The government’s proposal to ensure that all new rental properties have an EPC rating of at least a C by 2025 or 2026 is already shaping investor buying behaviour, according to the latest monthly lettings index from Hamptons, part of Countrywide.
While the proposal remains at consultation stage, many landlords are already hedging their bets, the agency says.
So far this year, the share of homes bought by investors with an EPC rating of A-C is running at 50%, the highest figure on record, and up from 39% in 2021 and 33% in 2020.
This uplift has been driven by two factors. Firstly, landlords have bought more energy efficient homes where improvement works have already been done. Secondly, there has been a shift towards investors purchasing newer homes, particularly flats, built within the last decade. These properties typically carry much better EPC ratings, with almost all awarded a B or C ranking.
Second, investors are increasingly purchasing modern residences, particularly flats, developed within the last decade. These properties often have higher EPC ratings, with nearly all receiving a B or C.
Because of the trend toward new construction, London landlords tend to purchase the most energy efficient buy-to-lets in England and Wales. Two-thirds of new acquisitions completed this year – 66 percent – already had an EPC rating of C or higher. Investors are more inclined to buy higher-yielding but older and less energy-efficient terraced housing property further north. Only 34% of investors in the North East purchased a buy-to-let property with an EPC rating of C or higher.
The aim for higher EPC ratings will save tenants money as well as reduce pollution. At present costs, a tenant moving from a D-rated property to a C-rated home will save £285 per year on their gas, electricity, and water bills. A tenant who moves from an E-rated home to a C-rated home will save £725 per year. While most residences with a F or G rating are no longer rentable, upgrading to a C rating saves £1,348 and £2,404, respectively.
Share of landlord purchases with an A-C EPC rating (2022)
London 66%
South East 56%
South West 55%
East of England 52%
East Midlands 48%
West Midlands 45%
North West 42%
Yorkshire & Humber 40%
Wales 40%
North East 34%
England & Wales 50%
After reaching record highs during the summer, rental growth has slowed. Average rents in the United Kingdom rose 7.0 percent in January 2022 compared to the same month the previous year, with the pace of growth declining in all but one month since a high of 8.7 percent in July 2021. Decreasing rental increases in Northern England have aided the slowing growth, which has been partially offset by stronger growth in London in recent months.
In January, rents in Inner London returned to pre-Covid levels after a 21-month hiatus. In Inner London, rents increased by a record 17.3 percent annually to an average of £2,546 per month, which is same to the March 2020 figure and 29.6 percent higher than the mid-Covid low of £1,964. Meanwhile in Outer London, where rents now stand 9.9% above their pre-pandemic peak, average rents rose 4.0% year-on-year to hit £1,851pcm.
"By removing the least energy efficient rental homes from the market, government policy has already selected the lowest hanging fruit," said Aneisha Beveridge, head of research at Hamptons. However, expanding this programme to convert homes with a D or E rating to a C will affect a much larger number of people while resulting in smaller savings for tenants. The programme will eventually result in cheaper energy expenditures for the typical tenant than for the average homeowner, albeit it is expected to remove some rental homes from the market, placing additional pressure on stock levels.
"Given that obtaining an EPC rating of at least a C without significant cost will be unattainable for all homes, it's likely that older homes will become significantly less appealing to landlords." Instead, investors may concentrate their efforts on purchasing new construction, with rental properties centred in blocks or streets where properties already have a C-rated EPC certificate or where this can be obtained with minimal effort.
"The return of Inner London rentals to where they were on the eve of the epidemic is a watershed moment for the capital's landlords." With the greatest recorded month-on-month gain in Inner London between December and January, it looks that the rent recovery is still going strong. The level of pent-up demand coupled with a lack of stock is likely to support high rates of rental growth over the coming months.”