With housing one of the UK's largest carbon emitters, pressures are building on investors owning older properties. Legally required retrofit costs will run into thousands of pounds for each property. This is an issue that investors need to address right now.
The residential sector accounts for over 25% of the UK's carbon emissions, making it a high priority in the drive for net zero. Driven by the government's own Climate Change Committee, three initiatives are under way to reduce housing's impact - increasing energy efficency through Energy Performance Certificates (EPC), encouraging lenders to increase the proportion of loans for green mortgages and to find a way to end the use of gas boilers. All will have a significant impact on property investors.
Energy performance certificates
The Minimum Energy Performance of Buildings Bill is currently going through it's parliamentary process and is widely expected to pass into law. It applies to properties in England and Wales.
Landlords will need to increase the minimum energy rating for rental properties to EPC band C for new tenancies by 31st December 2025. For those tenancies that are already in place this minimum needs to be met by 2028. Just 40% of UK homes currently meet this standard.
fIn July this year the government's English Housing Survey estimated the average cost to upgrade to band C at £7,600. Properties at the lower end on the bandings are likely to cost considerably more.
With few exceptions, investors who do not upgrade to level C will find themselves legally unable to rent their properties.
This from a Top 100 law firm:
Only good quality new-build properties or those which have had significant upgrades are likely to reach EPC band C.
A green mortgage in the UK is a mortgage that offers buyers of energy efficient homes favourable terms. Most often, lenders offer a lower rate of interest or cashback on green mortgages.
The government is pushing for lenders to reach an average energy performance certificate rating of band C across their mortgage portfolio by 2030. This is currently voluntary, “with the option of making this target mandatory if insufficient progress is being made”.
In order for lenders to meet this target it may become necessary to withdraw loan availability for non-qualifying properties or to reduce their loan to value ratios. Either will make properties more difficult to sell and may affect the prices achieved.
Hydrogen or heat pumps - the gas boiler conundrum
For most properties, powering the boiler with hydrogen is not yet possible. Fundamental policy decisions still need to be made to determine if and when this option becomes realistic..
Heat pumps, however, are here now, but they are expensive. There is currently a subsidy of £5,000 available which covers both owner-occupiers and landlords.
It seems unlikely that many landlords will go down this route as they bear the capital cost while savings on energy bills, if any, accrue to the tenant.
At some point, the humble gas boiler is destined to go the way of the coal fire and property owners will have no choice but to shoulder the retrofit costs.
Early action advised
There are an estimated five million properties in the private rental sector. The number that will need to be upgraded in the next two to three years is vast.
The current shortage of building materials is likely to be resolved as supply chains adapt and improve. The exodus of skilled foreign construction workers due to Brexit and Covid may be more enduring.
Owners of properties that fall below EPC band C are faced with an impending decision. Sell or get started.