Posted on December 8th, 2022

Proposed new EPC rules will have unintended consequences, says Chris Kirby of The Mortgage Lender. Landlords will either sell older properties or raise rents.

Following a consultation in December 2020, the UK government has proposed changes to the Minimum Energy Efficiency Standards for England and Wales.

Under the proposed rules, all newly rented properties will be required to have an energy performance certificate (EPC) rating of C or above from 2025. This is an increase from the current legislation that requires an EPC rating of E or higher. Existing tenancies will have until 2028 to bring themselves up to the standard of the new rules.

Many landlords will circumvent the problem by buying new-builds instead

We must stress that all of these changes are still at the proposal stage as there is every likelihood that, for the parts of the UK where the law hasn’t yet been brought in, these dates could be pushed back.

Landlord exemption eligibility

Once a property has been assessed to establish its EPC rating, the landlord is given a set of recommendations for improvements they can make to raise the EPC rating to an acceptable level.

If the cost of installing the cheapest improvement measure exceeds £3,500, the government grants a five-year period of exemption from improving the rating. If, after five years, the improvements can’t be made for the same reason, another exemption will be granted. Given the climate of rising costs and inflation, it’s safe to assume an improvement that was too expensive five years ago would be too expensive today.

In the future, landlords may choose to sell their older properties to avoid costly EPC updates

The rules in their current form mean there is less accountability required of landlords to improve the EPC ratings of their property portfolios.

With many landlords taking advantage of the exemption, there seems to be a hesitation to bring homes up to a standard that is more environmentally friendly.

Portfolios to be unloaded?

Around 62% of rental properties currently hold an EPC rating between D and G, meaning they would be legally required to upgrade by 2030. Landlords could face bills in excess of £10,000 to meet the new requirements, giving an indication of the scale of investment required.

This issue disproportionately affects the rental market because private rental properties are, on average, older than owner-occupier homes

Landlords could consider either offloading properties (20% are mulling this option), or passing on the cost of property improvements in the form of increased rents (27% have said they would tackle costs this way).

It presents yet another issue for the private rental sector (PRS), where rents are already being pushed up by rising energy costs and the demand for housing is outstripping supply.

This points towards negative ramifications for tenants in an already challenging rental environment.

Given the climate of rising costs and inflation, it’s safe to assume an improvement that was too expensive five years ago would be too expensive today

As for the homebuyers who might snap up the properties being offloaded by landlords, they will likely incur costs where the homes they buy have a poor EPC rating.

New-builds are being snapped up

Due to the costs of upgrading homes to meet EPC regulations, many landlords are opting to circumvent the problem by buying new-build properties that more easily meet the minimum requirements.

Research has demonstrated that 15% of landlords would opt to buy a home that had been built in the past 15 years to avoid the challenges brought on by the new EPC regulations.

As much as 36% of housing stock held by landlords was built pre-1940, where homes typically need extensive and costly upgrades to bring them up to an EPC standard of A to C.

This points towards negative ramifications for tenants in an already challenging rental environment

This is an issue that disproportionately affects the rental market because private rental properties are, on average, older than owner-occupier homes.

UK Finance data has revealed that an increased proportion of newly built homes has been bought by landlords for private rental. In 2020, 4.09% of mortgaged new-builds were bought for letting purposes. This increased to 4.78% in the first six months of 2022.

We think this trend is likely to continue because, in the future, landlords may choose to sell their older properties to avoid costly EPC updates.