More than seven in 10 landlords (71%) say they are unlikely to buy a property which has an EPC rating of less than C, the latest BVA BDRC landlord research for Q2 2023 shows.
Asked to what extent the EPC rating of a property now impacted on their purchasing decision, the vast majority of respondents said they were increasingly unlikely to purchase a rental property if it wasn’t already at a C level – which is likely to be the future minimum standard.
The more properties the landlord had within their portfolio, the less likely they were to buy below C, with 74% of those with six to 10 and 11-19 properties, saying this, and 78% of those with over 20 properties. Only 18% of landlords said the EPC level would make no difference.
The research, comprised of 983 online interviews with landlords, was undertaken on behalf of Foundation Home Loans, the intermediary-only specialist lender, between the first three weeks of July this year.
Landlords also had a strong awareness of the likelihood of future legislation around a minimum EPC level of C being introduced for all private rental sector (PRS) properties. 71% said they were aware and fully understood the details, 24% were aware but did not understand the details, and just 4% had no awareness.
Given that, according to the research, the average landlord has 3.3 properties rated EPC D or below, with this rising to 9.5 for landlords with more than 11 properties, Foundation said it was not surprising to see strong awareness of future minimum EPC standards for PRS properties and landlords being less inclined to add below-Level C EPC properties to their portfolios.
In terms of the work landlords intended to carry out on below-Level C properties, 37% said they would carry out the works at the minimum cost required to comply, while nearly one in five (20%) said they would carry out works to maximise the long-term value of their property. However, a quarter said they would not carry out any works and would either sell the property or not re-let it.
Landlords anticipate it will cost just over £10k per property to carry out the works required to reach EPC Level C, with this rising to over £11.5,000 for those with larger portfolio sizes.
Some 57% said they would fund the works via savings (down from 76% last quarter), 33% said they would increase the rent (up from 26%), 18% would access Government grants or funding (previously 19%), while 19% said they would either take a further advance from their lender or take out a loan (down from 20%).
Grant Hendry, director of sales at Foundation Home Loans, said: “While we still might be waiting for certainty and clarity over when the Government is likely to introduce its minimum EPC Level legislation for the private rental sector, it’s clear from this research that landlords are aware of what is likely to be coming, and are thinking seriously about their existing portfolios, how they might fund improvements, and what their plans might be when this is introduced.
“With landlords anticipating a cost of over £10k per property in order to improve its EPC Level to C, it is perhaps not surprising they are disinclined to buy properties already below this. In effect, they are future-proofing their portfolios by opting only to buy C and above properties now, while they will presumably focus on those properties within their portfolio which are not currently at this level.
“Clearly, this presents a significant opportunity for advisers to not only discuss this with their landlord clients, but to also provide solutions about the funding of these improvement works. It remains somewhat surprising that the majority of landlords are saying they will fund the work via savings, and we wonder whether when push comes to shove, they will really want to do this or they will seek instead to use finance.
“What we do know is there are clearly mortgage pricing incentives to be accessed for properties which are already at EPC C – we offer such products – and as we move into the future, landlords are likely to see this as a further incentive to ensure the property is above C.
“Overall, it seems clear this will remain a major focus within the PRS for years to come, and from an advisory point of view, it is clearly worthwhile having these conversations with landlords immediately, particularly for those at the point of refinance, as they might want to take advantage of this opportunity in order to secure the funding they require for the works.
“As it stands, it appears we are looking at either a 2025 or 2028 implementation date, and clearly the former will be with us before we know it. It therefore makes sense to be exploring options with every landlord client, outlining what is likely to be coming, and working on those financial arrangements with specialist lenders like ourselves, in order that they can keep invested and meet the standards going forward.”