Why EPCs are going to become really important
A quick glance at any landlord news item or blog and it's clear the private rented sector is facing many challenges at present. Here are some: changing regulation on landlord powers of eviction, reduced tax allowances, increased scrutiny over living conditions, higher costs of finance, higher EPC standards, and changing energy technologies.
EPCs (Energy Performance Certificates) figure in this list partly because the Government is going to increase the basic EPC rating needed for a letting. Currently it is an ‘E’ and will be changing to a ‘C’. This means that the energy efficiency of a property, as measured using the Government’s algorithms, needs to move from 55 to at least 69. However, the methodology behind the algorithms is also under review, so all current assumptions may change.
EPCs are important to landlords for another reason, one that is less well understood. That is, they symbolise the wider change that is going on in government and society. To put it bluntly, a low efficiency score will say to the outside world that your property is a risk to society. As that happens (and it already is), the Government will turn against you through more regulation, lenders will turn against you through choking your access to affordable finance, and tenants will turn against you through prioritised selection of higher performing properties.
Take lenders, for example. They are already clamping down on their exposure to properties with poor EPC ratings. They don’t want to end up with loans on homes which suddenly require expenditure to meet EPC compliance. Furthermore, residential mortgages make up the bulk of bank lending activity, and as such are responsible for a high portion of their carbon footprint under ‘Scope 3’ emissions – those connected with a company but outside their direct control. At Nationwide , the UK’s third-largest residential mortgage provider, 80% of the bank’s financed emissions are linked to its mortgages. The more that banks become liable for reducing their carbon footprint, the more they will look at their exposure through mortgages.
Mortgages have become high on the list of concerns for many landlords. The monthly cost of a new mortgage rose by 61% in the year to December 2022 for the average semi-detached house in the UK. Most fixed rate mortgage deals coming to an end in the next 12 months were set at interest rates below 2%. The average two-year fixed-rate mortgage rate in the UK is currently 5.63%.
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If mortgage rates are causing pain, think how much more uncomfortable life will become if your property effectively labels you as a social pariah.
In the same way that, from 2007, the public accepted that smoking in public was unsociable, properties with high carbon footprints may also become socially unacceptable. It perhaps sound fancible now, but consider this pathway to changing social behaviour. As landlords are exposed to ever more software platforms to manage and market their properties, letting agents find it harder to compete and more services are provided online. These platforms then start using AI to differentiate their services and give tenants greater insights into the properties on their listings. 360 degree internal views? No problem. Energy bill forecasts? At a touch of a button. A full range of internal functions such as heating and Wi-Fi which can be controlled remotely? Standard. The shift in public mood then gives Government the opportunity to introduce more stringent regulation. And there you have it.
If that scenario is even partly borne out, then landlords need to start thinking of whether this just poses a challenge which nimble footwork can mitigate, or whether this offers an opportunity for a more radical shift in how they manage their assets. And that opportunity is this: creating an asset which society values sufficiently highly that it will reward its owners.
Here is the call to action for society. Incentivise property owners sooner rather than later to make it worthwhile for them to go beyond the minimum spend necessary to scrape into a compliant EPC bracket. After all, who wants to live in a neighbourhood where the buildings leave a dirty footprint?