The Winter Issue — Green BTL

Issue 4

Winter 2023

GREEN HOMES

UTB MORTGAGES FOR INTERMEDIARIES

A smarter approach to Buy-To-Let UTB have three product sets in our Buy-to-Let range.

These cater for a wide range of property types including properties above or next to commercial such as shops, restaurants, pubs, takeaways and clubs, high rise and balcony access.

We specialise in non-standard construction including concrete, steel and timber framed properties and many more.

We support individual, limited company, portfolio and non-portfolio landlords, with no minimum personal income or with impaired credit.

Get an instant decision in principle via our online portal.

Scan here to register and access our broker portal

T: 020 7031 1551 E: mortgages.enquiries@utbank.co.uk This information is strictly for the use of professional intermediaries only.

we understand specialised mortgages

acknowledgements

AUTUMN 2023

Editor-in-chief Beth Fisher

Deputy editor Andreea Dulgheru Reporters Jodie Bradley Elliot Topham

Creative direction Beth Fisher Andreea Dulgheru Sub editor Christy Lawrance Contributors Kim Lidbury

Photography Alexander Chai

Sales and marketing Beth Fisher beth@medianett.co.uk

Special thanks Courtney Nicholson, Redwood Bank Catriona Tripp, Strand PR Penny Norton, PNPR Printing The Magazine Printing Company Design and image editing Jana Rade, impact studios

BTL Insider Magazine is published by Medianett Publishing Ltd Managing director Beth Fisher beth@medianett.co.uk 0203 818 0160

Follow us: Twitter @BTL_Insider | Instagram @BTLInsider

| 02

welcome letter

BTL INSIDER

A

s winter is fast approaching, having a warm home is something that everyone wants—but at what cost?

As Rishi Sunak recently scrapped the long-discussed proposals to increase the minimum EPC rating for domestic rental properties, many landlords may be tempted to put energy efficiency upgrades for their rentals on the back burner—leaving tenants to deal with the expensive aftermath.

With the PRS seemingly taking a step backwards on the journey to sustainability, is this just a bump in the road, or a sign of things to come? We set out to find the answer to this question, together with five industry experts, and highlight what is needed to get landlords to embrace and drive the green agenda [p28].

Although the government has chosen to take a more relaxed approach to sustainability in the PRS, specialist finance lenders are still here to provide finance to support landlords keen to continue upgrading their properties. We take a look at the latest green BTL products available in the market [p6], and talk exclusively with Redwood Bank about its recently launched green cashback offer and the reasons behind its creation [p10]. Plus, Leaders Romans Group’s director for property management shares some insights about why making rental homes more energy efficient is a wise investment [p40].

The road to sustainability will be long and hard for sure. However, with the climate change threat looming over the UK and the entire world, it is a journey that we must take—something many BTL industry experts agree on. How the PRS will eventually reach the sustainability panacea, only time will tell.

Andreea Dulgheru

Deputy Editor

03 |

contents

AUTUMN 2023

Products

The latest green BTL finance options

6

News

A new way of rewarding sustainability-conscious landlords

Interview

HTB gears up for its next phase

Insight

Time’s ticking for commercial landlords

Cover story

Is the BTL sector taking a break from sustainability?

Column

Why going green is a wise investment

Spotlight FP Show 2023

|4

28

BTL INSIDER

8

14

20

40

The only way that you’re going to incentivise landlords to upgrade their properties is if there’s some material gain for them. We have to link the value of properties to sustainability—if it’s at all possible” p28

44

5|

products

WINTER 2023

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• for landlords improving property EPC levels to C and above • available on Fleet’s five- and seven-year fixed-rate products (excluding green options) • £1,000 cash payment given directly if the property is upgraded during the initial fixed-rate period

|6

BTL INSIDER

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7|

news

WINTER 2023

Words by Andreea Dulgheru

Cash in hand for greener loans You might think lenders would be less eager to bring in green loans in the wake of EPC rule changes. But Redwood Bank doesn’t agree—and is offering an incentive to gain cashback on all of its BTL mortgages

|8

A

fter years of uncertainty, Rishi Sunak said at the end of September he was going to scrap plans to require rental homes to have a minimum C EPC rating before they could be let to new tenants. With this sudden change, some are expecting landlords to put the task of improving their properties’ energy efficiency on the back-burner—but not Redwood Bank.

Just a couple of weeks after the prime minister’s announcement, the specialist lender unveiled its Green Reward cashback offer to support landlords still keen to increase their rental homes’ energy efficiency.

The proposition is available across Redwood Bank’s entire BTL product range for residential, commercial and mixed-use properties. For any new loans completed on properties with an A-C EPC rating, the bank will give borrowers cashback for a certain percentage of the net loan value—0.2% for C-rated properties, 0.4% for B-rated ones and 0.5% for A-rated properties.

BTL INSIDER

This cashback offer applies to both landlords purchasing properties with an A-C rating and those undertaking upgrades to improve a building’s rating at the time of the loan application. “We’re a fairly flexible lender. If a customer says they have a property they want to mortgage with us and they’re undertaking some work to improve the EPC rating, they will qualify for the cashback if they can prove the property achieved an A-C rating before the deal is going to drawdown,” explains Tom Worbey, lending proposition manager at Redwood Bank.

“What we also wanted to do is make this available to [portfolio landlords] who have half of their properties rated A-C, as our data indicates that these customers are showing intent to bring all of them to that standard. For example, if you’re a client with 10 properties in a deal brought to Redwood Bank, and five of those have an A-C rating, you’d also qualify for the deal, with the cashback calculated based on whichever rating is more common,” Tom adds.

While it may seem a counterintuitive decision to launch a green product immediately after the prime minister scrapped the EPC plans, it is a calculated move, driven by demand from the borrowers who are still looking to increase their properties’ energy efficiency. According to Leon Marklew, the lender’s director of business development, the firm’s clients—which tend to be professional landlords for whom this is their business and livelihood—understand that upgrading their properties is important from not only an environmental but also a business point of view, as doing so could maintain long-term profit and boost a home’s value. “What landlords want is a tenant who can stay in place and pay their bills. They don’t want someone who has to pay out an astronomical amount on utility bills as that might cause problems with paying their rent,” he explains. In addition, Leon observes that tenants are increasingly looking for higher-rated properties because of the cost of living crisis.

The residential sector is responsible for 16% of total greenhouse gas emissions, so if we can help change this, it would be a significant contributor to a better future for the UK”

9|

news

WINTER 2023

This is providing something that has a tangible benefit for the customer. It’s putting money back in their pockets for doing that work to get to an A-C rating, and they can then use that reward to benefit their business as they see fit”

| 10

While some landlords have indeed slowed down plans to boost their rentals’ energy efficiency due to the scrapping of EPC requirements and the rising interest environment we’ve seen over the past two years—which has affected the affordability of BTL mortgages—Leon remarks that plenty of the bank’s clients are still considering making energyefficiency improvements to their portfolios.

“A number of them are really energy conscious, and they want us to continue to help them because they know this also helps reduce the UK’s carbon footprint— ultimately, it’s the right thing to do.”

The decision to provide cashback, as opposed to a discount on a loan’s interest rate or fees, was also an intentional, calculated one, based on customer research that Redwood Bank carried out while designing the offer. “The feedback we've got is that landlords would rather have a cash lump sum back than perhaps a discount on a margin. They can use that cash immediately to pay for the things that they need to do, whether minor or major,” says Leon. Tom concurs. “This is providing something that has a tangible benefit for the customer. It's putting money back in their pockets for doing that work to get to an A-C rating, and they can then use that reward to benefit their business as they see fit. For us, it was about getting out there to make a tangible difference to customers of ours.”

As the proposition is new, Redwood Bank is promoting it via its network of brokers and borrowers. However, despite the short amount of time the cashback proposition has been live, Leon and Tom

BTL INSIDER

report the business has already received plenty of enquiries for it. Tom believes around 30% of the new deals the lender is working on could qualify for the cashback offer.

They believe another of the main reasons behind this demand is the landlords’ desire to future-proof their portfolios. “By investing in property with a better EPC rating, you’re also protecting them in the long run from issues such as dampness,” says Tom. He adds that improving their portfolios could help landlords save money in the future, as he expects the cost of materials and insulation to continue to rise, so it is cheaper to upgrade a rental home now than later.

I ask the two what their lending targets are for the cashback offer, but Leon and Tom state the bank has no specific figures in mind currently, as their priority is helping landlords with their property improvements. “We haven't put specific targets on profitability or the amount that we lend—we just think this is the right thing to do,” says Leon.

Despite current market volatility, the cost of living crisis and the now-scrapped EPC rules, Redwood Bank is confident landlords will continue to boost the energy efficiency of their rentals, so expects its cashback product to be popular. “At the end of the day, this is a force for good,” says Tom. “It’s been delayed slightly, but the UK is still on its journey to net zero.

The residential sector is responsible for 16% of total greenhouse gas emissions so if we can help change this, it would be a significant contributor to a better future for the UK.”

A number of them are really energy conscious, and they want us to continue to help them because they know this also helps reduce the UK’s carbon footprint—ultimately, it’s the right thing to do”

11 |

advertorial

How will

a new government affect the

property market?

This isn’t surprising. A recent MFS survey found that 69% of UK adults see the housing crisis as one of the country’s most pressing social issues.

Clearly, how the property market is managed will be a decisive electoral battleground in the coming months.

As such, it’s vital that participants remain vigilant about the possible reforms that could be on the horizon.

Both Labour and the Conservatives have delivered what are likely to be their final conferences ahead of next year’s general election—and housing has dominated the headlines

Words by Paresh Raja CEO at Market Financial Solutions

| 12

BTL INSIDER

What needs to be prioritised?

What’s been proposed so far?

Investors: prepare for change

Whichever party wins the next election, there are major issues within the UK property market that the next government must address.

First is housing affordability. In the mid-1990s, average house prices were just four times the average wage. But, by last year, the average buyer could expect to spend around eight times their annual earnings to purchase a home.

The rising cost of borrowing has only exacerbated the situation.

Therefore, the next government must take a multifaceted approach to affordability—one that addresses not only the immediate market challenges but also the systemic factors that are contributing to the crisis.

For instance, tackling the perennial lack of supply of homes is of utmost importance.

Commentators from all backgrounds have been calling for more housebuilding for years now, which is why it was surprising to see the government drop its mandatory housebuilding targets at the end of 2022.

This threatens to exacerbate the imbalance between supply and demand.

While there will be a focus on the government’s approach to housebuilding over the coming years, converting or renovating derelict properties shouldn’t be overlooked.

In England alone, there may be as many as 676,000 homes just sitting empty. Any policies that bring these properties onto the market could help alleviate supplyside pressure. Planning reforms will be critical to this.

As an extension of this same theme, we are seeing demand for offices continuing to fall due to the rise of hybrid working. The planning system could be adapted to make it easier for investors to convert commercial units into residential properties.

Finally, whether it’s the recent scrapping of EPC regulations or the hikes in the Bank of England base rate, property stakeholders have faced an unprecedented amount of uncertainty in recent years. Therefore, any incoming government should prioritise stabilising the market. Having consistent policies in place would allow investors to plan with confidence.

While the Conservative conference was light on formal announcements, Michael Gove did confirm the Renters Reform Bill would get its second reading in parliament, which eventually passed without a vote. Billed as a huge shake-up of the PRS, it includes plans to abolish section 21 no-fault evictions and end fixed-term tenancies—which are likely to have the biggest impact on landlords.

Elsewhere in Manchester, there was recognition by the former housing minister Rachel Maclean that more homes had to be built. Clear indications were made that the planning system needed reform, which should encourage developers and landlords alike.

So too should be the rhetoric coming out of the Labour Party which, considering how ahead they are of the Conservatives in the polls, are looking likely to emerge victorious next year.

In a speech focusing on housing a great deal, Keir Starmer laid out his party’s plans to boost the stock of UK housing by reforming the planning system. He set out an ambitious goal of building 1.5 million homes over the next parliament if Labour were to win a majority.

Alongside tweaks to the Affordable Homes Programme, the party would look to strengthen section 106 agreements and reform to allow the private sector to get building.

However, as the party has not committed any additional funding to the housing sector in their initial plans, there are some concerns that the proposals will be difficult to put into practice. Meanwhile, shadow housing secretary Angela Rayner MP reiterated the party’s commitment to the already released Renters’ Charter. This charter— which would ban section 21 no-fault evictions—looks similar to the Tories’ Renters Reform Bill, but it has been criticised by some industry experts for being too harsh on landlords.

Whatever happens at the next general election, we can see that both parties have put forward reforms that could precipitate considerable change in the UK PRS. Property investors need to be prepared.

It’s vital to remain abreast of policies as they take shape and form part of the election manifestos. Furthermore, property investors will need to have the right finance in place to help them navigate the next parliament with confidence.

Regarding environmental rules, tenants’ rights, planning reforms or housebuilding targets, there will be both challenges and opportunities. Seizing opportunities in this complicated market will require access to flexible financial products from confident lenders.

Therefore, whether it is to assist landlords who are navigating new reforms, capitalising on emerging opportunities or simply maximising the potential of their portfolios, specialist lenders and intermediaries must work together to help investors secure capital that best matches their needs.

interview

WINTER 2023

Chris Daly

| 14

BTL INSIDER

GROWTH THROUGH SPECIALIST POWER Hampshire Trust Bank’s specialist mortgages division has expanded its team and boosted its proposition.

I talk to the department’s managing director Chris Daly and sales director Andrea Glasgow about why you need experts on board, plans for a one-stopfinance shop, and a culture of trying things out Words by Andreea Dulgheru

15 |

interview

WINTER 2023

“OUR MANTRA IS ALL ABOUT EXCELLENCE THROUGH SPECIALISM, AND THAT’S WHAT OUR BROKERS NEED FROM US”

| 16

ver the past five years, Hampshire Trust Bank’s (HTB) specialist mortgages division has grown significantly, having added multiple products and having welcomed several experts to its team. One of these is Chris Daly, who joined at the beginning of November 2022 as managing director of the department. “I’ve worked in specialist real estate lending for the past five or six years, and HTB was always the firm that I came up against in competition. The bank was always the one to get a deal quicker than me, was more competitively priced or had better relationships. So I thought, if you can’t beat them, join them! When I got the phone call about the role, I was really excited, as HTB is a brand that I really respect,” he recalls.

According to Chris, his appointment as managing director of the bank’s specialist mortgages division marks the next phase of the business’ growth plans. As part of that, HTB also brought in one of its veterans, Andrea Glasgow, to work with Chris as sales director.

As we talk about her recent promotion, Andrea’s excitement for her new role is very obvious. “I could really see the potential in the sales team, and also in what I could bring to the table. We are all about doing what’s right for the broker and looking after their clients. It’s really exciting—even with getting very little sleep,” she jokes.

On top of Andrea’s promotion, HTB’s specialist mortgages division welcomed several

BTL INSIDER

new people to the business, including Greg Barnard as head of broker support, Annie Crust as a BDM for the Midlands, Serena Grewal as a BDM for London, and Nicola Ledgard as head of portfolio management. “What we’ve got is a highly motivated, incredibly knowledgeable and well-connected sales team. They already get the nuances of HMOs, holiday lets or semi-commercial deals. Our mantra is all about excellence through specialism, and that’s what our brokers need from us,” elaborates Chris.

This recruitment drive aims to help the business maintain and improve its service levels, and deliver the finance its brokers and clients require. The team’s SLAs are 24 hours for most of its services, including issuing terms.

Meanwhile, its underwriting team aims to complete the tasks for each loan within four working days, as it handles complex BTL cases.

Chris and Andrea tell me these SLAs have been achieved since Q1 2023, despite the market volatility.

“Post mini-Budget, we had a backlog of cases but we worked incredibly hard to get through that and, by the time we came back to market at the beginning of this year, we had cleared it and we were able to offer fast turnaround times from day one,” Chris recalls.

Not only that, but the division also extended its DIP validity to 90 days, and continued giving a 24-hour notice period for any change to its products and interest rates, which was well received by its broker partners, particularly as intermediaries have been advocating for a mandatory notice period for a while now.

Andrea Glasgow

17 |

interview

WINTER 2023

“WE’VE TURNED EVERY BIT OF NEGATIVITY INTO A POSITIVE IN ORDER TO SUPPORT THE MARKET EVEN FURTHER”

| 18

MORE NICHE PRODUCTS It is not just the team that has had a refresh in 2023. Over the past 11 months, the division has brought out several new BTL products and proposition enhancements.

In January, the bank unveiled a new range of five-year fixed-rate residential and semi-commercial products with differing ERC profiles—the ERC Plus product offers a lower rate in exchange for an increase in the typical ERC, while the Lite product comes at a higher rate, but with HTB’s existing ERC profile. A few months later, the lender introduced new specialedition products and expanded its lending criteria to accept vulnerable tenant cases where properties are let for emergency housing, rehabilitation or social transition purposes, provided there is a credible professional management operator. In addition, the specialist mortgages division has entered the PBSA investment market, in a move to increase lending to residential-led landlords and investors.

According to Chris and Andrea, all these product enhancements were selected by the department following careful observation of the market state, and constant feedback obtained from intermediaries, which the team gathers religiously every month. “We launched the special-edition range on the remit that we could easily do it and, if the brokers don’t see the need for it, then we can choose to withdraw it.

When we went out, we got so much

feedback—we were reaching out to brokers to find out if they wanted this to be a permanent product suite and, when the answer was yes, we made it permanent,” Andrea elaborates.

“The other thing is speed.

There’s no point innovating something and delivering it in 12 months’ time—the borrower and broker need it now,” adds Chris.

The speed of product creation is something the division prides itself on—Andrea tells me HTB can create and execute a product in two working days. This is the mentality the team had when it launched the special-edition BTL products.

“That was a first stab at a higher fee product. We could’ve taken our time and got everything just perfect before we launched it, but we would have probably been too late and someone else would have done it first,” he elaborates.

BTL INSIDER

FREE TO TAKE RISKS The two experts believe a culture of innovation and being able to try something new without fear—even if it might fail— sets the lender apart from others. “I’ve never worked in a place that has such a culture of trying things out, learning and continuing to grow—and, if something doesn’t work out, no one’s coming after me or Andrea to ask why we’ve done that,” states Chris.

Andrea adds that this mentality was the division’s secret to overcoming the many obstacles met in recent months as a result of the macroeconomic factors impacting the BTL sector. “We could have waited for the market to improve but we chose not to, and we actually followed where the market was going. We’ve turned every bit of negativity into a positive in order to support the PRS even further,” she elaborates.

With all the pieces now in place, HTB’s specialist mortgages division is ready to take things to the next step, and it seems like the team is already working on this—while the two can’t reveal any specific figures, Andrea claims this year’s going to be one of the strongest the division has had so far. As for the next five years, she and Chris tell me the focus will be on further enhancing the bank’s BTL proposition. There is another, overarching goal for the entire bank—for each of its divisions to work together to offer

a one-stop shop to meet any clients’ requirements for specialist finance.

While there’s a lot of work ahead to meet these goals, both Chris and Andrea are excited by the division’s future and the journey ahead, and are confident the bank will go from strength to strength. “If we’ve got the right people with all the right tools, and throw Andrea’s energy into the mix, we have got absolutely everything we could need to succeed—we just have to get out there.”

“THERE’S NO POINT INNOVATING SOMETHING AND DELIVERING IT IN 12 MONTHS’ TIME— THE BORROWER AND BROKER NEED IT NOW”

19 |

insight

WINTER 2023

Seizing

the

moment for sustainable commercial lets

| 20

BTL INSIDER

Demand appears to exceed supply of green offices, driven by market sentiment and looming government targets. Amid metrics that make sustainability hard to measure, how can landlords give tenants what they want and meet deadlines?

Words by Elliot Topham 21 |

insight

WINTER 2023

find “The ability to do contractors to ing the work is go the to get harder to closer you get use that date beca ome there will be s ke people who wa last up at the very alise minute and re 12 they only have this” months to do

| 22

s for nability target lthough sustai been ve ha ed homes domestic rent for se ca e is not th scrapped, this . gs in ild nted bu commercial re es on st ile ce m Green workpla e original th g on al remain the first EPC timeline, with t deadline on E requiremen is year, the C 1st April of th ents on the rating requirem and the 27 horizon for 20 C B by EP of eventual goal 2030. ady With ESG alre e th in embedded , ld or w corporate al ci er that comm it’s no surprise the ginning to heed be landlords are are d an s r workspace call for greene out ab e bl ea e knowledg becoming mor s tie er op mmercial pr how to make co ble. more sustaina n is conversatio “If we'd had th ve ha ld o, I think I wou eight years ag to w ho en ally knew th said nobody re it h uc m to B or how get from EPC E involve,” what it would would cost or K and U y, director of says Mat Oakle at ch mercial resear European com now s e' er er, I think th Savills. “Howev ce en ce and experi enough eviden and the e contracting out there in th real stries, and the consulting indu alise re hip universe to estate owners it ily expensive as it's not as scar emed.” might have se m, parent optimis Despite his ap ve that things ha Mat still feels ars ye of le up co a changed since d terest rates an ago, as rising in ad m e viability have development allenging. things more ch tions set for The EPC regula of the ts mean time is commercial le to lords looking essence for land ratch, erties up to sc bring their prop gs its ing to Mat, brin which, accord

own set of issu es—such as th e lack of sufficient cont racting capaci ty in the UK to carry ou t improvemen t works.

“The ability to find contractor s to do the work is going to get ha rder the closer you get to that date be cause there will be so me people who wake up at the very last minute an d realise they only have 12 months to do this,” he elaborates.

Time may inde ed be of the essence where landlords are concerned as , according to PwC, around 85% of UK office build ings are at risk of being unlettab le by the time the EP C B regulation is implemented in 2027.

The demand fo r London offic e space alone fa r outstrips the number of net-zero-car bon buildings in the pipeline, ac cording to JLL. The company’s rese arch shows th at between 2023 and 2026, ther e will be eight millio n sq ft of net-ze ro carbon offices in the pipeline— a far cry from what is needed to m eet the 19.2 million sq ft of demand fo r green office space ex pected betwee n now and 2030.

JLL’s 2023 Resp onsible Real Es tate Survey highlig hts that renter s are already priori tising carbon-c entred criteria when looking for thei r next lease. However , according to the firm, existing green leases ca n be stymied by atte mpts from lega l teams to avoid as muc h risk as possib le, and by broker s who want to see a deal pushed th rough, which of ten results in gree n leases being tick-box exercises.

Amid such rise s in demand an d carbon-based prioritisation, JLL has outlined what it calls Green Le asing 2.0, in which it calls for basic gr een leases to requ ire data on en er gy , waste and wat er to be shared .

BTL INSIDER

the obligations In addition to and tenants to on landlords a rbon output of reduce the ca ts— en ugh improvem property thro e to and from th such as travel the erials used in building, mat d rbishments, an building, refu een tion—JLL’s Gr waste genera strong ms to enlist a Leasing 2.0 ai een boration betw sense of colla d-party piers and thir owners, occu ent from managem stakeholders, cing, an eration and fin through to op capturing and as well as data sharing. rector g, executive di Sam Pickerin m y at Incendiu of sustainabilit ant st In e Th of part Consulting— ing sees data shar Group—also nts lords and tena between land ble ent of sustaina as a key elem inues t one that cont workspaces, ye to be elusive. tterns of floor He notes the pa piers nts. While occu usage by tena rent red across diffe are often scatte lves es find themse floors, or at tim ers, this with other rent sharing them rting lems over repo can cause prob ch as hen aspects, su energy data w uare portioned by sq electricity, are ice uded in a serv footage or incl charge. ent nge is the curr Another challe claims em, which Sam EPC rating syst ient. rate and ineffic is very inaccu ptions around assum “EPCs are built ing, not ance of a build on the perform u operate ormance. If yo its actual perf credit u don't get any it efficiently, yo in it's a moment around an EPC; but it's , ly al nu do it an time. You might use it standard beca not a very good

doesn't includ e performance metrics.

So I think regu lation is the lo w est common deno minator for m e.

It 's what you've go t to do; it's clas sic compliance,” he elaborates.

Sam believes th at real change will come from the way companies use their office sp aces as well as looking at ESG creden tials in their in ve stment decisions.

To do this, Ince ndium uses an energy mod elling system that assesses the facade an d the systems withi n the building, then adds in its co nsumption da ta , which is valid ated over a ye ar , in ranges from an nual to half-ho urly data. This is th en used to mod el scenarios, incl uding change s to chillers, light ing, glazing an d other factors.

The carbon an d cost savings are th en measured ag ainst the company ’s ESG targets an d the costs requ ired to meet th ose targets.

Use of space is also an area th at Incendium aim s to highlight to its clients. With offices now of ten operating with employees on ly present on cert ain days of the week, Sam highlight s that workspa ces tend to be poorly ut ilised. “For exam ple, if you start to co nsolidate whe re people can sit to the fir st two floors an d only use the lifts up to the second floor, these sorts of savings will be come significant,” he explains.

While regulati on may not seem to be a reliable indica tor of a building’ s carbon effic iency, EPC ratings st ill play a role in the market value which cannot be ignored. Acco rding to Mat , lenders

“The tenants who will go in those larger o ffice buildings will h ave their own net zero targets a nd ESG agendas, and they’re driving some of that improvement because they want to be ren ting sustainable properties to meet their own goa ls” 23 |

insight

WINTER 2023

’t “What you can d is do as a landlor here be in an area w e all that chang nd is happening a you choose to do nothing to your building— ’ll eventually, you find yourself probably left without any g tenants wantin ace, to rent the sp ster” which is a disa

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ng their to view meeti are still keen e lens of ets through th own ESG targ k most rating. “I thin a higher EPC lending ers are up for finance provid also e, because they into this spac so G champions, want to be ES eir th at g in ok e lo actually they'r ‘Well, s and saying, own loan book at we the lending th how much of e world as to make th did in 2023 w e?’ To -efficient plac a more carbon grade B ho's buying a a developer w grade A, turning it into building and .” that looks good iving ent may be dr im nt se t ke Mar er th stainability ra workplace su ment rn ve go of sures than the pres ad yl Norkett , he regulation. Dar at n io it os prop of real estate d Sam, nk, like Mat an Ba k oo Shawbr ve a nts already ha feels that tena own to meet their strong desire ss of EPC ents regardle ESG requirem reason ct , this is the ratings—in fa s k revamped it why Shawbroo ition os op pr e ortgag commercial m mand. this tenant de in response to ings that we “One of the th rger, lending for la brought in was gs. We office buildin higher-value that's inimum of C— now want a m er based, but rath not regulation ve lie be e w at fact th driven by the in go y el lik ho will the tenants w are fice buildings of er those larg their ve ha 'll e. They more corporat G targets and ES own net zero some g in iv dr they're agendas, and e they ement becaus of that improv e bl na ai st nting su want to be re goals.” n ow r ei meet th properties to s one of his Daryl believe is s as a lender important role and ip sh er ght lead providing thou ally ci pe es — the field education in s— er ok with br when working ive access to ns te through ex

resources such as market repo rts, and helping th ose intermed iaries place the issu e higher up th e agenda, while , in turn facilit ating the conversati ons with land lo rds.

“I think what you can't do as a landlord is be in an area where all that change is happening and you choose to do nothing to your building—even tually, you'll fin d yourself left w ithout any tena nts wanting to re nt the space, which is a disaster,” Dar yl elaborates.

Despite his vi ew that the commercial re al estate marke t is still in its in fancy when it comes to sust ainability, and while various comm ercial spaces will take different types and leve ls of adaptation— as he claims re tail spaces are be ing driven mor e by legislation th an tenant dem and— Daryl believe s the office sp ace is already in the midst of chan ge: “I think the futu re is already he re for offices. It's al ready import ant.” And landlords who don’t look ah ead may face a bumpy road down th e line. +

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GREEN HOMES The writing’s on the wall

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With proposed EPC rules now put aside, will landlords still be motivated to make their homes energy efficient, and how will lenders influence this?

Words by Andreea Dulgheru

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F

or years, landlords have been waiting with bated breath to see if the proposed minimum energy efficiency standards—requiring all rental homes to have a minimum C EPC rating—would come into force.

Then, in September, prime minister Rishi Sunak put them on the backburner. Has the industry welcomed this decision, and where does this leave the PRS in the UK’s journey towards sustainability and net zero?

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Several industry experts—Louisa Sedgwick, commercial director at Paragon Bank; Helen McKinney, head of sales (south) at Landbay; Shelley Walker, director at The Mortgage Mum Specialist Finance; Daryl Norkett, head of real estate proposition at Shawbrook Bank; and Roger Morris, director of mortgage division sales and distribution at Tandem Bank—weigh in on where the PRS stands when it comes to sustainability, and what is needed to get landlords to embrace and drive the green agenda.

Andreea Dulgheru: Rishi Sunak recently announced proposed EPC rules for the PRS were to be scrapped.

From your discussions with landlords, and as landlords yourselves, how has this decision been received in the market in general?

Louisa Sedgwick: My take on this is that it’s a delay, not a long-term decision.

Ultimately, if we have a change of government next year, this is going to be firmly on the top of their agenda. So I suspect that all this has done is just kick the can down the road for maybe six months or probably longer—it’s just a postponement of the inevitable. If you look at the PRS, which actually forms 19% of all households, 56% of that PRS has an EPC of D or worse. So that percentage needs to be upgraded at some point and, even if we’d have kickstarted the legislation in 2025— as was originally talked about—they’d still have to upgrade more than 4,000 properties per day. I think all this decision has done is exacerbate the problem because, ultimately, I do think we’ll have to conform in some way. Otherwise, we’re never going to hit that long-term goal that the government has suggested. As far as landlords are concerned, we’ve actually seen an uptick in the number of landlords who are now looking to buy D- and E-rated properties who were maybe not looking to do that perhaps before Rishi’s announcement.

Daryl Norkett: I think that kicking the can down the road is correct. However, I also think that it’s welcome for most landlords at the moment because they’re dealing with a barrage of change and intense interest rate volatility, and all of their business models need to be able to adjust and change to the evolving dynamics of where we are today. I think for them, anything that gives them more time to make some of these structural changes is very welcome. So I think the market received the news positively, but I think most landlords will still understand that, in the long term, improving EPCs is going to be an important part of being in property.

Helen McKinney: We ran a survey of some of our landlords, and 73% said that they were quite happy with the decision, but 27% felt that landlords had a duty of care to provide better properties for their tenants. Post announcement, of those landlords surveyed, 60% said that they still anticipated making changes quite rapidly to their properties, but to what extent is the question. So there’s still that desire to keep pushing forward with some improvements. I think, like Louisa says, it’s probably a delay at this point; for how long, it remains to be seen, but landlords are still keen to invest in some improvements—it’ll come down to the cost of funding ultimately.

The EPC system is probably not fit for purpose but, given what we have, it just needs some adaptations to give us a better outcome

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Technology moves on at such a rapid pace now. You can’t have a 20-yearold document that dictates what good and bad look like

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Shelley Walker: Absolutely. I’m finding the same, really. My landlords said this decision takes the pressure off, but they suspect they’ll still have to do that work at some stage. So it was seen as a welcome move.

Some people have been quite cynical about it, claiming this is just a government move to get more votes but, overall, people know they need to make changes. I don’t have slum landlords on my books—they tend to be ethical landlords who want to provide good-quality homes for their tenants. The majority of them are still pressing on with plans but they are relieved that, faced with all the interest rate rises and other market challenges we’ve got right now, they don’t have to expedite plans to meet the deadline.

legislation that would cause evictions. If the government was prepared to give landlords a tax break so that any energy efficiency improvements would be tax deductible, then you would have a different outcome.

The letting agents I deal with, specifically in the North, are seeing landlords sell as they expect the legislation to come in. What I’m now doing is buying new-build properties, which are providing safe, warm and sustainable accommodation, but the rent cost for those houses is significantly higher than that for a Victorian property. Overall, there’s a lot of weighing up of what you’ve got to do, but forcing a Victorian property to become airtight, how we actually legislate for this and the unintended consequences are what concern me.

Roger Morris: I didn’t believe it was ever possible for any government to introduce this piece of legislation. For one, the upcoming SAP 11 review will not come into effect until 2025—once that report is issued, it will determine how you calculate an EPC for a property that was structurally designed to breathe. Take a Victorian property for example—if you legislate for that not to breathe, how do you then counter black mould, damp and condensation? That’s the first challenge if the government is to introduce a piece of legislation to do it. I fundamentally agree that landlords should provide safe, affordable and well-heated properties but the Building Back Britain report says it’s not cost-effective to improve the energy efficiency of any property worth less than £162,000. I have a substantial amount of £100,000 Victorian properties in the North East of England and, for those homes to get to a C rating, it’d cost £30,000–£60,000.

Plus, if that legislation came in, I’d have to ask families to leave their homes because I’d no longer be able to rent them legally— meaning we would be bringing in a piece of

RG: Yes. It is currently getting one. The SAP calculations of what you do for any form of energy efficiency work against the age and construction of that property. The actual expenditure costs of doing a PAS 2035 retrofit come from the financial costs of 2002—the world has changed dramatically since then, technology has moved on and there have been innovations and new ideas. But it’s also about understanding how we counter damp, mould and all those issues of making that property airtight and whether or not you’re better off redressing it through other factors or having a different allowance for Victorian properties. We should also look at the geographical location. Take my portfolio in Teesside, particularly Hartlepool—this is one of the most carbon-efficient areas. It’s got four of the world’s largest wind farms and a nuclear power station, and it’s one of the few producers of hydrogen in Europe.

So you could argue that certain regions could be given allowances just because of their geographical location and where their energy is sourced.

AD: Roger, as a landlord yourself, how do you feel about this decision?

AD: So would you say the EPC rating system needs an overhaul before this type of legislation comes in?

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LS: The problem with EPCs is that they’re out of date, so they don’t take into account that the cost of electricity may well be different from what it was when they did the original EPC. Things change dramatically within a relatively short period of time. There are some other factors that we should be taking into account alongside EPCs. As much as we’d probably all like to scrap them and start all over again, to actually launch a brand new system—whatever that might well be—is going to take time and effort. Plus, to educate people to take that on board is massive, and you’ve absolutely no chance whatsoever of it hitting a 2050 deadline if we start messing about with what we’ve got today. The EPC system is probably not fit for purpose but, given what we have, it just needs some adaptations to give us a better outcome. As Roger said, there are lots of things going on in the background that are going to help to support that. So I’m not sure that we need to go and rewrite the whole script on EPCs, but I do think some changes need to be made.

RM: The EPCs were created purely and simply as a by-product to speed up the buying process; they were an add-on for us to try to become like Scotland. We did a full PAS 2035 retrofit in Hartlepool, and the immediate problems—which we knew we’d have—are, if you’ve ever put double glazing in a Victorian house, the big things all the tenants complain of are damp, mould and condensation. The only way to deal with those is to put proper extraction systems in every single room of the house. So, if you’re watching TV, and above your head is a big extraction system making a load of noise, then you won’t want to live in the house because of that. The other, really sad factor is that if I put a highly rated, energy-efficient property on the market, like one of my newbuilds, the tenants will pay £300 or £400 a month more—at least in the Midlands and the North East—than for a Victorian D-rated property; so, ultimately, there are fewer and fewer properties available. Typically, 25 families are applying for one of my properties at the moment, and it’s so sad to see the desperation in trying to provide a permanent base where their family can grow up and the children to go to school.

AD: When it comes to adjusting the EPC rating system, what would make it more accurate?

DN: The place to start [is to revise] what is and isn’t included. Even on new builds, we had a client who funded a development who put infrared heating in every room in his flats in London. But, when it came to getting the EPC ratings, this didn’t appear on the SAP scoring anywhere, so it didn’t help him overall. Technology moves on at such a rapid pace now. You can’t have a 20-year-old document that dictates what good and bad look like and, going forward, once we’ve done an update, you can’t wait another 20 years either. There needs to be a live, more engaging process, as technology comes into it to provide solutions to some of these problems that may not exist now, but I’m sure will be invented as the future comes around.

RM: That’s a great point, Daryl. I put in a microwave boiler in one of my houses. It’s carbon neutral but it made the EPC a lot worse because it doesn’t have a SAP rating.

AD: Based on the points raised so far, do you feel like this whole legislation was a bit rushed?

LS: I think we’ve actually fluffed about, to be perfectly honest. If you look at the base consultation, that went back over two years before they actually reached the point of saying they were not going to do the EPC legislation. I think that we sat on our hands, waiting for things to happen as a government and, potentially, as an industry because, in my opinion, there’s a lack of leadership. If you’ve got your housing minister flipping over every few months, then they’re not going to drive a particular direction of travel.

The government needs somebody to get behind it and kickstart whatever effort needs to go in. So, overall, I don't think we’ve rushed into anything—in fact, the complete opposite in my opinion. Other people might think differently, but we do seem to sit on our hands.

If you’ve got your housing minister flipping over every few months, then they’re not going to drive a particular direction of travel.

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People don’t want to invest in this market at the moment for fear of negative change

DN: Yes, I totally agree, and the lack of certainty—thinking of the length of time that that document stayed as a white paper before being moved through parliament—is really unhelpful because landlords need certainty. They need to be able to build a plan, figure out how to fund it and, potentially, reconfigure portfolios if that’s what it means for certain assets.

And all the time that they haven’t got that certainty, we’re leaving them out there, probably taking no action when they would otherwise be doing something to improve stock.

HM: I think whenever there’s guidance as opposed to a rule, it creates ambiguity, and then everybody tends to dawdle at their own pace. And ultimately, landlords are going to ask “What’s in it for me?” In 2018, when the Minimum Energy Efficiency Standards came in, the cost of funding was a lot lower, which meant they had more resources to be able to facilitate change, but now they’re just seeing high costs. Plus, I don't think there’s a lot of data around on whether tenants are more likely to stay if you have an A-C rated property. So I think landlords are questioning if it is worth it for them.

AD: Are landlords still carrying on energy efficiency upgrades to their properties, regardless of these rules being scrapped for now? Or are they leaving it until there’s more clarity around this?

HM: Our survey said that 60% were. I think we’ve got a fairly recent reminder with Covid-19—everybody wanted to build extensions and do general maintenance to their properties, and the cost of materials went up and there wasn’t as much labour available. That still sticks in the forefront of people’s minds so, if landlords think that this legislation is looming and that it will happen, then there will be that desire to get in before we recreate that cycle of chaos

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again. So people are trying to do it bit by bit but, as we’ve said, for as long as there are no rules and there’s ambiguity to it all, then it will delay the extent to which they do it.

LS: It’s interesting Helen, because we’ve done some similar research with our landlords and, not too dissimilar to your study, 41% of them said that they hadn’t taken any action, and I can’t imagine that that’s going to go down in any way. So 41% said they’d taken no action, and then 35% stated they’re going to wait for the government to decide what they need to do—so waiting to be forced into taking any action is how I’d read that. In answer to that question, I can’t see any landlords suddenly saying, “Oh, now that Rishi has decided that we don’t need to do it, I’m going to do it anyway”—it doesn’t feel like that. Sometimes they like to go against what the government has to say but I think, in this particular instance, it’s unlikely.

SW: I think the concern is, what if they do some repairs and renovations, and then the goalposts move? Even with the best-laid plans, you can only do what you know at that time. People don’t want to invest in this market at the moment for fear of negative change, effectively. So, if the ratings or the criteria change and they’ve paid out all the money and then still not met the new requirements, that’s going to be a big problem, isn’t it?

RM: Shelley, that’s an absolutely amazing point, and it was stated by the government during the consultation that landlords should not do any energy improvements until April this year, because it won’t count against your exemption. Yes, landlords should put in double glazing, replace combi boilers and use energy-efficient light bulbs because they’re all tax deductible and also why wouldn’t you, if you could get the tax break for it to improve the property and its value, and for your tenants? They’ll carry on doing that. So you’ve got to be

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very careful differentiating between what’s classed as a tax-deductible repair and a PAS 2035 retrofit, which is not tax deductible.

Also, if the SAP 11 calculation changes in 2025, as Shelley said, you may have done a load of work and later on find that there were other things you could have done cheaper to get a better outcome. Until the government actually makes it clear how we’re going to measure the energy efficiency of our homes—which isn’t until 2025—you shouldn’t do anything, unless it’s a logical expenditure for the older Victorian houses, which pose the biggest challenge. It’s a bit like as Louisa says, we’ve fluffed about with this for a long time. If we’d have got ourselves organised when Boris Johnson was making the commitment in 2019, we’d be there already. But I think you need that certainty, particularly at a time where landlords are making less profit than before.

SW: I think that, with the current EPC being so static as well, you just get a rating and then nothing else for 10 years, then you’ve got to do it again unless you’re selling the property—it just doesn’t feel right. We’re in a modern age, things need to be much more interactive than this, don’t they? The whole world needs more energy-efficient properties, but we need to have our finger on the pulse with this because at the moment, it’s very much a tick-box exercise.

Are we going to remortgage or sell? Tick, great, we get the EPC done and whack it in the cupboard until 10 years later.

RM: We did energy efficiency improvements in 10 houses, and we could prove the expenditure. Seven out of those 10 properties got a worse reading because the original inspectors nine years ago— who were paid £20—just assumed that a 1904 Victorian property would have wall cavities, even though they were never designed to have a wall cavity. You could spend a load of money on your property and actually find out it’s got a lower EPC because of the work carried out by the original EPC inspectors. Somebody paid £20 might not be that concerned with getting the report correct.

DN: It’s interesting to hear your survey results, Louisa and Helen, because ours was pretty much the same. We had 46% of landlords who had spent money improving the property so far—about half said they had plans to be EPC compliant by 2025 but, obviously, there’s a half that isn’t.

There are some landlords who maybe need a bit of the stick to be forced to make improvements to properties, and the stick’s just been taken away. At the same time, there’s the carrot half of that equation, and there are some property strategies that fit quite nicely with refurbishment to improve EPCs, or just for environmentally minded landlords who realise that climate change isn’t going away. Legislation will come and go and the focus will change but, at the end of the day, climate change is going to be the common theme. Therefore, we’ll just take action on the back of that; it’s about encouraging those landlords and providing options to them to keep on doing what they want to do, while also acknowledging there’s always going to be a significant portion who need rules to change before they’re going to take action.

The whole world needs more energy-efficient properties, but we need to have our finger on the pulse with this because at the moment, it’s very much a tick-box exercise

LS: A big challenge is the supply/demand mismatch as well, because you’ve got tenants who actually want better, more sustainable properties—whether that’s because they’ve got an eye on the green agenda or because of the cost of living crisis. But when you’ve got 25 people, like Roger said, queueing up for one property, there’s no incentive within the landlord community to want to upgrade those properties. So, until you resolve that mismatch around supply/demand, which is clearly a massive long-term issue, I’m not entirely sure that the tenant demand is going to drive the outcome that we’re looking for.

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When you’ve got 25 people queueing up for one property, there’s no incentive within the landlord community to want to upgrade those properties.

Until you resolve that mismatch around supply/ demand, I’m not entirely sure the tenant demand is going to drive the outcome that we’re looking for | 34

AD: You’ve actually anticipated my question, which is around tenant demand. Are they actually looking for greener properties to counteract high utility costs? Or are they pushing sustainability aside because there’s so much competition to get a place to live?

LS: I think it’s on the ‘nice to have’ list.

All these other factors come in: is it near a school, does it house my whole family, can I bring my dog? And then, probably in seventh or eighth place, comes how much it costs to heat the home or if it ticks any of the green boxes. And because of that mismatch in supply/demand, I don’t think that will change.

SW: I’ve got a few properties that I rent out, and I don’t think it’s even on the list for renters. My tenants are on housing benefit, and I’m quite happy to give them that leg up that they need to get into a property.

They’re so desperate for somewhere and so grateful that you’ve been willing to accept their family that they would sign anything. And I would want to be an ethical landlord and provide them the best I can but, obviously, I have to have an eye on the bottom line as well.

RM: You see surveys that say 100 tenants were asked if they would like to live in a more energy-efficient home and pay out less [for utilities], and they come back unanimously that they would. But if you’d ask those tenants if they would like to not pay tax and national insurance, they’d also say yes. It’s a ridiculous question.

The biggest single thing a tenant will ask me when renting a new property is how long they can stay there. We just never get tenants moving out now; they just stay because there are very limited places to go.

HM: It is a challenge because, for as long as there’s a supply and demand issue in the PRS, that’s going to come to the forefront before the green issues do. The last rental I left, there were 25 people a day wanting to look around it, and I said to the landlord: “Do you know you’re going

to have to improve your energy efficiency?

It’s blowing a gale through here.” And his response was: “I don’t need to. Someone will take it regardless.” So, for as long as that’s somebody’s mindset, this is the challenge we will continue to have. If the demand is there for a property and there are no rules to suggest what they have to do, landlords will just put this on the backburner.

LS: The underlying challenges are around the tax implications for landlords. If it’s not a profitable venture, why would they? If there are tax incentives for them to grow their portfolio, then naturally they will, which will then help with the demandsupply mismatch. I think the structure of the PRS needs underpinning with some incentives to allow landlords to grow and continue to develop. It just feels like every time we turn around, there is another challenge that landlords have to overcome, and I think we’ve got fewer of them being able to deal with some of those.

DN: Yes, I totally agree with that. I think a more thriving BTL market will introduce the competition that you need to improve standards, driven by their customers.

At the moment, the tenant doesn’t have any power because of the supply and demand mismatch. There have been five or six years of sustained challenges, some manufactured for landlords around tax and legislation, but others are a consequence of the market. The Bank of England base rate hasn’t gone up to make landlords’ lives more difficult, but the impact of higher interest rates is bigger on a property business compared to [how it is for] manufacturing or retail firms where debt is a reasonably small part of their P&L. I do think we just need a bit of impetus to make BTL more profitable for all types of landlords again, and that will help with the supply issues.

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AD: You mentioned having some incentives to drive this green agenda in the BTL sector. What could those look like?

LS: So, I think this is all related to tax and tax breaks. There are some grant schemes available to landlords as well as owneroccupiers, which is good. But for me, the only way that you’re going to incentivise landlords to upgrade their properties is if there’s some material gain for them.

We have to link the value of properties to sustainability—if it’s at all possible—and the amount that they can rent them for, and then give landlords some sort of tax rebate breaks, whatever they need to look like.

Ideally, you’d go back to how they used to be taxed, but that’s not going to happen.

But I think, in some way, they need to be incentivised beyond what’s available to them at the minute.

DN: Yes, I think grants are particularly ineffective because people just don’t realise what’s available. Too often, the rules are very complex, and it’s not always clear how to apply for them, how to get the money upfront, how to claim the cost back etc.

All these issues with grants mean that the impact’s always very much watered down from the kind of theoretical peak of what they could do down to what they actually do on the ground. It’s just too complex.

AD: Currently, there are many green BTL products offering discounts for higher EPC-rated properties.

Are there any other options that lenders could introduce to encourage landlords to upgrade their properties?

LS: Yes—I’d be amazed if everybody wasn’t working on some form of green product that’s a little bit more innovative than just giving 10 basis points’ reduction. I would expect that, among everybody here, we’re probably all beavering away on something in the background. There’ll be lots of other things to try to drive it forward. I think that Rishi’s decision to kick this into the long grass has probably given us all a little bit of time to really think about what we want to enhance and to launch. Otherwise,

I suspect, if that had been signed off, we’d have seen a plethora of really good innovative products. So it’s probably a when, not if.

RM: Just to be clear, if you’re able to get a reduction on your rate because of your current EPC rating, that’s not green. You’re not doing anything to reduce energy expenditure, it’s just rewarding compliance with building regulations. For lenders that are trying to do the right thing, it’s not an easy journey to be able to quantify what the baseline is now and how that product will encourage energy efficiency. It’s quite a challenge for the lenders because it’s such a bad system that is so inaccurate.

AD: Are these current products that encourage landlords to either buy or improve their properties actually profitable from a lender’s point of view?

DN: The cost of funds is the same—so if you’re giving fee or interest rate income away, you’re making less money as a lender. Fee discounts are a pretty blunt tool, to be honest. But it’s about having a book of BTL loans on properties that look future-proofed. Whether it’s EPC or something else, climate change isn’t going anywhere, and what you don’t want to do, as a lender, is build a balance sheet full of properties that have got no hope of being sustainable or energy efficient or will be at the bottom of the market forever. So there is a commercial incentive in trying to have some balance on your lending book and encouraging landlords with more modernised properties to take mortgages with you because, ultimately, those guys will have less challenge in the future in adapting to changes in regulation than others.

I’d be amazed if everybody wasn’t working on some form of green product that’s a little bit more innovative than just giving a 10 bps reduction

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It’s impossible to say every property’s going to be EPC C by a certain date, but I do think the quality of stock is improving

AD: As lenders look to add more energy-efficient properties to their books, will this push landlords to look more carefully at retrofitting and property improvements, so they can get finance later on in the future?

LS: No, I don't think that there’s a correlation, and I don't think the landlords will even see it. Of the landlords we surveyed, only 14% of them suggested they would borrow additional money to make those improvements. They’re relying on lenders for the original mortgage advance but not to support any improvements—45% of our landlords said they would just use their own savings.

I think we probably all have really good solutions available, even if it’s just a further advance to help support what they want to do, but they’re not crying out for them.

DN: Yes, I think it’s about the broader role that lenders play within the whole conversation, really, beyond just products.

The education part is really important but, at the end of the day, all of this will be driven by the landlords and the law, because, if the new EPC rules come in and you can’t let anything below that, clearly, that’s going to be a big problem for any landlord who’s got a D- or E-rated dwelling, and they’re probably going to sell or whatever it might be, or repurpose.

I think the role we’ll play is just around encouraging the conversation, providing some education and insight.

AD: Based on what we’ve discussed so far, how long do you think it will take for the PRS and landlords to truly embrace sustainability?

LS: It’s a bit of a finger in the air job, isn’t it?

SW: Yes—how long is a piece of string? I think we talk about landlords like they’re one body. At the end of the day, you’ve got hundreds of individual people here, with different appetites for different outcomes.

So this is a challenging question to answer.

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DN: I think that property generally moves slowly in lots of ways, and I think this might be one of these cases as well. But I think the market, overall, is improving and, whatever rules come around, landlords have to adapt, adjust and comply. But in the interim, all these little steps forward that people are taking are making a difference, and they are contributing to the overall climate change debate, which isn’t going anywhere. So it’s impossible to say every property’s going to be EPC C by a certain date, but I do think the quality of stock is improving.

LS: Yes, I think it is a positive direction of travel but also, if we do have a change of government next year, it’ll very quickly legislate towards improving the sustainability of properties, and it will impact the PRS undoubtedly. So, I think you’re right, Daryl, the direction of travel is a really positive one.

How long that journey takes will depend on whether or not we get some sort of clear direction from the government and improve education—I think those are going to be the things that’ll speed things up.

RM: I think, by 2030, the vast majority of D- and E-rated BTLs will no longer be there. Because they will not be making a profit on these properties, those landlords will be selling off in droves. So I think what you’ll find is, by the time a Labour or Conservative government brings this regulation in, these landlords will have voluntarily sold off and either exited the market or bought new-build properties. I think we are going to see the PRS change now, regardless of legislation, just because the writing’s on the wall.

HM: Yes, I agree with what everyone’s said. I think we’ve started the journey, and we can only influence what’s within our control. At Landbay, we’ve got a very strong ESG group, and it’s very much at the forefront of our mind. There are a lot of moving parts to this, and we’re reliant on many people jumping on board and understanding the full process and how we measure and do things. So I think, as everybody continues to make those baby steps forward, hopefully we’ll collectively get to where we need to be.

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WINTER 2023

landlords Why making Many may rejoice homes at the latest news regarding sustainable energy is a wise efficiency for domestic rental investment properties— however, property investors that stick to their plans and continue to improve their BTL dwellings will likely be rewarded in the long run

Words by Kim Lidbury, group director (property management) at Leaders Romans Group

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BTL INSIDER

D

espite Rishi Sunak’s decision to drop the proposed minimum EPC ratings for rental homes bringing much respite for landlords, it is important to realise that this may only be temporary: whatever the outcome of the next general election, there is a strong likelihood that the Minimum Energy Efficiency Standards (MEES) or something similar will reappear.

Furthermore, energy efficiency is increasingly becoming a necessity due to both the cost of living and the climate emergency. We know from our own research that it’s something our clients take very seriously, whether they’re buying, selling, letting or renting.

According to our recent survey, almost three-quarters (70%) of respondents nationwide would like their property to be more eco-friendly. More than half (56%) agreed they would specifically seek out a property with these qualities, while twothirds (66%) revealed they would choose a property with eco-friendly features to buy or rent over one without.

Although landlords may welcome the opportunity not to spend on substantial work while mortgage rates remain high, in many cases it will be prudent to take the long view. Any work carried out now will help you stay compliant with future regulations, as well as reduce your carbon footprint and provide a more energy-efficient home, which could attract a higher rent.

A survey by Green Building Renewables revealed that fewer than half (43%) of landlords were prepared for the

introduction of MEES, and highlighted the changes being considered by landlords. In order of preference, these included new boilers (37%), insulation (36%), solar panels (29%), LED lighting (29%) and heat pumps (23%).

The number of options available, along with the knowledge that accompanies them, is constantly growing—did you know, for example, that there are at least eight types of heat pumps available for use in houses: air source, air to air, cascaded, exhaust air, ground source, hybrid, solar assisted and water source?

The Energy Savings Trust provides useful information on the various means of achieving energy efficiency, with information tailored to size and type of a property. It advises, in relation to a range of potential improvements, what a typical installation would cost, how much could be saved annually in energy bills and how many kilograms of carbon dioxide emissions could be saved for various types of BTL properties.

The relative benefits of the options available—which include cavity wall insulation, double-glazed windows or energy-efficient doors, draught-proofing gaps and cracks, energy-efficient boilers, LED light bulbs, loft insulation, smart meters, solar panels and solid wall insulation—depend on technical matters, such as wall types and planning restrictions (like the building being in conservation area or the property being listed), your reasons for making the change, your budget and whether you intend to carry out the work yourself or use a professional.

As the National Residential Landlords Association said shortly after Sunak’s U-turn, with energy use in residential properties accounting for around one-fifth of UK carbon emissions, the PRS has an important role to play in reaching net zero.

Making the changes can be financially prudent: Legal & General research shows that 13% of renters are willing to pay a premium for a low-carbon property, allowing landlords to recoup the costs.

There is evidence, too, that investing in energy efficiency is a wise decision.

According to property investment consultancy BuyAssociation, more than half of portfolio landlords use EPC ratings as an investment tool, buying homes rated D or lower, and using the EPC structure to determine the necessary renovations to generate a higher resale or rental price. The figure is higher among those with the most buildings, decreasing in line with the number of properties owned. It is substantiated by research from Hamptons in 2022, which found that property investment trends are leaning towards more energy-efficient buildings, with 50% of investors buying properties rated A-C, up from 39% in 2021 and 33% in 2020. Similarly, green mortgages can be an astute financial choice because of their preferential rates.

Whether you wish to put additional investment into your portfolio, gain a higher monthly income, help your tenants or support aspirations to achieve net zero, increasing the energy efficiency of a property is undoubtedly of value.

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spotlight On 10th November, thousands of specialist finance experts gathered to attend this year’s Finance Professional Show at Olympia London. Surrounded by exhibitors’ creative stands—which featured an array of exciting and original games, food and merchandise to attract more visitors—the place was buzzing with chatter from colleagues catching up, industry experts making new connections, and brokers and lenders placing deals left and right. We take a look at some moments from the successful event and highlight the key lessons learnt during the event’s BTL Live Criteria Clinic, chaired by Knowledge Bank’s founder and CEO Nicola Firth.

Words by Andreea Dulgheru Photography by Alexander Chai

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spotlight

What have we learnt?

Knowledge Bank’s Live Criteria Clinic on BTL mortgages brought together Andrea Glasgow, sales director for specialist mortgages at Hampshire Trust Bank (HTB); Caroline Mirakian, sales and marketing director at United Trust Bank (UTB); Zahira Fayyaz, regional sales manager at Market Financial Solutions (MFS); Alan Kimber, head of sales at OSB Group; Shane Wallace, BDM at LendInvest; Daryl Norkett, head of real estate proposition at Shawbrook Bank; and Liz Syms, CEO at Connect for Intermediaries, to talk about the current state of the BTL finance market.

During the discussion, the panellists highlighted the rise of the professional landlord, confirming that many of their BTL mortgage clients are either looking to, or have already incorporated their properties into limited companies.

The experts also revealed that semicommercial dwellings remain attractive for landlords looking to enhance their portfolios, as these types of units are more profitable even in the current volatile market.

The Live Criteria Clinic also brought to light the issues surrounding the social rental sector. According to Daryl, there are many factors impacting the outlook for the social rented sector—from rental inflation to a massive supply and demand imbalance. As landlords tend to gravitate towards tenants with stable incomes that can pay the most rent, those that do not meet the bar are likely to be left behind. When asked about the future of this particular sector, Daryl said these issues will likely remain in the near future, as he did not predict an increase in social rental housing supply.

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