Residential EPCs: impact of new requirements

Save your energy

3 April 2017

James Ginley considers the impact of new energy performance requirements on residential property

Energy performance certificates (EPCs) are a well-established feature of the residential property market, having been introduced in 2007 in England and Wales and 2008 in Scotland. An EPC provides information about a residential property’s energy use and typical costs, and records its energy efficiency rating on a scale from A to G, where A is the most efficient and G the least.

EPCs are valid for 10 years and are lodged on the Department for Communities and Local Government’s website. They are needed whenever a property is built, sold or rented, and must be ordered before it is marketed, while in Scotland the EPC must be displayed in the property.

The certificate:

  • makes recommendations about how to reduce energy use and save money
  • shows estimates of energy costs of the property over a three-year period, based on the current costs of lighting, heating and hot water, and possible savings over the same period if recommended improvements are made
  • provides a current and potential energy efficiency rating, for example “E, and with improvements C”
  • summarises features of the property related to its energy performance, such as walls, roof, windows, heating and controls, hot water and lighting
  • provides the carbon dioxide emission rating and its potential level if improvements are made.

From 1 April 2018, any new lets and tenancy renewals in the private rented sector will normally be required to have a minimum rating of E; the same requirement will come into force for existing tenancies on 1 April 2020. Unless there is an applicable exemption, breaches of this requirement will incur a civil penalty of up to £4,000. Separate regulations also came into effect on 1 April 2016, under which a tenant can apply for consent to carry out energy efficiency improvements in a privately rented property.

But will a better EPC rating affect a residential property’s value? What impact will the new requirements have on lenders in the buy-to-let market and on mortgage valuations? Although a property’s value is determined by its location, size and condition, will it also be affected by the rating due to the potential energy cost savings?

A large-scale study undertaken for the former Department of Energy & Climate Change, published in 2013, analysed 325,950 dwellings that were sold at least twice between 1995 and 2011. The results suggested a positive correlation between energy rating and dwelling price per square metre.

Compared to G-rated homes, those in higher bands consistently sold at a statistically significant price premium: those rated F or E sold for around 6% more, D-rated homes for 8% more, those rated C for 10% more, and A- or B-rated homes for 14% more. But further research is essential to allay fears that expenditure on energy measures in a property is not a waste of money, particularly in an unstable market.

The likely impact of the new requirements on buy-to-let lenders – who will have to ensure from April 2018 that rented property has a minimum rating of E – is unclear. Should lenders and brokers advise mortgage applicants about the need for energy efficiency measures inproperties they are to let? If a lender has to take possession of a property and it fails to meet the required EPC standard, could they be liable for the civil penalty?

By 2018, many properties mortgaged to buy-to-let lenders may not meet the required EPC standard and so letting them will be prohibited. Those with mortgages must have sufficient income to cover this potential shortfall and the funds to bring a property up to a suitable standard for letting.

UK appendix 10 of the RICS Valuation – Professional Standards (the Red Book), residential mortgage valuation specification, states at 3.7: “The energy efficiency rating provided within the EPC is to be considered, if it is available.”

Given that a property will not be considered a suitable security for lending until it meets the required rating, in future, will surveyors carrying out buy-to-let valuations have to determine whether it is compliant? Does this also mean that mortgage valuations for properties that will be owner-occupied and those that are to be let become totally different? Should RICS, the Council for Mortgage Lenders and the Building Societies Association have a separate specification for buy-to-let residential mortgage valuation? Further guidance from the regulators is awaited.

James Ginley FRICS is Head of Professional Risk at Legal & General Surveying Services

Further information