Nick Garner’s view on EPC C landlord regulation

Probable legislation forcing landlords to meet EPC C standards. What should I do about this?

Caveat: it’s a huge topic.

This article is about energy performance certification.  There is proposed legislation to drive landlords to improve the energy efficiency of the properties they let out.

If you’re familiar with the topic; UK government is going through a consultation process ahead of proposed legislation. Essentially they are saying they want all rented property to be let out as EPC C after 2025. At the moment it looks like this legislation has been postponed for one year and therefore will go live in 2026.

This government consultation document is an interesting read ( 48 pages )  https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/946175/prs-consultation-2020.pdf

In the north of England, most of the cheaper rental stock is Victorian. So if the government took a hard line on achieving this certification, landlords would be forced to sell and the market for cheaper rented property would massively diminish, driving rents higher and creating a homelessness problem. The problem government face: There are too many 120 year old ( Victorian) properties which will never achieve EPC C

What are the risks?
Assuming the legislation is put in place as per the consultation agreement, landlords would have to spend a maximum £10,000 obtaining the highest level certification possible. There are exemptions at the moment where:

• ‘High cost’ Exemption “The prohibition on letting property below an EPC rating of E does not apply if the cost of making even the cheapest recommended improvement would exceed £3,500 (inc. VAT).”
• ‘All Improvements Made’ Exemption. Where all the “relevant energy efficiency improvements” for the property have been made (or there are none that can be made) and the property remains sub-standard (Regulation 25).

So, if we assume these exemptions remain in place, the maximum landlord liability will be £10,000.

The risk for the government: If the legislation is too aggressive and assuming house prices rise for the next 4 years (very likely), it will trigger a massive sell-off of private rented property. In turn, this would create a huge rental housing crisis. For context, approximately 40% rented property in the north of England cannot be upgraded to EPC C.

As a frame of reference, the average EPC for all property in the UK is 60 or EPC D.
https://www.ons.gov.uk/peoplepopulationandcommunity/housing/articles/energyefficiencyofhousinginenglandandwales/2020-09-23

The 18 year property cycle
I’ve written about the 18 year property cycle here: https://nicholashgarner.medium.com/uk-18-year-property-cycle-and-the-end-of-the-long-term-debt-cycle-fb4aa4abadce
There is a regular property cycle and we are currently in the last phase of the current cycle. This is where property prices tend to escalate prior to a property crash.
Based on my calculations and assessment, if someone buys decent property in a reasonable location, in an area with reasonable capital growth potential, within 3 years, they could easily sell this property for a profit. These lower cost Victorian houses are perfect for first-time buyers, a market segment the government loves to talk about.

With the 18 year property cycle in mind, the UK government has to be very careful about not triggering a massive sell-off of rental property in the UK.

Government does not impose EPC legislation on homeowners
Right now homeowners are not obliged to meet any EPC standards. Yet, rental property accounts for 81% of total property stock in the UK
If the government were genuinely serious about raising energy performance standards for UK housing stock, they would impose legislation on homeowners. The catch: it’s a vote loser.

Potential compromises:

• The UK government may mandate minimum EPC D for properties being let.
• There may be more exemptions for properties which cannot be upgraded despite considerable expenditure
• The legislation may not even come into force

How does this affect property acquisition?
The problem: Best ‘value’ in the market is for property under £130,000. This is partially because foreign nationals are generally unable to get limited company buy to let mortgages under £100,000.
Lower cost properties typically yield higher. And of course these are higher yielding properties tend to be Victorian terraced houses which will never achieve EPC C standard.

So, ignoring the EPC C regulations, it makes sense to buy cheaper properties which are minimum EPC E standard, but could be upgraded to EPC C without too much cost.
The reason I would not spend much money upgrading to EPC C: A landlord does not pay the heating bills on behalf of the tenant. The tenant makes a decision as to whether they want to rent a property with the lower EPC rating, knowing they will have higher energy costs.

Putting it all together. My view.
If the legislation comes into force, it will be in 2026.  By then, anyone buying property now will most probably have enough capital gain to exit to make a reasonable cash profit after expenses. Therefore, for properties which cannot achieve EPC C I would purchase with a view to selling in 4 years time. if the UK government is pragmatic and they don’t force a massive property sell-off, then you keep the property and carry on.

I would not spend any significant money on EPC upgrades until absolutely necessary.  The reason; for the government to acknowledge your EPC expenditure upgrades, they have to be undertaken within 2 years of the EPC deadline.  For EPC C properties, that means in theory you could do upgrades in 2025…

Would I buy property which cannot be upgraded to EPC C?
Yes: if the property gives a gross yield of above 7% and shows reasonable likelihood of more than 14% inflation-adjusted capital growth over the next 4 years
No: if the property gave a gross yield of 5.2% or less and doesn’t show reasonable prospects for capital growth.

The most important caveat: Capital growth! If you can achieve real capital growth of more than 14% over a four-year period, you will have preserved your investment capital and made an actual net profit. In addition, these lower value properties will offer good net cash returns.

Articles/posts worth reading:
https://www.thisismoney.co.uk/money/buytolet/article-9932959/What-does-EPC-C-energy-efficiency-target-mean-landlords.html
https://propertytribes.com/energy-ticking-time-bomb-for-landlords-t-127650959.html
https://www.thisismoney.co.uk/money/mortgageshome/article-9648431/Reaching-energy-efficiency-rating-C-impossible-1-7-million-homes-owners-face-penalties.html
https://www.gov.uk/government/publications/private-rented-sector-minimum-energy-efficiency-standard-exemptions/guidance-on-prs-exemptions-and-exemptions-register-evidence-requirements