Changes to EPC assessments brought in by will mean higher energy assessment costs for landlords on top of what it will cost them to upgrade properties, it is becoming clear.
The Reduced Data Standard Assessment Procedure (RdSAP) is a simplified methodology used to produce energy performance certificates. It uses a lot of assumptions about how buildings are constructed to save the energy assessors’ time and generate a rating of a property's energy efficiency. The problem being the system produced unreliable results.
From 15 June a new EPC system was introduced, RdSAP-10 which updates the methodology underpinning domestic energy assessments. The changes are a significant step aimed at improving the accuracy and reliability of EPCs. Although the changes will improve the accuracy and reliability of the scores, the increased assessor time involved will inevitably increase the cost to landlords.
Energy assessors will now have to measure, collect and record more data about a property. This includes types of glazing and their condition, the heating system efficiency based on an evidence model, including manufacturers’ data, and if smart heating controls are present. Improvements such as added insulation or new windows will only be acknowledged if evidence is provided.
This means EPCs will now depend much more heavily on the documentation evidence that homeowners, landlords, and agents provide.
Previously, if a heating system’s details couldn’t be verified, default assumptions were used, often underestimating its efficiency. RdSAP 10 introduces a hierarchy that prioritises actual evidence over assumptions. If no documentation can be provided, the system’s efficiency may be rated lower, potentially impacting the EPC score.
It has been estimated that the best part of 2 million rental homes is still below the EPC “C” rating target for 2030 – that’s less than half the homes rented out currently meet the standard.
What’s more, although just over half the landlords questioned by specialist buy to let mortgage lenders, Mercantile Trust, were confident that they were aware of the rules, that leaves over 40% of landlords in the dark about their forthcoming obligations.
The Energy Secretary Ed Milliband has said he wants all private rental homes to have an energy performance certificate (EPC) of grade “C” or higher by 2030, while all new tenancies will be required to comply by 2028.
With all new lettings in England needing to meet a grade “C” rating by 2028, there’s only three years left to meet an ambitious retrofit challenge for thousands of properties if government plans materialise. These landlords face some difficult decisions between now and then: to swallow some costly upgrades, to be recovered by raising rents over time, or exiting the sector now while the going’s still good.
The banking lobby group, UK Finance, has raised “serious concerns” over Labour’s housing push to net zero which is forcing landlords to renovate millions of homes at an estimated aggregate cost of £36bn. UK Finance believes that all rented homes will struggle to meet the EPC “C” rating before 2043 – a good 13 years beyond the government’s target.
The problem is, argues UK Finance, a “one size fits all” deadline that will be difficult if not impossible to meet, given Britain’s aging rental housing stock, many of which are old Victorian terraces, with solid – no cavity – walls.
In its written response to the government’s consultation exercise, UK Finance called for the 2028 deadline on new tenancies to be abandoned:
“We have serious concerns that proceeding on this basis will have severe consequences to the supply of rentable properties,” the group stated, arguing that complex renovation work forced upon landlords would lead to tenant evictions.
“Properties might need to be vacated for works to be undertaken, potentially leading to the loss of a good tenant, and loss of rent.
“This level of disruption will be challenging to a significant portion of the private rented sector, especially in regions of England and Wales, such as Yorkshire and The Humber which have lower than average energy efficiency scores,” it said.
With significant regulatory changes coming in the sector, with the pending introduction of the Renters’ Rights Bill, many landlords are taking a wait and see approach. They are presumably weighing the costs and aggravation of undertaking upgrades against the drastic alternative of selling up.
But if too many landlords take that approach, huge bottle necks could be created when demand for labour and materials reach epic proportions in the final run up to the refurbishment deadline. Against that background is landlords exposing themselves to the prospect of heavy fines. These are to be increased from £5,000 to £30,000 under the proposed new rules.
The Home Energy Model (HEM) is an entirely new assessment methodology developed by the UK government to determine the energy performance of dwellings. It will eventually replace the existing Standard Assessment Procedure (SAP) which is known to have accuracy and reliability limitations.
The new methodology aims to provide a more accurate and more detailed simulation of a building's energy consumption, considering factors like smart technologies and real-time weather conditions. The new model changes how electric heating and LPG systems are scored, intended to solve the problem of people installing heat pumps and then seeing their EPC rating go down.
When the Home Energy Model eventually launches, after several years in development, the increase in the cost of commissioning an EPC assessment - which will likely take the assessor longer to complete - is likely to be significant, perhaps in the region of twice the existing cost.
It will also likely increase the cost of renovations as the more stringent assessment process could mean that landlords with homes currently meeting a grade “C” could find themselves downgraded to a “D”, running the risk of a fine.
The government’s plans on EPCs have a wider reach than many people realise. The proposal is that they next include holiday lets and temporary accommodation - immigrant and social housing.
Until now social housing has been spared the burden of meeting the EPC regulations that private landlords have had to comply with. So in that respect by levelling the playing field, having all rental sectors measured by the same metric removes an egregious level of outright discrimination against private landlords.
The Labour government has floated the figure of a spending cap of £15,000 per property as an upgrade ceiling for landlords, an amount to have to pay out before financial support licks in. To back this, Chancellor Rachel Reeves in her spending review confirmed a £13.2bn worth of funding for property insulation upgrades.
However, it has been suggested that ultimately the cost of these improvements will get passed on to tenants in the form of higher rents. Research by the UK arm of the Swedish bank, Handelsbanken, finds that over 90% of UK landlords think that tenants will pay more for their greener homes.
To soften the blow, this increased rent expense could be offset to some extent by the reduction in energy costs. For example, it has been estimated that a “D” rated home typically pays around £420 a year more in energy bills, compared to a C rated home.
The Government has not yet finalised the timeline for enforcement of the new targets.
The FT reports that buy-to-let mortgage lenders are aiming to “future-proof” their mortgage portfolios by reassessing the criteria they use when lending against properties with lower energy efficiency ratings, based on research from Cotality.
If the 2028 and 2030 deadlines go ahead, it will mean that those landlords now looking at a five-year fix, secured on a property with a EPC rating below band C, could be refused a new mortgage on that basis.
The Cotality research found some BTL lenders will want to ensure they limit their own exposure to a “net zero risk” when approving new loans. Others plan to utilise more “dynamic data sources” of information when assessing for new BTL lending and refinance. They want to modernise how they assess property environmental and energy performance risks.
Cotality UK chief operating officer, Mark Blackwell, told the FT:
“There is a clear desire in lenders to act to mitigate the impact of climate change, starting with the climate risk sitting on their own loan books.
“There’s an imminent regulatory deadline that requires them to do it, but during our research we found that without more robust data inputs and better access to model scenarios, many aren’t as far on as they want to be.
“There are ways to address this, and our research highlighted that lenders are taking a wide range of approaches.
“What was common to all though, is that meeting the challenge of net zero is not straightforward, and it will require the cooperation of all parts of the market to achieve it in such a short time.”
Landlords need to be aware that energy efficiency standards are becoming more important, deadlines are looming and the costs and hassle of getting to EPC level “C” will not be insignificant for some times of property.
Standards are becoming more stringent and the EPC assessment process more involved, increasing the cost of energy assessment. It will become more important to meet the required standards if landlords are seeking a new or refinance mortgage in the near future.
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