There has been a lot in the news recently regarding energy efficiency in the rental market. So much so, that it is understandably difficult for landlords to interpret how best to incorporate this into their investment decisions and business strategies. In this article we will try to decipher the main trends.
1. Apparent government U-turn on EPC rating requirements for landlords and other net carbon zero initiatives.
Most landlords will be aware that the government had previously stated that it would require landlords to upgrade their properties to an EPC C rating by 2025 on new tenancies, and 2028 for all tenancies. The exact timelines had not been committed to law however and details remained vague. The consequence of these unknowns and the potential risk to landlords of large bills for remedial works to meet this legislation has played a major part in the recent trend of landlords selling their rental properties. This has led to a contraction of the market and supply and demand issues.
However, the Prime Minister has now shared that homeowners and landlords are likely to no longer be required to meet these new energy efficiency targets. Landlords and other households will instead continue to be encouraged to upgrade where possible.
The Labour Party has yet to respond in full to Rishi Sunak’s announcement, so with a potential change in government in little over a year this could come back on the table.
Mr Sunak has also announced that households will get more time to make the move to heat pumps or other forms of low carbon alternatives, with only 80% of gas boilers now expected to be phased out by 2035. Off-grid gas homes also have until 2035 to upgrade. This avoids the need for households to fork out £10,000-£15,000 on upgrades in the near future. Undoubtedly, this would also have had a knock-on effect to the rental market.
2. Renters paying attention to EPC ratings of properties.
Despite the fact that there may not be additional legislation in the near-term forcing landlords to further improve the energy efficiency of their properties, they would still be advised to pay attention to the effects on the market. We are seeing indications that tenants are now starting to pay attention to EPC ratings and apparent energy efficiency of properties offered to the market. Rents are increasing across the board, but more so for more energy efficient properties. Renters are also on the lookout for an efficient heating system and a well-insulated property and will increasingly ask questions about these features during the property viewing.
3. Mortgage lenders starting to offer discounts based on EPC rating.
Finally, there is evidence that mortgage lenders are also taking notice of the benefits and advantages of rental properties with a lower EPC rating, Paragon Bank being the latest to reduce mortgage rates for landlords.
Recently the bank has cut rates across 22 buy-to-let mortgage products, with fixed deals now starting at 4.59 per cent.
This rate is available to portfolio landlords for the purchase or remortgage of single self-contained homes with EPC ratings of A-C. Rates are higher at 4.64 per cent on properties banded EPC D or E and 4.84 per cent on HMOs and MUBs.
However, there is a sting in the tail: the product fee on the two-year fixes is set at 5.0 per cent.
Conclusion
The property rental market has initially responded negatively to government pronouncements on enforcing tougher EPC legislation. Although this – and other market interventions – have undoubtedly caused the market to contract, it has also increased the visibility of EPC rating as a measure of property running costs. This has been exacerbated by the recent general cost of living squeeze. As a consequence, although landlords may no longer be forced to improve the EPC rating of their properties, there are early indications that the market itself is starting to ‘self-regulate’, with energy efficiency becoming a selling point for renters. Landlords should take note of this and use it to aid their investment decisions.
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