ARE YOUR EPC PLANS DIALLED IN?

How proposed EPC changes are going to work are as confusing as the rankings itself. So, should you be working to boost your portfolio’s energy rating now or waiting for more detail to emerge?

Heraclitus, a Greek philosopher, is quoted as saying “change is the only constant in life.” When it comes to the private rental sector in the UK that certainly rings true. If it isn’t having to rewrite our entire business model in the wake of George Osborne’s penning of Section 24 or having to act as unofficial border control guards with right to rent checks – to be successful investors you have to roll with the punches.

One jab the government has in the works – minimum EPC rating requirements for rentals potentially changing from E to C for 2025 – could leave landlords of older properties down for the count.

Despite making another appearance in the Queen’s Speech earlier this year delivered by her understudy, any changes have not yet been signed into law. We are however seeing it effect how lenders and landlords alike approach the market.

ON THE HOUSE Magazine talks to experienced investors and experts about whether a wait and see approach is best or if it would be wiser to devote effort now to upping your portfolio’s energy efficiency before you are forced to do so.

RENEWED INTEREST

Paul Crovella of Swindon Energy has been doing EPC assessments for 15 years. He observes with a smile that assessors have gained a bit more respect in recent years. “We’re suddenly becoming much more involved and important than we were 15 years ago, where we were looked as this guy who is just going to come and count your light bulbs!” he laughs.

Jokes aside, Crovella suggests that the furore surrounding the government’s proposals is somewhat premature and leans towards a wait and see approach - keeping an eye on the property media for updates.

“They’re going to have to come up with an extremely robust exemption register,” he says, giving the example of a property that was a low F rating and has just scraped current letting requirements to become an E as very unlikely to be able to make the grade again.

“I think [the proposals] will end up being deferred. I doubt it’ll even make its way through into legislation but it’s scaring a lot of people and it’s creating a false move towards a C rating.”

Adam Lloyd of EPCExperts.co.uk agrees there will need to be some exemptions but doesn’t expect too much deviation from the proposals as written.

“I foresee it applying to all properties,” he says. “The majority of homes are in towns and cities with a gas connection so it should be easy enough to scrape a C on these properties. Only properties that are on oil or LPG will struggle or listed buildings that cannot have wall insulation.”

EPC requirements could turn up the pressure on landlords

So, back to a waiting brief. However, there is a good chance if you have a portfolio of traditional mid terrace BTLs or similar that your hand is forced earlier. Some mortgage providers are offering more attractive lending deals on refinancing and new lending for properties with an EPC rating of C or above. As the cost of borrowing continues to climb, this might help landlords maintain margins.

“I’m doing that quite a lot at the moment where [landlords] are saying, ‘I’d like a C, but it’s currently a D’,” notes Crovella. “So, they just pay me a fee to go back out and run the figures again. It’s cost effective. If they get the C and remortgage for a 0.5% lower mortgage rate, well I’m helping them get a real good discount. I should charge more!”

Martin Baker, the founder of EPCman.co.uk, an online network of assessors says tenants will be hit by the changes too.

“When the need for a C rating comes in I can see many landlords selling up which will in turn push

rental costs even higher with fewer properties available,” he says.

Across the network he reports an increase in recent years of landlords forward-planning for the changes: “I am encouraged that there are still many landlords out there who take pride in their properties and who are taking the steps that are necessary.”

PAUL CROVELLA, Swindon Energy

WASTED ENERGY

While it is difficult to have a blanket estimate for costs of improvements to get a property to a C rating, EPCExperts’ Lloyd offers some general estimates to give new landlords an idea of what they might need to factor in.

“For the majority of properties, it will only require an up to date boiler and loft and wall insulation. Perhaps £2,000 for boiler, £5,000 for wall insulation. But you could skip the wall insulation and just go for solar, again around £4,000 for solar, max,” says Lloyd.

Among the most common misconception he adds is that just switching to more efficient lightbulbs can make a big difference.

“I have customers say they’ve just decorated and put new carpets down thinking the EPC will improve!”

Another is double glazing - being an expensive improvement this does not necessarily fair as well as people might have hoped due to the payback period being longer than other changes.

MARTIN BAKER. THE EPC Man Network

Worse still, Crovella describes those who went it alone and failed to consult an assessor before carrying out major works.

“I’ve had people whip out oil boilers and put in a heat source pump because they think it’s a new bit of kit that’s going to really push up their score and they’re going to be A-rated,” he recalls. “I’m going out there and producing an EPC that’s lower than they had before and they are beside themselves shouting at me that I’ve got it wrong and they can sue me and I’m saying, why didn’t you speak to me first? You know, before doing this, I could have told you that air heat source pumping in an old sixties bungalow was a disaster. ‘Oh, the government say air source pumps are great?’ Well, yeah, maybe, but the EPC methodology isn’t in agreement.”

Some landlords though can take advantage of low hanging fruit.

“A big one we come across is having a thermostat on the hot water tank - a lot of our older properties, they haven’t got that, so the boiler and the hot water don’t talk to each other and the EPC methodology regards that as a fairly major failing,” says Crovella. “Therefore, you can get a competent plumber or electrician to put a band on, put the thermostat into the cylinder, and that can gain you some good points and make a big difference. That can jump you up.”

THE PROPOSALS A quick recap of the key points of the EPC changes that the government is proposing. The Minimum Energy Performance of Buildings Bill is in the second reading in the House of Commons at the time of writing. - All new tenancies will be required to have an energy efficiency performance of at least EPC Band C from December 31st, 2025 - All existing tenancies will be required to be band C by all existing tenancies must be at least EPC Band C from December 31st, 2028 - The requirements will be “where practical, cost-effective and affordable” as defined by regulations introduced by the Secretary of State.

C INTO THE FUTURE

So, while the general consensus might well be to take a wait and see approach to how the proposal might evolve in the next year, it is certainly prudent to get to know your EPC assessor and start modelling the costs associated with making a passing grade. This is particularly relevant if you have D-rated properties that are due for refinancing.

There are some definite no-nos the experts would advise most investors against at the moment until the EPC methodology adjusts.

“Never install an electric boiler. Electric panel heaters are extremely bad on the EPC, regardless of how modern and good they look. Changing an electric meter to Economy 7 tariff can push up an EPC by a grade,” says Lloyd.

As an aside, Lloyd advises landlords with tenants on low income or benefits to looks seriously into the new Eco4 grants.

EPCMan’s Baker offers up a final encouraging perspective: “My thoughts are that all landlords should not be too quick to throw in the towel when it comes to C rating time. A little time and effort, and some cost, will get you there with your properties and it will be a benefit in the future with a higher property value and potentially higher rental returns. Get a new EPC done now so that you know what potential costs you may be in for. You may be pleasantly surprised!”