The £25bn eco bill for the PRS
Last month the government launched yet another consultation, this time into, “Improving the Energy Performance of Privately Rented Homes in England and Wales” which until recent days stayed completely under the radar, partly as the government had as usual not trumpeted its' arrival as they knew what lurked within, partly because no one had read it, and partly because we have all been preoccupied with the pandemic. A copy of the consultation can be found here.
It is only this week now several later, that the industry has become aware of the content of the consultation and landlords in particular are once more up in arms, and to be fair rightly so, over what the government propose. Before we get to that, I would like to furnish you with some detail and the backstory as the context of this consultation will become very relevant when I get to talking about the very cynical deadline for it.
In 1992, the government committed to the Kyoto Protocol, as did most countries in the world at that time. Global warming had become front and centre of everyones' agendas, and everyone committed to reducing their carbon footprint, their greenhouse gas emissions (GHGs). Burning carbon essentially, cars, planes, business & households being the 4 largest contributors. In the UK where a good proportion of housing stock is old or Victorian, there is much to be done with drafty and inefficient housing leading to 40% of UK emissions as we all madly keep boilers on far longer trying to keep them warm. Our cold climate for 8 months of the year doesn’t help either.
Very little was done for the first few years until the government decided to grasp the nettle and introduce a way of working out how to measure the efficiency of our housing and work out what could be done to improve it. Hey presto, EPCs were borne, or what has become known more recently as MEES, Minimum Energy Efficiency Standards. An EPC or Energy Performance Certificate was an assessment of a homes’ energy efficiency, its potential future efficiency with recommendations as to what needed to be done to improve it. So new regulations came into being in 2007 with the launch of EPCs taking place in October 2008.
The easiest point of capture was clearly whenever a property transaction took place and the government sold us the idea that every buyer and tenant would want to know what the Energy Efficiency Rating (EER) of the property they were about to move into was. At the time I was in Agency and I cannot remember at any point from 2008 to 2018, where either asked to see one, such was the lack of interest from the public.
It was clearly going to take time and as I write today, 20.7 million dwellings now have an EPC, so it has taken 12 years almost to the day to get 90% of our housing stock assessed. For these first few years the government knew it was simply only about data capture, but as some point there was going to be a need to turn the screw and start getting all these dwellings more energy efficient, after all that was the whole point. In 2012, the UK signed up to the 1st Doha amendment of the Kyoto Protocol which had us adopt legally binding targets that needed to be met by 2020.
Our own amendments were made to the Regulations in 2012, with the first bombshell then arriving in 2015 for the PRS. Only properties with an EPC rating of A to E, so not F or G, would be allowed to have a fixed term tenancy granted on them from April 2018, and then all remaining tenancies by April 2020. This is all still quite fresh in our minds with the latter deadline having only just passed during the lockdown, but with the 2nd Doha Amendment due to commence on 31st December 2020, the government has quickly sought to up the ante which I will come to later.
So F & G ratings account for 6% of rented property so it was not going to being too prohibitive to the PRS and most agreed that a property had to be in pretty substandard condition to warrant such a rating, so it was probably not a bad thing to have these weeded out. However, the government would rather these properties had their EER improved, not be sold or abandoned, so Green Home grants have existed in one form or another over the last few years to help landlords cover the cost, and if a £3,500 investment could not improve the EER to an E, then a Landlord would qualify for exemption from the regulations. See the regulations on exemptions here. There are currently 1.38 million F & G properties, 227,000 of which are in the PRS, so an investment from landlords of £795 million would have them all qualify to be rented whether an E or not. Either way the government would have made significant progress in improving the EER of these poorest properties.
The greatest underlying challenge behind the scenes though has been the accuracy and methodology of EPCs, both in the early days when the new cottage industry was borne, and even to the present day when they are still not always an accurate reflection of the EER of a property. To start with, assessors were poorly trained and basically didn’t always know what they were doing, and many didn’t have a property background. Then and today, on page 2 of an EPC, many assumptions, which have to be declared are made, in particular about insulation, so it is always best to be present when an EPC is carried out so you can show an assessor what they need to see, invoices, guarantees, even drilling a hole to show sub floor insulation for example. D ratings in years to come are going to lose capital value, replacing a floorboard will be soon seen as small change to retain that.
In the 2015 regulation changes it was muted that the plan was to introduce a second minimum threshold of C rating by 2030, 10 years after the minimum E was introduced. I remember at the time a muted outcry from the PRS that this was too much too soon and 10 years was not enough time to be able to find the investment and/or the time when rented properties are obviously occupied by tenants. That has now all recently been superseded and forgotten. Bombshells have been replaced with the £25 billion atomic bomb that has just been delivered last month in this most recent consultation.
So, without a murmur or notice this most recent consultation has brought forward the planned introduction of a minimum C rating by 5 years to 2025. The air this week has turned blue in the landlord and lettings agent community as the penny has dropped what this actually means if the proposals in the consultation go ahead.
Currently, 62% of EPCs are rated D-G, that’s 12.2m dwellings already existing with a substandard EPC. If the PRS makes up 20% of all dwellings, that means 2.44 million rented properties cannot be relet in just over 4 years’ time without £24.4 billion being spent by LLs to qualify for exemption – The proposed minimum spend to qualify for exemption will increase almost 3 times from £3,500 to £10,000.
It feels like a bit of Russian Roulette from the government where their failure to build any social housing over the last 20 years has come back to haunt them, and has them rely on the PRS to house the 1.1 million people they have on the waiting list. What’s the backup plan in 4 years’ time if nearly half of the PRS fails to meet MEES and cannot be rented?
I don’t think they have one, so does that mean they are bluffing, or do they really expect landlords to cough up £25 billion on top of all the tax increases they faced in recent years? It’s not just the failure to hit the right standards that’s a threat either. Many landlords have just had enough and plan to sell, especially in advance of the leaked increase in Capital Gains Tax. Which ever way, the PRS shrinks. Many stakeholders are rallying supporters and lobbyists, encouraging us all to feedback in the strongest terms in the consultation of our objection to the change, so the government is forced to do a u turn. It’s a massive risk the government is taking, so surely when they get this feedback in this consultation, they will realise it’s not workable and revert back to the original 2030 plan?
No. No u turn, no for the following reasons which they have indiscreetly telegraphed to those that examine the detail.
I refer back to the Doha Amendment of 2012. This set legally binding targets for the government to hit by 2020. The second higher set of legally binding targets comes into force on 31 December 2020 for the next 7 years’ ambitions. The current consultation for the new 2025 plan expires at 11.45pm on 30 December 2020, when parliament is in recess and Ministers are on holiday, just 15 minutes before the second phase of the Doha Amendment is enacted. Now how much do you think the government is interested in the feedback from the consultation when Parliament is unable to debate the results, everyone is on holiday and they have only given themselves 15 minutes in spite of that to read that feedback, discuss and agree any changes, and then discuss and agree whether in light of that we plan to stick to abiding by the new rules that start at midnight? The same rules we could not pull out of at that time of night even if we wanted to.
Not a bean, in fact for those of us that know of the Doha amendment it is the same as sticking up 2 fingers out of a car window at a bystander as you drive past, swearing and laughing as you go. What they relied upon is no one knowing anything about that amendment or the relevance of the 31st December. One of the first things I was taught at University in two politics degrees and that has rung true ever since, is the British government think the public are uneducated fools who should not be given any information on much at all. Here is another example.
It’s not just about hitting these targets though. This 5-year change is a cynical back door tax hike to try and reduce the deficit created by the pandemic. Instead of being honest with the electorate though, their contempt for it shows through by not trusting them with the truth. If their £25 billion gamble pays off, that will produce another £5bn in VAT alone, let alone all the frenzied economic activity in long far reaching supply chains as 2.44 million properties are worked upon, with all the extra tax verticals that will benefit. Rishi Sunak is licking his lips at what will be a very welcome windfall in the next 4 years.
So if you are the landlord of a property with an EPC rated D, you may well be able to remedy that without too much expense or hassle, especially if you invest the £35 to get a new EPC done first as I am advising my clients to do, so you start in the right place. If you are E, F or G, tougher decisions lie ahead. Spend the £10k? Let illegally? Sell? Gamble the government does a 2024 climb down?
Bear in mind though that all homeowners should be considering this as well, the worst is yet to come, this is only the PRS this applies to. At some point the government will turn its’ attentions to the 15 million owner occupied properties. What then? You can’t sell if you aren’t a C? Can’t get finance? What stick will they use to get compliance? I’ve got a feeling English Heritage are going to be overwhelmed with applications to gain Listed status, as being Listed is almost the only way that guarantees exemption. It’s going to get expensive for everyone else.
Only time will tell.