Following the end of a public consultation on the subject in January of this year, the UK government looks likely to introduce new legislation raising the minimum permissible EPC threshold for rented properties in England from "E" to "C". Whilst the specific requirements of the legislation have not been brought forward as of yet, it is likely to have very significant ramifications for the private rented sector and those who operate within it.
In total there are 4.6 million privately rented homes in England & Wales of which over 2.1 million have an EPC rating below a "C". This equates to 47 per cent of all privately rented homes in existence. These properties may all, in the relatively near future, need to undergo significant and costly energy efficiency improvements if they are to continue to be rented out.
At this stage it's hard to know the specific ramifications of such a change and what carve outs or exemptions there may be.
It's highly likely that the changes will be phased in over a number of years and quite possible that the total amount private sector landlords will have to spend on their properties may be capped. None the less - this is a significant policy change, with the potential to meaningfully alter the medium term economics of the UK private rented sector.
It has already been reported that the proportion of new purchases of buy-to-let properties attracting an EPC rating of "C" or higher has risen significantly - rising from approximately 30 per cent to over 50 per cent in the last three years alone.
The costs of upgrading much of the Victorian housing stock commonly found in the UK's major towns and cities are likely to be substantial. Most of these properties were built with solid brick walls and therefore provide no possibility to retrofit cavity wall insulation. Whilst upgrading loft insulation and adding floor insulation may be a relatively cost effective way to improve the EPC rating, these measures are unlikely to bring most properties up to the required "C" rating in isolation.
Adding external or internal wall insulation is exorbitant (in the region of £10k + for a small two bedroom terrace) leaving landlords and investors with the option of fitting solar PV panels to the roofs of their properties in an attempt to make the grade. The cost of fitting such a system would be approximately £4000 - £5000: a substantial sum even for those who may own only a single property. Not all properties are likely to be suitable depending on the orientation and surface area of their roofs.
"Show me the incentive and I'll show you the outcome"
Given that the focus on ESG initiatives has been with us for a number of years, upgrading the minimum EPC requirement for PRS property was somewhat foreseeable.
We are fortunate enough to have largely factored in the changing legislative environment for all of our investments in the last few years. We have bought properties which already met the new energy efficiency requirements, or those that can easily (and cost effectively) be upgraded in order to do so.
None the less, recent personal experience shows how narrow the margins can be between meeting the threshold and falling a fraction below.
The minimum threshold for a "C" rating is 69 points out of 100. The difference between a 68 and 69 is tiny: on one property the threshold was crossed by insulating an area of just one square metre above a kitchen extension. I can assure you that this token task is not practical to implement (think cutting holes in ceilings, diverting wiring and re-plastering). Neither is this small change something that will make any difference to an occupant's energy bills or carbon footprint.
Indeed, I foresee some strange outcomes arising from the new incentives, if and when the new rules are introduced.
Opportunity
There are 2.1 million privately rented homes in England & Wales that do not currently meet the minimum energy efficiency requirements likely to come into force in 2028. If you assume that the average required spend in order to upgrade these properties to reach a "C" grade is approximately £5000 this equates to a £10.5 billion market opportunity over the next 5-6 years.
Moreover, this ignores the likelihood of significant price rises in the future. The enormous rise in demand as we approach the deadline for implementing such measures is likely to overwhelm the restricted supply of skilled labour and contractors to fulfil it.
This is an extremely fragmented market, dominated by small contractors who largely confine their work to operating in a specific local geography. In addition, there are few one-stop-shops offering the full range of services required to sufficiently upgrade much of the UK's ageing housing stock (think cavity wall & loft insulation, internal & external wall insulation, photovoltaic panels).
The ballooning size of the market and urgency of the solution provide an interesting opportunity to roll-up a number of firms in order to provide an all-in-one solution - at scale - for the many operators in the private rented sector.
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