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The buy-to-let rental market could shrink if landlords decide to sell rather than invest in costly upgrades to meet energy efficiency targets, warns a property expert.
The private rental sector faces a bill of £17.9 billion over the next two years to meet government energy performance certificate (EPC) demands.
Experts fear the huge upgrade bill will lead to property investors selling homes rather than investing the thousands of pounds needed to meet the measures.
Although still at the consultation stage, the new EPC policy is expected to increase the exemption cap from a ceiling of £3,500 to £10,000, meaning fewer landlords can avoid spending on improvements.
Meanwhile, landlords must spend an average of £9,620 a property by December 31, 2025, to reach an EPC grade C if the proposals become law.
From this date, all private homes rented to new tenants must meet an EPC C grade rating or be withdrawn from the market.
It is proposed that on December 31, 2028, the EPC rules extend to cover all existing tenants.
Property consultants Knight Frank says the average rent in 40 per cent of local council areas does not cover the cost of refurbishing a rented home to meet the EPC target, even though 13 per cent of tenants are willing to pay more rent to live in a low-carbon property.
The government agrees the measure is not cost-effective for homes that need more than £10,000 of improvements to meet the rating. Owners of these properties can apply for an EPC exemption.
Knight Frank research has revealed out of the 4.8 million rented homes across England, 60 per cent have an EPC rating of D or lower, needing the £9,620 spent to remain on the rental market.
Flora Harley, head of ESG Research at Knight Frank, said:
“If legislation is passed, the additional cost pressures placed on landlords – which come on top of rising mortgage costs, changes to mortgage interest relief and the erosion of capital gains tax allowances – may lead some landlords to look to rationalise portfolios or leave the sector entirely.”
EPC stands for energy performance certificate. An EPC is intended to show potential buyers and renters the typical energy costs for a home and how energy efficiency may be improved.
The EPC aims to help tenants reduce carbon emissions and to aid the government in meeting net-zero emissions by 2050.
Property owners do not need an EPC if they can show the home is listed or protected, and any energy improvements would lead to unacceptable alterations or breach the £10,000 cost cap.
Read more about EPC exemptions
No one knows the scope of the new legislation as the government has yet to enshrine the new rules in law. However, ministers have suggested a ‘fabric first’ policy to improve windows, doors and insulation before tackling boilers and other heating issues.
Most EPC improvements are capital costs, so they are not set off against tax until the property is sold or gifted to a new owner. Other costs are repairs or replacements, like upgrading windows and doors, offset against tax like other day-to-day business costs.
The EPC assessment varies between properties. The assessor will look at the following:
Knight Frank says moving from a D to C EPC rating could lead to a £400 a year saving on energy, while moving from an E to C rating could save almost £1,000 a year.