Potential New EPC Regs - Don't Panic (yet!)

[Turbine Terry]

Hello All,

Potential EPC band C Requirement for PRS Landlords from 2026/2028

If you don’t read all of this post perhaps just read points 1 and 2 below.

Having read online as much as I can about the feared EPC changes I do not believe anyone needs to panic. I certainly do not yet believe that landlords should seriously be considering selling any properties. I am in no way an EPC, or any other form of expert, I am just another cynical landlord trying to plan ahead. I have 13 properties and 20 years experience as a landlord. Of my 13 properties, 9 are band D, 2 are E (ouch), one listed building exemption. 9 of the 13 are band D and E Victorian properties (more ouch)

My very rambling thoughts on the current proposed new EPC regulations follow, and I am very happy for others to correct me:

1. We all await with baited breath the outcome of the governments’ consultation ‘Improving the Energy Performance of Privately Rented Homes in England and Wales’ which can be downloaded in all it’s horrific and gory detail here (right click if link won't open). Improving the energy performance of privately rented homes - GOV.UK (www.gov.uk) The government is not in a rush to publish its findings (early 2022?) and is seemingly oblivious (uncaring) about the anxiety and potential for panic the uncertainty creates during the wait. The press of course likes to fuel the panic.What they rarely discuss is a) the likelihood of the bill ever becoming law at all, or b) if it does become law that a watered down version will likely become reality.
2. The Private Members that is linked to the above consultation is currently awaiting its 2nd reading in parliament on18^th March 2022. These types of bills very rarely become law – see Bill to make minimum EPC rules mandatory by 2025 unlikely to become law after MP's stabbing (landlordzone.co.uk) and also see here Minimum Energy Performance of Buildings (No. 2) Bill 2021-22 (parallelparliament.co.uk). If you click on ‘Learn more about this bill’ in the second of the 2 links it says it's unlikley to ever become law. So, even though a new MP has now sponsored the bill following the death of the original sponsor, the bill is still unlikely to become law. To do so it would have to successfully move through its 2nd reading in parliament with unanimous support, then through 2 separate debating sessions, and then a separate 3rd reading. If it passes all that it must do the same in the House of Lords. A House of Commons spokesman says it is very unlikely to be given debating time. All it has been given is a date for a second reading (this is not the same as being given debating time).
3. Even if the bill does become law it will need to contain significant changes to limit the potential for unintended consequences. The NRLA submitted to the government a very thorough response to the consultation in point 1 above. This response raises most of the issues that we as landlords have with the proposed EPC changes. https://www.nrla.org.uk/download?document=1242
4. The NRLA and other industry/trade bodies remain very vocal about all this - comforting for us. A Google search shows many news articles from NRLA etc. As stated by the NRLA and many other persons with the capacity to think sensibly and rationally (that’s our government out then) if the bill became reality it should not be a one size fits all approach. e.g. amongst many other tweaks it would need to have a sliding scale - based on property value or rental income - for the £10,000 cap on improvement costs, starting at say £3,500 for the cheapest properties.
5. For non-domestic commercial property they use a return on investment calculation (using annual savings in energy costs) to determine if improvements are sensible to do. That would solve many of the issues in one hit that. We would then not be forced to spend many thousands on upgrades that do not have a sensible return on investment of less than say 7 years. It is beyond ridiculous to expect us to spend up to £10,000 on internal/external insulation and/or underfloor insulation only for the return on investment to take a 100 to 200 years (seriously that is the payback time derived from the info on my EPC’s for some of the improvement recommendations for my Victorian properties) . How the designers of the EPC software algorithm and the government imbeciles that assisted can suggest those types of improvements with a straight face is beyond my comprehension. Maybe there will be a big juicy government grant to pay for it?
6. Perhaps the proposals will be watered down to an EPC band D, or maybe a band D for certain ages/types of properties (including Victorian hopefully!). There are many other unanswered questions that the consultation papers throws up.
7. Getting tradespeople to do the work in anything like a timely manner will be very hard. I note there may be an exemption to doing the upgrades when a tenant refuses access for the upgrades. We could therefore encourage tenants to refuse to allow the upgrades (after all most landlords will need to increase the rent to pay for them so many tenants won’t want them). That is fine whilst the tenant is in situ, but from 2026 it is proposed that as soon as that tenant moves out the landlord will need to make the upgrades. If the upgrades were made with the tenant in situ then the landlord would not loose rent. Conversely, if the tenant won’t allow access and the landlord cannot get a tradesperson to do the work quickly at change of tenant time then the landlord could lose many months rent. A tenants refusal to allow the upgrades to happen whilst they are the tenant in the property could therefore seriously hurt the landlord through no fault of the landlord whatsoever.
8. I would likely fit solar panels to several of my properties as this would get me a band C quickly and with the least disruption and cost (around £5,000 per house). However, if the rules do follow the suggested ‘fabric first’ approach it may be necessary to insulate the property fully first before any power generation measures are used. I can understand that to a point (when the insulation measures are cost effective, like loft insulation and double glazing). But what makes more sense, spending £5k on underfloor/ wall insulation (return on investment 100+ years) or spending £5k on providing fully green/renewable, and free electricity to the tenant via solar panels? (clue: it’s not the insulation).
9. We do not know how far back will count towards spending for the £10k cost cap. Indeed, it is quite possible that any spending towards the cost cap will only count from, or close to, the date the new bill becomes law. We also do not yet know where we should spending our cash to get the most benefit in terms of EPC points. I will not be making any upgrades for EPC purposes until I know the outcome of the governments consultation, and the new EPC software tweaks are made (Summer 2022?), and the full details of any new laws are clear.
10. EPC assessors will have to become much better trained and consistent as the consequence of having a bad assessor is very costly, and the power they hold will rise substantially. EPC scoring is inconsistent between different assessors and can vary depending on what the EPC assessors had for breakfast that day, or how late they may be for their next appointment. The whole assessment must reflect the most likely circumstances e.g. as it is 95% likely that say a flat roof will have some insulation, then they should assume it has a minimum level of insulation, not none. I will likely employ a chartered surveyor to do my EPC assessments rather than one of the registered EPA/ Energy Assessors. I believe I will get better advice with what upgrades to make and the whole assessment will be done far more professionally and carefully. I mean, you can get an EPC assessment for £45 – how much care and advice can you expect for that money? I also don’t want some inexperienced person who has only just recently completed a 5 day online course to become an Energy Assessor being given the power to cost me unnecessary thousands. Even measuring the floor area of the property incorrectly can result in a loss of EPC points (again how carefully will they measure for 45 quid?). I wonder if we could assess our own properties if we had passed the 5 day course to become an assessor?
11. The proposed changes have already been pushed back from Dec 2025 (for new tenancies) to Dec 2026. The dates could likley slip further as the Bill is not even scheduled for it’s second reading until March 2022. So, even if it does progress further, it could take many more months and even years before it gets made into any form of law. That means we would still have to pay for the upgrades, but the greater the delay the more equity we should have in our properties to release at re-mortgage time to pay for the upgrades.

In summary, I firmly believe that if a change is coming that it will not be as bad as we all fear and so will look reasonably different to the proposals. There are far too many unintended consequences (see NRLA document) of the proposals as they are, and even our government will not want to make that much of a mess of the matter.I think it very likely that any new regulations will be watered down so as not to upset the applecart too much (but we should still expect a few spilt apples).

I could go on all day on his subject but I will stop and wish you all a Very New Year.
Cheers!

[jpucng62]

I would like to think you may be right but I fear you may be wrong!

There is only one way of travel - and that its towards EPC C & maybe even B. The fact that the system is not fit for purpose or will make people homeless does not mean the Govt will not pursue it. Common sense is not a prerequisite for policy.

The Green Homes Grant fiasco shows that the Govt is happy to plough ahead with poorly thought out proposals, regardless of the outcome.

As you say, the 'new tenancy' date for EPC C has slipped to 2026, but the end date of 2028 did not slip at the same time. It maybe that the dates will move (as they have for gas boilers originally being banned in new houses from 2016, now 2025) or the EPC requirement will be D, or the EPC assessment will change, but it is not possible to liquidate a portfolio of houses quickly and if we all do it at the same time prices will fall & selling will be difficult.

The lack of clarity from the Govt is astounding, but their idea of how quickly we can improve the EPCs of our properties and how we will fund these improvements is so out of touch with reality that we should perhaps not be surprised.

I have no desire to make people homeless, so I am not issuing S21s yet, but my first set of tenants in a Victorian Terrace gave notice this month so that is going on the market. Others will follow until or unless the policy becomes clear. Quite frankly, with all the other changes recently and with the likelihood of a hike in CGT in the near future, I firmly believe it is a good time to shed all older &/or electrically heated properties.

If I had another 20 years in the game, I would still be selling these properties but I might be re-buying newer properties, as it is I am leaving the PRS and taking my gains to the stock market.

Someone commented recently that successful investors get in early and get out early. Given how many people left getting EICRs until the last minute & then couldn't get an electrician, I do not intend to be crushed in the rush to sell. I am going now while the market is still pretty warm. I have made good money & I am not waiting around for the Govt to erode my profits.

We each have to decide what we think will happen - I believe EPC C is coming and that sensible LLs will be off loading their hard-to-improve properties.

Two opposing views, then - what does every one else think?

[Hudson01]

We each have to decide what we think will happen - I believe EPC C is coming and that sensible LLs will be off loading their hard-to-improve properties.

Two opposing views, then - what does every one else think?

It's sad to agree with you but i have too, irrespective of the damage to tenants the govt are locked into their net zero commitment for 2050, we will be the first casualties of this promise, there is no way back from it i am afraid. I have properties that will never reach a C in a month of Sundays, i am waiting simply to get more rental income in the next 5 years but they will be sold. The govt brought in the Poll Tax against all the advice..... The Iraq war !!!! They listen to nobody and do what they like, we are small fry and this will come in.

[AlexR]

For non-domestic commercial property they use a return on investment calculation (using annual savings in energy costs) to determine if improvements are sensible to do. That would solve many of the issues in one hit that. We would then not be forced to spend many thousands on upgrades that do not have a sensible return on investment of less than say 7 years. It is beyond ridiculous to expect us to spend up to £10,000 on internal/external insulation and/or underfloor insulation only for the return on investment to take a 100 to 200 years (seriously that is the payback time derived from the info on my EPC’s for some of the improvement recommendations for my Victorian properties) . How the designers of the EPC software algorithm and the government imbeciles that assisted can suggest those types of improvements with a straight face is beyond my comprehension.

To improve a Victorian terrace may cost more than £10,000 and in fact may only ever reach a C after wall insulation has been added which will cost considerably more . The EPC system has been in place for years and has been largely ignored by the public and until rents and sale prices are reflective of the level of insulation levels in houses then I believe it will continue to be ignored. The government will not concern itself with Return On Investment for Private Sector Housing stock but will legislate as necessary and allow the market to adjust itself. You can see some extending of time limits but the general direction of travel is the same.For those of us who have a long memory we may recall the government demolishing old housing stock as not economic to renovate.

I think that jpucng62 makes a strong argument.

[JK0]

I don't know if you guys read my thread about 'The Great Reset'. Probably far too conspiratorial for most of you.

I believe TPTB have no concern about making millions of rental properties unlettable:

BTW, when I say 'confiscated', I don't mean just expropriated. What they'll do, and we can see this happening already, is make it impossible to heat our properties. I suspect we'll each get a carbon ration, and only the extremely wealthy will be able to afford to live anywhere bigger than a shoebox. Most houses will be worthless, and can be snapped up for pennies by Mr Gates and his pals.

[Hudson01]

If i put my crystal ball to the test i would say that the majority of the non C properties will never be improved and will simply change hands and be passed onto the owner/occupier market, with the end result being our carbon footprint (in real terms) will hardly alter a jot.

[royw]

The government can easily sh*t on a few landlords but if thousands of voters can't find somewhere to rent I think the regulations will be watered down or kicked into the long grass. I'm staying in for now, CGT is prohibitive so my thinking has been to pay IHT on them instead (not planning to die just yet though). Stone properties in my area are still more desirable than brick ones and there's a shortage of housing anyway so I don't see them dropping much.
Shame they don't consider the total carbon footprint, stone would come out on top - and will still be standing when the modern ones have fallen down.

[Hudson01]

In regards the above..... logic would dictate that if you enshrine policies that lower the number of rental properties, the govt would understand it is bad for tenants, I am sure they do..... but.... it will not change their path, look at the right to buy policy, it has been going over 40 years and has done untold damage to tenants who need social housing, do the govt give a toss ? Of course they don't, even when Labour were in power for 3 terms they did not reverse it. We are all thinking to locally and in a way that a fair and level headed person would, the govt (any govt) do not think like this, they have made a promise to the world on the climate and how we will be the world leader in reductions...... nothing, not a thing will get in the way of it.

[royw]

Few politicians put morals above saving their own skin at the next election and I very much doubt the current government is amongst them. Not sure about the power behind the throne though and she appears to more clout than the cabinet.

[Turbine Terry]

A few more of my rambling thoughts to enter the mix:

As per my original post I certainly don’t think it will all be plane sailing. There will likely be some sort of EPC changes coming in the next few years (even if the latest proposals never make it through parliament, changes will still likely eventually come) so it is more a question of how severe they will be and when. Even the current proposed worst case scenario is certainly not doomsday for 99% of landlords as they will be able to adapt and survive if they want to. Whether to stay, or whether to sell up and exit will be a very personal decision and dependant on a large number of factors e.g. net monthly rental income (rent minus mortgage and fixed costs), market value of properties, current equity in properties, expected future rises in equity, number of properties, local supply vs demand for rental properties, are the properties the primary source of income or are they additional income, equity in private home/other assets and cash in bank, experience as a landlord and as a business person, age of landlord etc etc. The answers to all those questions will dictate whether a landlord can adapt and survive or whether it is best they sell up once the detail of any EPC regs changes is known. Human nature dictates that there will be landlords that look for reasons to validate their pre-existing desire to sell up due to all this, and there will be those (like me) that look for reasons to validate their desire to stay.

There will be landlords that could stay if they wanted to but for many good reasons that are personal to them they will decide to sell up. However, even if the new EPC regs were made law exactly as they are proposed I am very much of the opinion that only a tiny minority of landlords would actually need to exit the market. These landlords that need to sell and cannot stay are likely the more inexperienced landlords that were always over exposed/under funded anyway and so selling up may be the best option for them regardless of any new EPC regs or not. Lets not forget that the government is not (yet) proposing that unless we get our properties up to an EPC band C then we cannot let them out full stop. Indeed, there is a cost cap of potentially £10,000 and up to 7 years before all tenancies must comply. I would guess (just a guess) that outside of London and the South that the value of the bulk of rental properties falls somewhere between £70,000 and £170,000. The equity rise in even a £70,000 house over just the next 5 years should be between and £10,000 and £20,000. So, even with the very worst case of having to spend £10,000 most landlords will still have seen a greater increase (much greater in the majority of cases) of equity in each property than cash that they are being asked to find for EPC reasons. A bit of careful planning of when to remortgage and for what length of mortgage should, in most cases, allow enough equity to be released at the right time to pay for the EPC upgrades. Mortgage lenders are already starting to offer ‘green mortgages’ - higher loans for EPC upgrade purposes, and more lenders will likely follow. There may also be a government grant available.

It is estimated that most buy to lets will require ‘only’ £4,700 to get up to Band C, but even worst case Victorian etc houses will still have a £10k cost cap. I am assuming the worst at £10k, but it will be less than £10k for most landlords but I am of the opinion that if a landlord cannot raise £10,000 per property over the next 5 to 7 years from either existing or future equity within the property, or raise it from other sources, then they are already somewhat over exposed and under funded, and not in possession of sufficient business acumen to be a landlord. How do they pay for repairs and upgrades etc? If they do not have the means to weather a £10k storm per property when given up to 7 years notice then maybe being a landlord is not the best use of the equity in their properties and landlording is not for them. I think those landlords that are over exposed/under funded and so will need to sell up due to EPC regs are greatly in the minority – I would be surprised if more than 1% of landlords fall into that category.

Taking everything into account I do not believe this EPC issue will cause a noticeable drop in house prices due to a big sell off by landlords as I do not believe there will be anything like a big sell off. Even if prices did drop a little for a short period then landlords, like me, that are in this for the long run will ride out the small price drop, holding onto our properties, and maybe even pick up some cheap properties during any short term drop in prices. Of course we would also reap the benefits of being able to charge more if the PRS sector shrinks further.
My main concern is availability of tradespeople to do the EPC work, but even then we will have up to 7 years to get it done. In some ways (not all ways) I almost wish I had the option to pay say a £5k or even £10k fine per property, meaning the property is then exempt from the new regs for say 15 years, and then I wouldn’t have the stress of getting all the work done. I am 100% sure that if the government used my £5k (or whatever) fine to invest in other green schemes/areas it would provide a massively bigger benefit to the environment than by me installing £5k’s worth of damn wall insulation.

Depending on what any new regulations look like, with a £10k cost cap, it may be that properties that are EPC Band D or lower are suddenly worth £10k less until they are upgraded to a band C. This is all a bit simplified, but if we hold onto our properties (not sell up) and we increase our properties value by £10k by spending a maximum £10k on EPC upgrades, then surely that makes sense to do as opposed to selling up for £10k less and exiting the sector? I appreciate it will not be quite that simple, but still possibly the outline of a situation we might find ourselves in.

If the regs moved on from band C and so become an EPC band B or A in another 10 years or whatever, so long as there is always a reasonable cost cap to the upgrades I really cannot see why the vast majority of landlords cannot again adapt and continue in the game. If the government change the rules so that it is illegal to rent out a property below band C, B or A and there isn’t a cost cap then that would be more of a game changer. If/when the government do remove a cost cap technology should hopefully be in place by then to enable most properties to get to a B or A. But if not I still believe most landlords could again adapt and survive so long as we are given enough warning. Despite what the doomsday mongers say the government does not want to see the end of landlords as, as others have pointed out there are many reasons why the sector is very important.

Lets not forget that the government has been shown in the past to be hard but not crippling for the sector: e.g. they did not legislate that all mortgage interest could not be expensed, they only lowered it to effectively a maximum of 20%, by allowing the 20% credit that we get. Landlords said they would sell up then and it was apparently the end for us all when they stopped allowing 40% interest, but there wasn’t any noticeable dip in the market that I was aware of. Many of us have been here and seen it all before: those that can and want too will stay, whilst those that are over exposed/under funded, or fed up with the ever increasing effort and regs will leave. There will be new landlords entering the sector to buy up from those leaving, those new landlords being attracted by the high rents we can get due to lack of supply in most locations and attracted by a housing market that, even in the face of something like covid, continues to rise.

I feel that those landlords that have already decided to sell up and exit without waiting, and so decided purely based on only the potential of new EPC regs that we do not even know the detail over yet, are likely landlords who had been considering exiting for some time now and so the EPC potential threat will be perceived as the final nail in coffin for them. This EPC threat will assist them in validating their decision. I of course wish them all very good luck and good fortune, but hopefully they realise that it is nothing like doomsday for most landlords as most will be able and willing to plan, adapt and survive if they want to. Whilst the UK population increases and demand remains as high as it does for rental accommodation (no signs of it ever slowing) the sector is, and remains, quite bomb proof (in my humble opinion gained from 20 years experience!).

[JK0]

Terry, do you know if the £10k (or even the existing £3.5k) cap includes making good though?

For something like floor insulation, the lion's share of the cost is going to be all the other stuff. If you are only credited the cost of the insulation, the whole job might be something like £30k.

[Hudson01]

I do agree with most of the comments, it will come down to the LL's desire to continue and if they want to commit anything near the 10k mark into a property they only rent out as an addition to their main income..... most will not, and coupled with all the other punitive legislation over the past years it will end their existance in the market.

My properties will never reach a C given they are flats and i do not own the exterior brickwork, they are also all electric heating and were substantially refurbished a few years ago..... like most LL's they are simply an addition to my pension, it is not worth the effort to even try and get them to a C, so they will be sold to an owner who will call them their home and be exempt from the requirement to reach a C, the end result to the overall reduction of the carbon footprint of my properties is exactly zero, no change at all. It it utter nonsense and most sensible LL's will not '' invest '' in reaching a C if it costs 10's of thousands of pounds, they will sell them and buy another which is already above a C.

We will see if the govt have the '' you know what '' to go ahead with it, i suspect they will and it will cause a mass sell off of the current properties below a C. It does have an up side though, more properties coming onto the market for the 1st time buyers, this is a good thing.

[Ted.E.Bear]

i suspect they will and it will cause a mass sell off of the current properties below a C.

Which will reduce the supply of rental properties, rents will increase, then new landlords can put an extra £10k of borrowing onto their mortgage and still make a nice profit, then we are back where we started. (With slightly higher rents, and slightly lower energy bills).

Maybe more poorly insulated properties will end up in private hands; but owners have more incentive to insulate because they pay the bills, so they typically have better EPC scores than rented properties anyway.

There are plans to have grants available, and even possible exemptions for small landlords. But I suspect that the big problems will be caused by the inability to get all of this work done - the green homes fiasco should be an indication that we don't currently have the resources for such large amounts of work.

[L4NDLORD]

Turbine Terry : Listed buildings are NOT exempt. However exemptions can be obtained if an architect or other cognate professional certifies that the energy improvements would detract from the historic fabric of the property. I have just got listed building consent to replace a late 1980s conservatory in C21 standards of insulation, which involves using Accoya acetlised wood and argon filled high grade double glazing. This will help. It is a mistake to think that there is an automatic exemption. Interestingly enough one can improve the grades but I doubt we will reach a C, To do so would probably cost six figures!

[Hudson01]

Wow - Re the above....... the EPC world is crazy.

To the average small LL all of this talk of ripping out kitchens/bathrooms etc and the insulation of internal walls and floors with possible heat pumps etc....... it's potty, most of these LL's have BTL's as an addition to their income, not to spend god knows what on changes which will add hardly anything to the rent they can charge and they may recover back over a century or so !!! Not a chance.