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As the UK moves towards a greener future, landlords are facing the possibility of having to meet new compulsory energy performance requirements. This change would see new tenancies from December 31st, 2025, being legally required to meet a C-band rating. This change will affect existing tenancies from December 31st, 2028, which will also need to adhere to a C-band rating.
Energy performance certificates (EPCs) indicate the energy efficiency of a building. To calculate this score various factors are taken into consideration such as building materials used, heating systems and insulation. The information is collected by accredited energy assessors and the score is generated by government-approved software. A score is then processed, and a certificate is awarded scaling from A to G. An EPC rating of A is the most energy efficient.
Only 38% of existing rental properties meet the new requirements. This is leading to one in five landlords considering selling their buy-to-let properties according to Which?. However, landlords and tenants could both benefit from the changes, should they come into effect.
Property investment trends are leaning towards more energy-efficient buildings, including the rise of Green Investing. According to a report by Hamptons, around 50% of investors are buying into properties with an A-C energy performance certificate. This figure has increased by 11% year on year.
Check the EPC rating for any property that currently has one, here.
New-build properties are more likely to have higher energy ratings, making them much more attractive to investors. Each new build property is likely to be fitted with the latest technology, from radiators to kitchen appliances. Therefore, most tenants are happy to pay higher rents in return for newer, more energy-efficient appliances which will help save on utility bills. Landlords could also save on repairs and maintenance because all appliances and utilities are new and could potentially come with a guarantee.
What Property Type is the Most Efficient?
According to the Office for National Statistics report, apartments were the most energy-efficient properties in 2021 with a median efficiency score of 72, which is equivalent to a band C. On the other hand, detached and semi-detached houses scored a median of 63, the equivalent of a band D. This is often due to the size and density of the living space. The average apartment measures around 452sqft whereas, the average house measures 818sqft, making apartments much easier to heat.
Median UK energy cost per year (2021):
Existing property: £797
Newly built property: £390
Tenants have welcomed the proposed changes as energy bills are on the rise. This is because more sustainable accommodation will help them reduce their utility bills. Newer heating systems and the latest appliances are often more reliable and efficient, which is a huge consideration for skilled professionals looking for quality accommodation.
Read more about the thriving rental market, here.
What Should First-Time Investors Do?
New investors can buy existing properties and invest further to meet the new EPC criteria. However, with some landlords expected to pay as much as £27,000 to bring their property up to the new standard and up to 1.7 million properties not being available for upgrade, there is a huge risk involved.
It is suggested that first-time investors now favour newly built properties as these properties are often more energy efficient. It is highly unlikely that once an investor has purchased a newly built property it will need additional work to meet the new criteria.
What Should Seasoned Investors Do?
If a seasoned investor has properties that currently do not meet the new EPC criteria, it is recommended that they begin to evaluate the expense of improving their EPC rating. Making large changes could negatively affect the return on investment. This is because increased expenditure means the total investment into the property is greater than the value of the asset.
As such many landlords are looking to offload their properties if they cannot meet the new EPC criteria. It appears as if investors are looking to sell their assets and reinvest in newly built properties. As newly built properties are often developed to a higher standard than that of the new EPC criteria, it could be an opportunity for property investors to rebuild their portfolios.
If the new EPC guidelines come into effect as soon as 2025, they are going to have a huge effect on landlords and property investors across the UK. If a property does not meet the criteria of an EPC rating of C or higher, the expected green improvement costs to meet the criteria could have a huge effect on the capital appreciation of the property.
We believe that it would be beneficial for investors to consider purchasing newly built properties. The demand from renters across the UK is high for quality and energy-efficient accommodation. Selling an existing property to reinvest in a newly built property could in some cases be more cost-efficient than upgrading a current property to meet the new EPC criteria.
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