considering is that lenders may be required to annually track and publish the EPC rating average rating for properties against which they provide lending. The goal is to use mortgage lenders to help meet the Government’s energy efficiency targets for housing by making renting out less energy-efficient properties more difficult.
Many landlords feel that despite this apparent abundance of funding, the restrictions imposed by lenders and the punitive incoming energy efficiency rules, will force them out of the market and indeed some are already starting to sell properties as current tenancies come to an end.
Energy Efficiency – A Step too far for landlords?
Many landlords feel that the incentives ignore the reality of the situation, and they would leave the market rather than spend money bringing their properties up to the required standard. Trying to achieve the required standards by replacing gas boilers or installing better insulation can cost more than £10,000 as a minimum – and many landlords feel that such expenditure is not financially viable. As for older homes, it could cost huge amounts of money and for some, it will probably be impossible to reach an EPC rating of C or above.
Landlords have made great strides in improving their properties – over the last 12 years, the number of properties in the PRS sector meeting the EPC C rating has risen by five-fold. New housing with high energy efficiency ratings accounts for some of the change. However, it remains a fact that nearly 45% of dwellings in the PRS are pre-1940 and only 12% of properties in the PRS were constructed post-2003. This shows that landlords have therefore invested heavily already in meeting energy efficiency standards but 2028 may prove to be a step too far.
EPC 2028 – What are the consequences for PRS?
Many landlords see it as impractical and uneconomic if the EPC C rating were to become a base target for the PRS and their reaction to the proposals was measured in a recent survey.
Nearly 50% of landlords surveyed confirmed that given the requirement to achieve these new standards, they will leave the PRS market by selling their properties and another third plan to reduce their stock to fund alternative investments. Only 10% felt that they would absorb the cost of upgrading their properties.
Clearly, the consequence of imposing these new targets may well lead to a loss of choice for tenants and higher rents in the PRS. Areas of the country where properties are predominantly older will suffer most as those areas are typically rural with little affordable housing.
Landlords in the PRS have made significant progress in raising both the safety and energy efficiency levels of the properties they let. The adoption of new technology such as the property management software provided by Inventory Base has had a significant impact on the improvement in PRS property standards. But the challenges posed by EPC 2028 both in terms of the costs involved in meeting the new standards and the limitations posed by “green lending” requirements will inevitably lead to a restructuring of the PRS. Over 80% of landlords surveyed who are renting property below C grade felt that the proposed EPC rating would cause them to sell or at least reduce all or some of their stock.
Not only could we see landlords exiting the rental market because of EPC regulations and impacting the choice and costs for tenants, but we could also see a transference of the issues of energy-efficient homes to owner-occupiers as a result of rental property sales.
Perhaps a more pragmatic approach which supported landlords through more effective grant schemes would have a more positive impact on the climate, landlords and tenants alike. Food for thought…