Buy-to-let landlords are adapting well to incoming EPC standards

The government’s proposal to ensure that all new rental properties have an EPC rating of at least a C by 2025 or 2026 is already shaping investor buying behaviour, according to the latest monthly lettings index from Hamptons, part of Countrywide.

While the proposal remains at consultation stage, many landlords are already hedging their bets, the agency says.

So far this year, the share of homes bought by investors with an EPC rating of A-C is running at 50%, the highest figure on record, and up from 39% in 2021 and 33% in 2020.

This uplift has been driven by two factors. Firstly, landlords have bought more energy efficient homes where improvement works have already been done. Secondly, there has been a shift towards investors purchasing newer homes, particularly flats, built within the last decade.  These properties typically carry much better EPC ratings, with almost all awarded a B or C ranking.

Investors move towards new build flats means London’s landlords tend to buy the most energy efficient buy-to-lets anywhere in England and Wales. Here, two-thirds – 66% – of new purchases made this year already had an EPC rating of C or above. While further North, investors are more likely to buy higher yielding but older and less energy efficient terraced housing stock.  Just 34% of investors in the North East bought a buy-to-let with an EPC rating of C or above.

As well as reducing emissions, the push for higher EPC ratings will also save tenants money. The average tenant moving from a home rated D up to one rated C will save an average of £285 per year on their gas, electricity and water bill at current prices.  A tenant moving from a home rated E to one rated C will save £725 annually.  While most homes with an F or G rating can no longer be let, the savings from an upgrade to C stand at £1,348 and £2,404 respectively.

If all privately rented homes with an existing EPC rating of D-G were upgraded to at least a C, it would save tenants in England £844m in utility bills each year, or £396 per household.  These improvements would leave the average privately rented household paying £326 less in utility bills than the average owner-occupier.

Share of landlord purchases with an A-C EPC rating (2022)

London 66%
South East 56%
South West 55%
East of England 52%
East Midlands 48%
West Midlands 45%
North West 42%
Yorkshire & Humber 40%
Wales 40%
North East 34%
England & Wales 50%

Rental growth continued to cool after hitting record highs over the summer months. January 2022 saw average rents rise 7.0% across Great Britain compared to the same time last year, with the rate of growth falling in all but one month since a peak of 8.7% was recorded in July 2021.  The moderation in growth has been underpinned by slowing rental rises across Northern England, which has in part been offset by faster growth across London in recent months.

After 21 consecutive months, January saw rents in Inner London return to pre-Covid levels.  Rents rose by a record 17.3% annually in Inner London to average £2,546 pcm – identical to the March 2020 figure and 29.6% above the mid-Covid low of £1,964.  Meanwhile in Outer London, where rents now stand 9.9% above their pre-pandemic peak, average rents rose 4.0% year-on-year to hit £1,851pcm.

Table 2: Average rent on a new let

Jan-21 Jan-22 YoY Change (%) YoY Change (£)
Greater London £1,842  £1,962 6.5% £120
   Inner London £2,171  £2,546 17.3% £375
   Outer London £1,780  £1,851 4.0% £71
South East £1,177  £1,226 4.2% £49
South West £907  £1,020 12.4% £113
East of England £1,049  £1,097 4.6% £48
Midlands £720  £777 8.0% £57
North £686  £737 7.3% £51
Wales £680  £742 9.0% £62
Scotland £682  £761 11.7% £79
Great Britain £1,055  £1,129 7.0% £74
Great Britain (Ex London) £853  £914 7.1% £61

Aneisha Beveridge, head of research at Hamptons, said: “By removing the least energy efficient rental homes from the market, government policy has already picked the lowest hanging fruit.  But extending this plan to upgrade homes with a D or E rating up to C will impact a far larger number of households, while generating smaller savings for tenants.  The policy will mean that the average tenant will eventually pay lower energy bills than the average homeowner, although it’s likely to remove some rental homes from the market, putting further pressure on stock levels.

“Given it will prove impossible for all homes to secure an EPC rating of at least a C without significant cost, it’s likely to mean older homes will become considerably less attractive to landlords.  Instead, investors may focus their strategy on buying new builds, with rental homes becoming concentrated in blocks or streets where properties already hold a C rated EPC certificate or where it’s possible to achieve this without significant work.

“The recovery in Inner London rents back to where they were on the eve of the pandemic marks a milestone for London’s landlords.  With Inner London recording the largest ever month-on-month increase between December and January, it appears the recovery in rents still has plenty of steam.  The level of pent-up demand coupled with a lack of stock is likely to support high rates of rental growth over the coming months.”

 

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2 Comments

  1. MrManyUnits

    Shall we knock the old Victorian houses down then?

    Every landlord I know is just waiting on the Government to make another u turn, either that or tens of thousands homeless.

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  2. northernlandlord

    Of course the proposed EPC changes are shaping investor buying behaviour.  If you are starting from scratch you would give preference to any property rated C or above or any property in the higher D ratings that would be relatively cheap to upgrade to a C (always taking asking price and upgrade costs into account).
    The fact that tenants will save on energy bills just means that they will have more money to pay the increased rent the landlord will want for a C rating EPC or to cover the upgrade costs, proposed Landlord licensing scheme costs, hedge against Court fees following the banning of section 21 and the dwindling return on investment as house prices rise.               
    To require rental properties to meet stricter EPC ratings than owner occupied properties would seem unfair, but imagine the outcry if this applied to home owners as well. These proposed changes are nothing to do with reducing tenant energy costs. They are more to do with the Government decreasing the PRS to reduce competition for their corporate Landlord party donor mates who are busy building compliant property to rent. Once the PRS goes tenants will have no choice but to pay whatever the corporate landlords want.   

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