Why is the government pushing for an increase in the minimum EPC rating for rentals and what can landlords do to prepare for this change?
As of 2020, all rental properties with active tenancies need an up to date EPC certificate with at least an E rating. However, the government is already talking about increasing this minimum energy efficiency standard.
In recent consultation and implementation documents, the government has suggested that they raise the minimum band for an EPC to a C as early as 2025 for existing tenancies, and 2028 for new tenancies. Additionally, there’s even talk about increasing that further to a band be as early as 2030.
This legislation will impact the majority of landlords as approximately 59% of the private rental sector have an EPC lower than a band C at this time. The energy efficiency upgrades will likely be immensely costly and involve things like installing new boilers, increasing insulation, or even installing solar panels.
Additionally, there are conflicts between what the government is pushing for as broad policy implementation and what local councils will allow. For example, some local areas will have rules and guidelines as to the aesthetic of the property which will limit the ability of landlords to make upgrades.
In short, these changes are going to be costly and difficult to enforce, why then, is the government pushing for these changes and what can landlords do to prepare?
There are a couple of key reasons that the government wants to increase the minimum EPC rating to a C. The first is to essentially force landlords to improve the rental stock. By increasing regulation around the owning and management of the property. They see themselves as forcing landlords to operate in a more professional manner and increasing the quality of the rental sector.
“From the government’s point of view, they want houses to be safe, healthy, and sustainable. EPCs are just one part of this. As the government pushes landlords to operate in a more professional manner, with increasing regulations and expenses, there’s a choice that people have to make, to continue to be a landlord or to sell up and redeploy their capital elsewhere,” said Will Mallard, an experienced property investor and host of My Property World podcast.
The other side of things is an attempt to reach ambitious carbon net-zero targets as early as 2030. And as property has been identified as one of the largest contributors to carbon emission this could have a massive impact on the overall carbon footprint of the country.
“The UK has sort of been patting themself on the back about how much we’ve reduced our carbon emissions over the past 20 years. But apparently, something like 90% of that has come just from simply closing down coal-fired power stations. Virtually no other category has contributed towards carbon emission reduction. The next biggest emitter (for us to target) is property,” said Christine Janaway, certified surveyor and owner of CJ residential lettings.
We’ve already mentioned that these EPC upgrades are probably going to be costly for landlords. In the recent consultation documents, it was suggested that the cap on expenditure for required EPC upgrades be around £10,000. With landlord margins already pretty slim, this could see a huge number of landlords (especially smaller portfolio landlords) go into the red. This is especially true if they have to spend all of this money at once.
This is why it is a good idea to adopt software and tools that allow you to forecast your financials and spread the cost of EPC upgrades out over a number of years before the regulations are implemented.
A few potential upgrades that you can consider include
“Get the EPC, see what they recommend, which I always find a little bit dubious, and then go to someone who really knows what they’re talking about, and figure out how you can improve the rating of your building in the most cost-effective manner possible. There’s always a balance between what you can achieve, and how much it costs,” said Christine Janaway.
By spreading out the cost and approaching it as an investment to improve your property and increase your overall returns, it can make reasonable financial sense to make these upgrades.
For example, if a tenant is comparing two properties, one with an EPC rating of E and one with an EPC, rating a B, and they’re the same rent, they’re much more likely to choose the more energy efficient property, it’s going to be warmer in winter more comfortable, less damp, and cheaper to heat.
“While tenants are much more interested at the moment in location, quality of accommodation and the price that they pay… energy efficiency does tie into the quality of the property, for example, they want one that’s well insulated for winter,” said Adam Ludlow, a portfolio landlord with over 25 years of experience.
In order to plan and prepare for these upcoming changes, you need to first have the tools and data to analyse your properties and make proper long term financial plans.
With Landlord Studio, you can keep you can easily keep detailed up to date and accurate records on a property by property unit by unit basis. With our dashboard, you can gain quick insights into your portfolio. Plus, you can generate any of our accountant approved reports from any device at any time to gain detailed and nuanced insights into your portfolio’s performance.
For example, simply log in on your phone, select the properties you want to analyse, date range and other customizable filters and hit “Run Report”. This will instantly generate a report for you allowing you to easily analyse years of data.
With this ability to analyse data you can easily identify weaknesses to optimise cash flow. Finally, it will allow you to make more accurate financial projections so that you can plan and spread out the cost of expensive expenditures like EPC upgrades.