What do the proposed EPC regulations mean for the residential rental market?

By 2028, all domestic properties in the private rented sector (PRS) in England and Wales could require an Energy Performance Certificate (EPC) rating of C or above. This has undergonegovernment consultationand the policy design is being finalised. The initial plans state that any new tenancies must meet these new criteria by 2025, and all tenancies must abide by 2028. The penalty for not having a valid EPC will also be raised from £5,000 to £30,000 from 2025. These changes are part of the government’s commitment to reach net zero by 2050, which also include thetransition away from fossil fuel heating systems.

According toDLUHC data, 64% of private rented properties (2.26m homes) in England and Wales are rated EPC D or below. At 60%, London has the fewest proportion of rental homes rated EPC rating D or below. Wales (70%) and Yorkshire and The Humber (69%) have the highest.

Figure 1: Number and proportion of homes currently EPC rating D or below

Source: DLUHC

Of these 2.26m homes, the same DLUHC data shows 478,000 PRS properties do not have the potential to reach at least EPC rating C. Under the proposed EPC regulations, these homes will be unable to remain in the rental market by 2028.

To ensure the remaining 1.79m PRS homes reach the new EPC target by 2028, around 298,000 homes will need to be upgraded each year.

Between 2019 – 2021, an average of 545,000 EPCs rated A-C have been issued each year according to DLUHC data. As PRS EPCs account for 22% of the total, this suggests around 122,000 PRS homes are issued with EPC rating C or above each year. At this rate, by 2028, there would still be around 1.53m PRS properties not meeting the new requirement and therefore unable to be rented out. The government consultation estimates that up to 10% of PRS properties could be eligible for an exemption to the new proposals. Under this assumption, the final number of PRS homes that become unlettable could total 1.38m, or 34% of current stock.

For all PRS homes that can reach EPC rating C to do so, we calculate that annual issuance would need to increase by 143% to just under 300,000 issuances a year – an extremely demanding acceleration.

Figure 2: Issuance of EPC rating A-C certificates, current rate versus required rate to address all non-compliant PRS stock able to improve

Source: DLUHC, CBRE

There is currently amaximum investment cap of £3,500. This means that if the cost of improving the EPC rating to the minimum standard exceeds £3,500, the property could still be let out. As part of thegovernment consultation, this cap could be increased to £10,000, meaning landlords would be expected to pay more to keep renting out their properties. Modelling carried out in this consultation suggests that on average, landlords will need to spend £4,700 per property to reach EPC rating C.

A blanket investment cap across the country doesn’t consider varying regional property values. The £10,000 that could be required to spend would account for a significantly larger proportion of rental income in the North compared to London or the South East. Consequently, these changes could have a disproportionate impact across the country, particularly considering that northern regions already have a greater proportion of homes rated EPC rating D or below.

Landlords who do not wish to exit the PRS sector will, most likely, be better off paying to improve their EPC rating rather than selling their current home(s) and buying another with a higher EPC rating. The latter will incur agent fees, Stamp Duty and potentially a Capital Gains Tax bill, all of which should be considered when the government sets the new investment cap.

The new EPC regulations will benefit the Build-to-Rent sector, given that over the last ten years, 95% of new homes were issued with an EPC rating C or better. Furthermore, the potential fall in second-hand PRS stock will tighten supply levels at a time when demand is rising, leading to rental price inflation.