Climate change is going to be in the news often over the next few weeks – as the UN Climate Change Conference (COP26) in Glasgow approaches. Add to that sharply rising energy costs means now might be a good time to run through a few thoughts on how climate change and energy efficiency affect the property market.
On the face of it, property might not appear to be as great a contributor to climate change as, say, industry, vehicle or aircraft emissions are. However, real estate contributes 30% of global annual greenhouse gas emissions and consumes around 40% of the world’s energy, according to the UN Environment Programme.
Also, on the face of it, it appears there is little that individual residential property owners can or need to do with regards to a global issue. So let us focus in more closely on the issues at a very practical level.
The increasing importance of EPCs – and perhaps an opportunity
Energy Performance Certificates or EPCs have been around for several years now. And it’s fair to say that, other than the need to have one when selling, they have not been considered that important by buyers, sellers and investors.
EPCs are likely to be a much more important factor in future, however. Currently under the Domestic Minimum Energy Efficiency Standard (MEES) a property needs to have an EPC of at least band E (on a scale of A-G) if it is to be let out. This will move to a minimum rating of at least band C in 2025. There are calls to reduce it even lower.
That means, within a few years, a fairly sizable slice of property will be off limits to the lettings market. (Whilst potentially pushing more property with a poor EPC rating into the owner-occupier only market.) While that is often presented as a bad thing for landlords and investors it could actually be to their benefit: The supply of property to let is likely to be tightened and it could lead to rising rents for tenants.
The move to EPC C for rental property could also lead to a new kind of buy to let opportunity. That is, buying up non-compliant properties that can’t be let and upgrading them with energy efficient measures so that they can be let out. Investors and developers who know what’s involved here – and who are able to take advantage of any grants that might be available – could potentially do well from this.
Owning an energy efficient property is good for the climate of course. But what are the financial benefits of doing it, if any?
Do energy efficiency measures actually make a property more saleable – or worth more ?
Research by the now-superseded Department for Energy and Climate Change claimed that yes, they do. They said that making energy saving improvements to your property could increase its value by 14% on average and up to 38% in some areas. (Generally regions with cheaper property benefitted more than expensive areas.)
This recent research based on Google search volume claims that energy efficiency is now the most sought after property feature with buyers. It now ranks well above proximity to a train station or parking.
Are energy efficient properties more lettable and do they earn more rent?
Perhaps regrettably it is hard to find any hard research showing that energy efficient properties are more lettable and/or earn higher rents the better their EPC rating is. As most agents will tell you, tenants place location and bottom line monthly rental affordability before much else.
There should in theory at least be practical and financial benefits to letting out property that is energy efficient: Properties that are warmer and cheaper to heat ought to be more appealing to tenants. There should be a benefit in that if tenants are not paying a large part of their income on energy bills they can more easily afford the rent, or even possibly afford to pay higher rents.
While there may be no direct link between rents and energy efficiency there certainly is evidence that energy efficiency measures (although they call for an initial outlay) save money. According to the Energy Saving Trust loft insulation to an average house should save £135 on energy costs per year, insulating a flat roof should save £175, a new A-rated boiler could save £200 and other minor measures combined should save around £300.
In this simple example a tenant would save £800 a year in energy costs in an energy efficient house. Theoretically at least this would free up an extra £800 to spend on rent rather than spending it on running costs.
If you are operating a HMO or serviced accommodation you should be able to cash in on the benefits of energy efficiency directly of course. In these cases the landlord normally pays the energy bills and so receives the savings. And again your property should be more attractive, more lettable and more affordable to tenants even at higher than average rents.
Lower energy costs could also mean better yields on this type of property that is already known for high yields. An £800 annual saving on bills could easily lift yields by 1-2% even on a small property for example.
Lastly a report by Sustainable Homes – Touching the Voids said that energy-efficient social housing properties have lower voids and lower rent arrears too. These are both things that can benefit private buy to let landlords and investors just as much.
Of course, the issue of climate change is much greater and more serious than the impact it has on the property sector alone. But energy efficiency in property is likely to become more relevant in the future than ever before. It will indeed present more challenges to those in property but it could also present opportunities too.