According to a recent survey by Shawbrook, 22% of UK landlords are still unsure about the cost of energy efficiency improvements for their properties.
The survey highlighted that despite the introduction of Minimum Energy Efficiency Standards (MEES) in 2018, which require rented properties to have a minimum energy rating of E, many landlords are still not aware of the cost implications of making improvements to their properties.
According to the survey, one of the key factors involved in landlord uncertainty about energy efficiency improvements is a lack of clarity on the rules and regulations, as well as concerns about the return on investment.
It is widely believed that better education and guidance are needed for landlords to help them understand the cost and benefits of energy efficiency improvements and to ensure they comply with present and future regulations.
The Shawbrook survey, which is part of its “Confronting the EPC Challenge” report, revealed that 26% of landlords have already made energy efficiency improvements with the aim of reducing energy bills for their tenants. On average, landlords have spent £8,900 on measures – around 50% more than was initially expected. Some fear that this financial outlay could act as a barrier.
However, earlier this month, research conducted by Finbri showed that landlords and tenants are nearly on the same page when it comes to EPC ratings, with almost 48% of landlords believing that they are “very or extremely important” when it comes to buying a property. 49.85% of tenants said they were “important or very important”.
It’s undebatable that improvements to the overall energy efficiency of residential properties throughout the UK will be a boon for standards across the housing sector, but despite their best intentions, with almost 50% of landlords poised to carry out EPC improvements over the next 12 months, the costs will have to be absorbed somewhere along the line.
So to better understand the debate, let’s first take a look at what EPC ratings are, the imminent changes on the horizon, and how they might affect the property industry in the UK.
What is an EPC rating?
An Energy Performance Certificate (EPC) rating is a measure of the energy efficiency of a property. It’s the main rating system used in the UK, and it is based on a scale of A to G, with A being the most energy efficient and G being the least energy efficient.
The EPC rating takes into account a range of factors, like the age of the property and the way it was constructed, as well as the insulation, heating and lighting systems, taking into account any renewable energy sources such as solar panels.
The rating is assessed and calculated by a qualified Domestic Energy Assessor (DEA) or Non-Domestic Energy Assessor (NDEA), who will conduct a survey of the property and produce the EPC report before granting it to the property owner.
EPC ratings are important because they provide information to potential investors, buyers or tenants about the energy efficiency of the property they are considering. If the EPC rating is high, in theory, it might indicate that the property is going to be cheaper to run and considerably more comfortable to live in, while also having a lower impact on the environment.
EPC ratings also have a legal element to them, as they are used to comply with legal requirements such as Minimum Energy Efficiency Standards (MEES) for domestic private rented properties. At present, the minimum standard is EPC band E.
Energy Performance Certificates were first introduced in England and Wales in August 2007 as part of the European Union's Energy Performance of Buildings Directive. The directive was introduced to encourage the improvement of energy efficiency in buildings and to enhance the long-term strategy around renovations of existing stock, with a goal to reduce greenhouse gas emissions.
Since their introduction, EPCs have become integral to the property market by providing valuable information about the energy efficiency of a building, with many renters and buyers referring to EPC ratings to make an informed decision about a property.
How will EPC ratings change?
Since April 2020, the Minimum Energy Efficiency Standards have applied to all existing tenancies in addition to new ones or renewals. However, following a consultation in December 2020, the government has announced new standards that will become law by 2025 in England and Wales.
These new regulations will require all rental properties to have an EPC rating of C or above, starting with new tenancies and then all tenancies by 2028. The aim is to increase energy efficiency and reduce carbon emissions to support the government's net zero by 2050 target.
The penalty for not having a valid Energy Performance Certificate (EPC) can vary depending on the circumstances. In England and Wales, the current penalty for not having a valid EPC is a maximum of £5,000.
However, the penalty for not having the minimum EPC rating is set to increase significantly as part of the new regulations. From 2025, new rental properties in England and Wales will be required to have an EPC rating of C or above. The penalty for not having a valid EPC is expected to increase to a maximum fine of £30,000.
How will EPC changes affect the property market?
Energy Performance Certificate changes are likely to have a significant impact on the property market. As we discussed, costs to bring rental properties up to speed with the latest regulations can in some cases exceed £10,000, which could potentially price out many of the “smaller” landlords in the UK.
The new EPC regulations may also lead to an increase in the value of properties with high energy efficiency ratings, while also decreasing the value of properties with low ratings. This could prompt a shift in demand for more energy-efficient properties which will likely impact the wider property market.
Research suggests that the proposed changes are already altering the buying preferences of landlords, with 24% saying they are likely to avoid a property with a low EPC rating when adding to their portfolio. 15% of landlords said they’d only buy a property if it was built in the last 20 years. One of the challenges here is that much of the UK housing stock was built pre-1940 and is unlikely to be above EPC band C.
When it comes to the rental market, EPC changes will mean that landlords must ensure their properties meet the revised energy performance standards. One way this could impact the market is if landlords have to increase rent prices to cover the cost of upgrades. Some experts claim that this will be yet another deterrent for an increasingly unprofitable endeavour.
Changes to EPC ratings may also have a knock-on effect on the new build market, as developers will need to meet the new energy performance standards. This could have an upside, leading to a much-needed shift towards energy-efficient building practices and materials. However, this could increase the cost of new build properties, too.
Overall, the impact of EPC changes on the property market will depend on a variety of factors, including the level of enforcement, the willingness of property owners to make upgrades and whether or not Government subsidies and grants will be readily available for those intending to make changes for the better.
Although the changes will provoke a movement towards more sustainable buildings, there are costs associated with those changes, which will have to be absorbed somewhere in the chain. But the question remains, who will ultimately bear the brunt of those costs?