MHA | The future of EPCs and UK rental market

The future of EPCs and UK rental market

Mark Lumsdon-Taylor · Posted on: March 4th 2024 · read

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Let’s take stock…

Sakichi Toyoda, the Japanese industrialist, inventor, and founder of Toyota Industries, developed the 5 Whys technique in the 1930s.

5 Whys is a clever construct that enables anyone to arrive at the root cause of any issue through five steps of interrogative questioning.

It is a hugely inciteful technique. I know, because I used it recently on a past government announcement, with surprising results.

The number of households occupied by private renters in England has increased significantly since 2000, from 2 million to 4.61 million in 2022, followed by a very slight decline in 2023 to 4.6 million.

This is a huge rise in a very short period of time; and it’s important from a climate change perspective.

Much of UK housing stock is old. The new-build plans of successive governments have fallen woefully short of targets over succeeding decades since the 1940s and left us with a housing stock that is widely energy-inefficient.

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Number of new houses planned in the UK

The number of new homes planned fell by 44% last year and, according to the Home Builders Federation, the supply of new housing is likely to fall below 120,000 homes annually during coming years making it the lowest since the second world war.

This places an increasing load on rental stock to fill the void between those seeking somewhere to live and the availability of homes.

Newly-built properties tend to have a higher EPC (Energy Performance Certificate) rating, with 94% being rated C or above.

With older rental stock the picture is very different. At the turn of the 20th century, and before, many properties were built with single brick walls, lacking the twin-wall cavity that aids insulation and reduces heat loss from within homes.

Earlier forms of double-glazing were far less efficient at preventing heat loss than their more modern equivalents thanks to advances in glass technologies, frame technologies and a greater understanding of thermal transmission pathways.

71% of landlords in the UK own rental properties with an EPC rating of D or below.

From 2018 it became a requirement for UK rental properties to meet a minimum energy rating of ‘E’ or above.

In 2022, plans were announced to raise the minimum threshold from ‘E’ to ‘C’ or better by 2025, with existing tenancies required to comply by 2028.

According to Ed Miliband, the shadow secretary for climate change, Britain has the ‘worst insulated homes in Europe’ so the announcement made sense.

In September 2023, the government reversed its decision and scrapped the policy.

To many, the reversal of direction also made sense. Rampant price inflation had led to soaring costs in construction materials making even the smallest of energy improvements cripplingly expensive. Wage inflation had added to the issue.

The government did, at the time, add some mitigating actions, raising the penalty for non-compliance, for example, from £5,000 to £30,000.

Other measures included:

  1. An increase in the grant available through the Boiler Upgrade Scheme to £7,500 when used in upgrading from a gas boiler to air source or ground source heat pumps.
  2. Oil and LPG boiler installations in off-grid homes will be allowed to continue until 2035, instead of being phased out by 2026.
  3. An exemption when fossil fuel (including gas) boilers are phased out in 2035. Households that struggle to switch to heat pumps or other environmentally friendly alternatives will not have to. It is thought this will capture some 20% of UK homes, particularly those that require expensive retrofitting or a more powerful electricity supply.

Despite the government announcement, many UK landlords had already been taking appropriate action to meet the new minimum EPC rating for rental properties.

According to a study by Shawbrook Bank, 80% of landlords were already prepared for the original 2025 deadline, 30% already had properties with a rating of A-C, whilst 50% said they had plans to improve their properties’ EPC ratings by 2025.

In addition, the research revealed that the mean amount spent by landlords over the previous year on improving or investing in their properties was £25,148, rising to £37,164 for London-based landlords.

So, why then did the government feel the need to scrap the 2025 ‘C’ rating target?

Was it simply an economic argument? The Shawbrook Bank research would suggest otherwise. Which is why I turned to 5 Whys.

The interrogation driven by the technique took me to a very different root cause.

In 2023, the share of households occupied by private renters was 18.8%.

That means the number of local authority and housing association stock is more than 80% of available property for rental. That’s circa 3.7 million properties.

Whilst it could be posited that private landlords may, in some cases, have the wherewithal to invest in energy performance upgrades, I wonder whether the same can be said for local authorities and housing associations whose housing stock is often older and of poor quality.

Recent years have seen an increasing number of local authorities ‘at risk of bankruptcy’. As of August 2023, these included at least 26 in addition to those already in special measures such as Slough, Croydon, Thurrock and Woking.

A cursory look at the news media over recent years also reveals increasing pressure on housing associations to bring their stock into alignment with fire and health regulations. Sadly, many are simply failing to keep pace.

Could this then be the real reason for the government U-turn?

Put simply, if the government had continued on its intended path, it could have simply widened the gap between private and public rental stock, with public stock appearing as the ‘poor cousin’. This could easily have led to charges of discrimination against less privileged individuals and would have been anathema to the concept of ‘levelling up’.

This leaves us with a dilemma. The thinking behind the policy is almost certainly sound. The ability of landlords to comply with it appears to have been less well considered. With a UK government election likely to happen in the near future, and rumblings within the Labour Party regarding re-instatement of the policy, it is time to take stock in order to determine how this dilemma can be resolved for the benefit of everyone.

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