Beware the EPC cliff edge
With the Minimum Energy Efficiency Standards for private rented properties coming into effect in 2025, landlords have just two years to ensure the EPC rating of their properties is at least a C. What are the problems with this, and what will be the impact on the sector?
Two years is a long way away, right? Wrong. Time flies when you’re a letting agent or landlord. So it always pays to have one eye on the future - especially when the not-so-distant future contains a pitfall with a particularly perturbing precipice.
The cliff edge we’re referring to, of course, is the new Minimum Energy Efficiency Standards (MEES) for private rented properties, which come into effect in April 2025. Landlords will have to ensure that the EPC rating of all their properties is at least C when new tenancies begin. They’ll have a further three years for existing tenancies.
Nervous? Maybe you should be. Although the government has extremely good reasons for doing this - they’re trying to cut the nation’s carbon emissions to net zero by 2050 - it’s a big ask for the sector. After all, the UK’s housing stock is notoriously old and leaky.
What are the problems?
Worryingly, half of the rental homes on Rightmove currently have an EPC rating below C. And the nation’s largest portal has also found that one-third of landlords are completely oblivious to the new regulations. One can imagine how they might react when the penny finally drops.
Other studies paint a similarly wobbly picture. Paragon Bank, for example, have calculated that approximately 3,000 rented homes per day will need to be upgraded in order for the sector to reach the government’s targets. That’s a hat load of homes.
What’s more, the cost of upgrading these rental homes could be eye-watering. Although the exact outlay will obviously depend on the size (and age) of each home, the government predicts that the average landlord will need to spend £4,700. That’s more than an all-inclusive break in the Bahamas.
What’s worse, the improvements will be classified as capital expenditure rather than repairs and maintenance - so they can’t be written off against profits to reduce landlords’ tax liabilities. Uh-oh.
In-the-loop landlords are therefore in a tizz. And panic will probably ensue when in-the-dark ones wake up and smell the macchiato. After all, they could be hit with bills of up to £10,000. The previous cost cap - that’s the maximum any landlord will be forced to spend on any single home - was previously just £3,500.
Oh, and did we mention that the penalty for failing to meet the new regulations can reach a ‘you ought to be sitting down for this’ £30,000?
The impact on the sector
When asked to pay thousands of pounds to upgrade their EPCs, we thoroughly expect many landlords to sell up instead. After all, being a landlord was tough enough beforehand. And the situation isn’t helped by confusion over potential support: there used to be a Green Home Grant but this was withdrawn and no successor has yet been announced.
April 2025 could therefore easily become a cliff edge, with thousands of landlords listing their properties frantically as the deadline approaches. Indeed, we’re seeing a similar trend with commercial properties, where new EPC rules are being introduced next year.
Is it all about money?
No siree. EPC upgrades aren’t the only thing bothering landlords at the mo. Many of the old tax breaks have gone, the impending Renters Reform Bill has shifted the balance of power towards tenants somewhat - at least, that’s the perception - and it will be hard to simply increase rents to cover the costs…
Tenants are already paying record rents. So asking them to pay even more, in the middle of a cost of living crisis, will go down like a bad joke. What’s more, some landlords will need to ask their tenants to move out when the upgrades are taking place, which will obviously cost them valuable rent.
As a result, research shows that as many as one in five landlords have threatened to leave the sector before April 2025. And if that happens, the number of privately rented properties will shrink, rents will inevitably increase as demand further outstrips supply, and letting agents will find themselves with fewer customers. Gulp.
So what can be done?
Nobody can stop the new MEES from coming in - unless your name happens to be Rishi Sunak - but agents can certainly help to make the transition more manageable.
The first thing they can do is ensure that customers know exactly what’s going on. They can also give landlords tips on how to improve their EPCs quickly and, hopefully, cost-effectively, too…
A great place to start is our article on how to make homes more energy efficient. Things like changing light bulbs to LEDs and installing extra loft insulation are quick wins that will rein in energy use without frightening the horses.
Sadly, however, in many cases more expensive measures like installing double glazing and upgrading to a more energy-efficient boiler might be necessary, too. Heat pumps are another even more eco-friendly option.
Although heat pumps don’t come cheap, landlords might be eligible for the government’s Boiler Upgrade Scheme, which offers up to £5,000 to replace fossil fuel heating systems with a heat pump or biomass boiler.
Some landlords might also be exempt: listed buildings that would be compromised by ECP improvements don’t need to upgrade, nor do temporary buildings (erected for a maximum of two years) or homes due to be abolished.
Finally, it’s vital for landlords to start budgeting carefully right away. Don’t forget that certain energy-saving and heating materials will come VAT free until 2027.
However, if money’s still tight - and it’s bound to be in many cases - it might be worth considering equity release or re-mortgaging with a green mortgage to raise the necessary dough. And while that might seem a bit drastic, it’s better than being hit by a big fat fine.
Think positively
Although the new MEES have already caused some gnashing of teeth in the sector - there’s even a debate over whether EPCs themselves are fit for purpose - the reality is that EPCs aren’t going anywhere soon. Therefore, landlords just have to bite the bullet.
The good news, in this regard, is that upgrading a home’s EPC will ultimately increase its value. Landlords should therefore be able to increase the rent and attract a higher price when they ultimately decide to sell.
Furthermore, the new MEES will at least focus minds on a vitally important environmental issue. Did you know that UK homes produce more CO2 every year (59 million tonnes) than the UK’s 27 million cars (56 tonnes)?
Consequently, whilst there’s no avoiding the price tag that comes with upgrading EPCs, the costs of climate change will inevitably be high, too. For example, adapting homes for ever-hotter summers will also require significant investment.
If you can’t beat them…
Finally, the sector is trending in an eco-friendly direction whether critics like it or not. Mortgage lenders, for example, are already offering lower rates on energy-efficient buy-to-let homes. Incentives might also be introduced to help landlords meet the new standards as fears of a cliff edge rise.
It’s also encouraging to know that many landlords have already made the necessary changes: government data shows that nearly 2 million rental properties in England already boast an EPC rating of A to C. This figure was just 1.2 million in 2011.
There are also a higher proportion of privately rented homes that meet the new MEES (45%) than owner-occupied homes that meet the same standard (43%). So maybe, just maybe, Rishi’s radical reforms are having the desired effect.
What we’d like to see now is some extra financial support to help less well-to-do landlords boost that figure further. It’s going to be an uphill struggle but the sector can avoid a cliff edge… at a push.