How do EPC regulation changes affect landlords?.
An Energy Performance Certificate (EPC) must be provided as part of every property purchase in the UK according to the law. It measures the energy efficiency of a property on a scale of A-G and gives detailed information about its sustainability and carbon emissions.
In April 2018, new Minimum Energy Efficiency Standards (MEES) were introduced which made it a legal requirement for all privately owned properties to have an EPC rating of at least an ‘E’ before they are sold or let. This legislation applies to both domestic and commercial properties, although there are some exceptions around properties which are Listed and therefore may not be suitable for energy efficiency works.
However, it applies to 98% of residential properties in the UK and as a landlord you should assume that you will need to achieve an EPC rating of at least E. Those who fail to meet this standard could be charged up to £5,000 for each residential property.
In future, these regulations are set to become stricter as the need to increase the sustainability of the built environment becomes more urgent. New government legislation means that all residential properties which are rented out will need to achieve an EPC rating of C or above by 2025. If they do not do so, they are not eligible for rent.
Similarly to previous legislation, this will first be applied to all new tenancies by the initial 2025 date and then be expanded to all tenancies including existing ones by 2028. The final thing to note is that the penalty for not having a valid EPC will increase from £5,000 to £30,000 from 2025.
What is the effect that this legislation will have on landlords? Clearly, it will increase the responsibility on landlords with existing properties – especially those with older properties. These could require a serious amount of retrospective work to bring them up the standard required to meet the required EPC ratings by 2025.
A whole package of works could be needed including better insulation, remedial structural works, a new boiler, improved windows and other possibilities. These have the potential to be very expensive and it is recommended that landlords take action sooner rather than later.
However, there are notable upsides to increasing the EPC rating of your property too. Notably, the evidence points to higher EPC ratings leading to a sales premium and higher rents. These are the two income streams available to landlords and increasing them is the primary target for a successful portfolio that is profitable in the long term.
Andrew Harvey, senior economist at Nationwide, agrees, stating: “Decarbonising and adapting the UK’s housing stock is critical if the UK is to meet its 2050 emissions targets, especially given that the housing stock accounts for around 15% of the UK’s total carbon emissions. With this in mind, we used our house price dataset to explore the extent to which owner occupiers pay a premium or discount for a home due to its energy performance rating.
“Our analysis suggests that a more energy-efficient property (rated A or B) attracts a premium of 1.7% compared to a similar property rated D – the most commonly occurring rating. There is a more noticeable discount for properties rated F or G – the lowest energy efficient ratings. Indeed, an F or G rated home is valued 3.5% lower than a similar D rated property.”
Harvey also notes that the value that people attach to energy efficiency is likely to change over time, especially if the government takes measures to incentivise greater energy efficiency in future to help ensure the UK meets its climate responsibilities.
Overall, it is estimated that the average cost of upgrading an existing property to an energy efficiency rating of C is approximately £8,000 – and that number goes up if it is currently rated in band F or G.
That is a serious outgoing which will have a major impact on landlords in the future who will have to find that money in order to meet their legal requirements. If they do not, they cannot rent the property out and it will become increasingly harder to sell it.
With that in mind, many landlords are wondering what the solution is and whether they should continue investing. While it is a large issue, there is a simple way to avoid the issue entirely when making new investments in future – and that is to buy new build properties rather than existing ones.
Over the past decade, energy efficiency measures have improved significantly in all areas and are now being incorporated as standard into new properties. Improved insulation, more efficient boilers, electric panel heaters, decentralised energy and more sustainable building materials are just a few of the sustainability features that new build homes typically include in 2022.
Due to this, new build properties will tend to have a much higher EPC rating than existing properties. Approximately 94% of new builds are rated at band C or above, and therefore they are cheaper to run and more attractive to tenants. Additionally, they will retain their value and be future-proof in this way against further legislation changes for many years to come.
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