What do the proposed EPC changes mean for landlords?

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Darrell Walker Head of sales & propositions, Shawbrook Bank
|
4th May 2022
energy efficiency epc utilities

The learning objectives for this article are to:

  • To understand what impact the proposed EPC changes will have on landlords
  • To understand the potential financial impact of proposed EPC changes
  • To understand how bridging finance can help landlords to begin making improvements to their properties

What are the new Energy Performance Certificate (EPC) proposals set to affect landlords?

From 2025, under the current proposals all newly rented properties will be required to have an EPC rating of C or above. Currently, properties only require an EPC rating of ‘E’ or above. Existing tenancies will have until 2028 to comply with the new rule changes. While awareness is beginning to grow around these proposals, there is still much consideration that needs to be given to the actual impact that these changes will have on landlords and property owners. There is a real concern that a substantial amount of properties risk potentially being declared ‘unrentable’ and subsequently ‘unsellable’ or ‘unmortgageable’ due to landlords being uninformed about what the changes will mean for current and prospective tenancies.

In this article, we will delve into the proposals, considering what it might mean for landlords and the wider property market, as well as how brokers can support landlords grappling with potential changes.

Are landlords aware of these proposals?

According to Shawbrook’s research, 15% of landlords are unaware of the proposed upcoming legislative changes to the Energy Performance Certificate (EPC). A quarter of landlords surveyed said they had little to no knowledge of the forthcoming changes, with long-time landlords – those who have been renting out properties for over 10 years – found to be less aware of the changes and what impact this could have on their properties.

Close to a quarter of landlords said their properties are currently rated D or below for energy efficiency, so would face being unable to begin a new tenancy from 2025 unless improvements are made, should the proposed regulations be implemented. However, 27% of landlords admitted to not knowing the energy efficiency rating of their property.

Consequently, a quarter of landlords don’t know if, or what, level of work will be needed for their properties to meet the minimum ‘C’ rating under current proposals.

With more than a third of landlords owning properties built pre-1940, it is important that landlords begin to understand what it means for their portfolios and consider what the cost might be to make improvements. Indeed, with the deadline for new tenancies in 2025, this leaves just three years to make improvements, some of which could be extensive.

For those landlords currently unaware of the level of work needed on their property, or properties, there is a real risk of a loss in income if work still needs to be carried out post-2025. And in severe cases, where a substantial amount of work needs to be done to improve a property’s EPC rating, landlords could find themselves unable to secure appropriate financial support to carry out the works.

The broker, as a trusted adviser of landlords, therefore, can play a key role in speaking to landlords early about these proposed changes and offering guidance on what products may support landlords in making improvements quickly, such as a bridging product.

How much could this cost?

According to our research landlords could lose up to £9.5k a year if they are unable to make changes to the energy efficiency of their property ahead of the proposed EPC regulation changes and 2025 deadline. This figure refers to the average amount landlords estimate they would lose in rental income per year if they were unable to rent out their property.

30% of landlords have not yet made any energy efficiency updates to their properties, with most claiming that works will start within the coming 14 months.

Surprisingly, 10% of landlords said they won’t be starting any works for three or four years, cutting it close to the proposed 2025 deadline, and 42% admitted that their tenants would need to leave the properties during the improvement works.

The research found that, on average, landlords expect the improvements to cost £5,900, but only a minority currently have the necessary funds available to pay for the proposed changes.

We are, however, seeing some proactive landlords taking steps to improve their properties. To date, landlords have spent an average of £8,900 updating their properties – nearly 50% more than landlords expect they will need to spend. This discrepancy could result in landlords not having the necessary funds in place to complete the works required to achieve the EPC level required. In addition, supply chain constraints, rising costs of material and labour may see costs rise even further in the future, something landlords may need to plan ahead for.

What are the wider implications for tenants?

The changes to EPC rules could have an impact on tenants as landlords consider how to fund the improvements. Some might see their rent rise as landlords contemplate passing on the cost of improving their properties’ energy efficiency rating directly onto their tenants. More than half of landlords said they will pass at least some of the costs onto their tenant, with fewer than a quarter (23%) saying they would not pass the cost on at all.

Tenants in London, where average rents are £1,589 per month, are most likely to see costs passed onto them by their landlords. In total, 68% of landlords in London said they would pass at least some of the costs on to their tenant.

Looking ahead to when the works have been completed, 18% of landlords expect rents to naturally rise due to the improved EPC rating. This is because tenants can expect lower energy bills, with these properties being more likely to have a range of energy-efficient features as standard.

What are the wider implications for the industry?

The proposed EPC changes are also expected to impact landlord buying decisions when adding to portfolios. A quarter (25%) of landlords said that they will now avoid buying a property with a low energy efficiency rating. A further 30% said they would be inclined to buy a property which already holds a rating of C, avoiding having to carry out immediate works to guarantee rental income.

With just 30% of current properties in the private rented sector (PRS) built since 2000, a change in the buying habits of landlords poses an issue for the UK’s housing market. Such a shift in approach from landlords underlines just how substantial the EPC requirement is and the huge implication it could have on the PRS. With older properties falling out of favour, this could leave current owners unable to sell their properties without making the necessary improvements themselves. It won’t be possible for landlords to ignore this drive towards improving the overall quality and energy efficiency of current housing stock.

How can brokers support landlords?

Our industry needs to prioritise support for landlords to help them make improvements as soon as possible. Advisers making clients aware of the changes and implications is the first step to making this possible, and if there are situations where access to the necessary financing is causing a delay, it’s important that lenders and brokers work together to come to practical and effective solutions. Technology and innovation have a key role to play and will allow brokers and lenders to quickly and effectively inform landlords on how they can best finance the works. While in the longer term we expect to see a greater range of incentives and green mortgage products entering the market, for now short-term bridging finance could provide a viable alternative for landlords looking to make the first move.

How can bridging finance play a role in the short term?

With changes required for many landlords and costs a major factor, bridging finance can play a key role in providing required funds in the short term. Among its benefits, the flexibility of bridging loans stands out to investors, as a way to leverage their investment at every stage of the property cycle from purchase to refurbishment all the way through to either selling or exiting to a buy to let. This can be a useful tool to mitigate the impacts of EPC changes, as it provides a quick cash injection to make improvements ahead of the deadline. Bridging products have become far more flexible and readily available to meet the growing needs of the market and shouldn’t be viewed as a one-size-fits-all solution. With the choice available in the market, brokers have a real opportunity to structure a deal to achieve the desired outcome for their clients. 

*Research Methodology

Shawbrook Bank contracted Opinium to undertake research between 18th and 25th November 2021 to understand landlords awareness of the upcoming changes to the Energy Performance Certification (EPC), which will require properties to be rated ‘C’ or above by 2025 in order to begin a new tenancy. A total 1,000 UK landlords were surveyed.

Thee ‘Confronting the EPC Challenge’ report, can be found here: www.property.shawbrook.co.uk

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To recap, this article has helped you...

  • To understand what impact the proposed EPC changes will have on landlords
  • To understand the potential financial impact of proposed EPC changes
  • To understand how bridging finance can help landlords to begin making improvements to their properties
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