EPC: The cost of wait and C...
Last November’s United Nations Climate Change Conference (COP26) in Glasgow brought home just how vital it is that we all make changes to our energy use and invest in sustainability innovations. The UK is the fifth biggest carbon dioxide (CO2) emitter in history[1], and climate change is an issue that 75 per cent of British adults are worried about[2].
Humankind needs to counteract its effects. Fast.
For the property sector, that means hitting sustainability goals in the next three to six years. But for the landlords of more than 4,000,000 UK rental properties[3] this vital vision is also a stressful reality – one that affects around 70 per cent of UK private rental stock.
The Department for Business, Energy & Industrial Strategy estimates that 15 per cent of net greenhouse gas emissions in the UK in 2019 came from the residential sector[4], so it’s hardly surprising that the government set strict targets in its energy white paper Powering our net zero future, published in December 2020.
To reach the desired net zero ambition by 2050, new rental properties will need to have a minimum energy performance certificate (EPC) rating of ‘C’ by 2025, with all rental properties complying by 2028.
Figuring things out
EPCs were first introduced in 2007 and current regulations state that a property needs to have an EPC of at least E if it is to be let (unless it is, for some reason, exempt). If the new regulations are approved, which looks likely, many landlords may find themselves having to jump from grade E to C – and could be looking at an estimated cost of more than £17,000[5] to do so.
The issues around upgrading rental properties are many and complex. To begin with, much of the UK’s housing stock comprises older properties with heritage systems that may currently meet regulations, but not for much longer. For example, 30 per cent of landlords owning a Victorian property say its current EPC rating is D or below[6].
The costs for updating these ageing properties will be much higher than average and won’t necessarily reflect geographical location. For example, a three-bed house in Teesside will likely cost the same to regenerate as a three-bed house in Berkshire, but the Teesside landlord may well be significantly less able to afford the necessary upgrades, and/or may not see the relevant return on investment – certainly not in the short term.
Where to start?
The term ‘necessary updates’ leads to another challenge – the lack of clarity around exactly what actions landlords need to take.
Essentially, there are two ways to improve the energy efficiency of an existing property: updating its heating system and increasing its insulation[7], but there’s no definitive direction on exactly what improvements might secure a grade C.
When making their report on an individual property, accredited energy assessors will look for many things that impact energy efficiency, including doors and windows, heating, lighting and insulation. Any one, or all, of these may need upgrades.
Paul Morton, group CEO of G2M, which specialises in acquiring and regenerating UK residential property, agrees it’s a challenge for landlords. “There’s no clear direction of what will get you to a C. You could spend a considerable amount of money on cavity wall insulation and find this still only takes you to a D. How do landlords plan for this and minimise the impact on a tenant’s family home? Multiply this across several properties, and energy updates become a huge, costly and complicated issue.
The bigger picture
As well as the cost, many private landlords are confused about timescales, logistics, and how new EPC regulations will be enforced. Up to 33 per cent suggest they’re not confident about meeting deadlines for various reasons, including lack of funds, not wanting to evict tenants in order to make the necessary upgrades, and not being clear on how to manage the process. Compounding the issue, 25 per cent of landlords don’t even know what their current EPC rating is.[8]
Even for those who are willing and financially able to make upgrades, there’s a bigger question regarding resource. The UK faces a significant challenge in terms of supplies, materials, and relevant professionals available to undertake the work on the millions of properties needing energy improvements. The Construction Industry Training Board (CITB) estimates that an extra 350,000 workers will be needed by 2028 to deliver improvements to existing UK buildings in general – an increase of around 13 per cent on the current workforce.[9]
Crunch time
Faced with escalating costs, confusion and considerable red tape, many landlords are taking stock of their assets and deciding whether now is the time to sell. It’s a decision they’ll need to make fast to avoid this and other challenges – such as the scrapping of Section 21 “no fault” evictions.
But G2M’s Morton highlights the crucial need to balance maintaining valuable rental stock while also supporting environmental goals. “The property market is caught in a dilemma. The macro effect of greater energy costs could mean many buy-to-lets exit the market. This would lead to a contraction of rental stock, which will impact thousands of individuals in the UK.”
Focused on the future
The solution, perhaps, lies with larger property organisations, for whom the regulations may pose less of a challenge. With finances, resources and expert advice more readily at their disposal, they’re in the fortunate position of being able to plan for the long-term, and have the advantage of being able to make decisions and take action fast, offering private landlords a quick and simple way to realise their assets.
They also often have the capability to buy tenanted stock, meaning the current inhabitants of a rental property can remain secure in their homes – albeit with a new landlord. But it will be one committed and able to provide a more energy efficient home. And when it comes to the bigger picture, the more properties that can benefit from this, the faster the UK will achieve its net zero goals.
