As part of their Warm Homes Plan, into which they will invest £6.6 billion over the course of the parliament, Labour have said they “will ensure homes in the private rented sector meet minimum energy efficiency standards by 2030”.
Although we don’t yet know what minimum energy performance certificate (EPC) rating this will involve, it suggests they will reinstate previous plans for all rental properties to have a minimum rating of C by that date.
Last September, Rishi Sunak shelved proposed targets which would have required all landlords in the private rented sector to upgrade their properties to this rating or above by 2028.
Given this backdrop, we have looked at whether landlords are still making energy efficiency improvements and, if so, how much these are saving the tenant.
Of the rental homes in England and Wales bought by investors this year, 41% had an EPC rating of A to C. This is up from a share of 32% a decade ago – although landlord purchase levels are much lower today – and likely reflects both a degree of pressure to comply with the Conservatives’ previous energy efficiency proposals and, more generally, an increase in homes with better EPC ratings.
The EPC-assumed annual running costs of inefficient rental homes are significantly higher than those of more efficient properties – even though rental properties tend to be smaller than owner-occupied homes and so therefore have lower running costs. Also, there are very few A-rated homes nationally, especially in the rental market.
Someone renting a typical B-rated home, which is the smallest at an average of 66 sq metres, pays an average of £711 a year for gas and electricity, or £11 per sq metre. The average C-rated home of 68 sq metres has an average utility bill of £983, or £15 a sq metre.
While properties with worse ratings are larger on average, their running costs are also significantly higher due to their inefficiency. A tenant living in a 75-sq metre D-rated home pays an average of £1,482 for their gas and electricity, while someone renting an 80 sq-metre property with a rating of E, the minimum EPC rating for a rental home, faces average annual running costs of £2,231.
Rental homes are slowly becoming more efficient, though. This year, 39% of rental properties that had their EPCs reassessed improved by at least one rating. The long-run average shows that 37% of rental homes receive a higher EPC rating when they are reassessed, which reflects ongoing improvements in energy efficiency.
This proportion is nevertheless lower than the peak figure of 47% reached in 2018, when homes rated below E were banned from the rental market (with a few exceptions). However, if the requirement for a C rating returns, this figure will probably pick up again.
The most energy-inefficient homes tend to be higher yielding – homes advertised to rent with a rating of E averaged a gross yield of 7.9%, while those with a D rating averaged 7.6%. These properties are typically two- or three-bedroom terraced homes in the north of England and the improvements required to boost their EPC ratings would be equivalent to a very high proportion of the value of these lower-value properties. In some cases, these homes will have single-skin brick walls, which typically have poor thermal performance – and also mean that getting up to a C rating is not likely to be possible.
So far this year, over a third (35%) of the rental homes advertised this year rated D to E achieved a yield of over 6%. Whereas for those rated A to C – just under a fifth (19%) achieved said +6% yields.
