There are two kinds of landlord. Those who survive on a hand-to-mouth basis, living in dread of missed rental payments or the roof springing a leak. Then there’s the other kind - those who plan ahead, budgeting for the occasional rental void and periodic maintenance work. But to be really successful at managing a portfolio of investment properties you need to be constantly scanning the horizon for new opportunities. And right now, some of the biggest opportunities are linked to energy efficiency. On face value, this may not be a subject that sets pulses racing. But look a little deeper and you’ll see that landlords who adopt a head-in-the-sand attitude could be seriously risk losing out.
But the big question is this: why should investors in residential property take much of an interest in energy efficiency and home insulation? The answer was neatly summed up in a recent article by The Sunday Times. In their review of the newly published Haynes Home Insulation Manual they made the point that “this is a subject who’s time has come”. This had the almost instantaneous effect of propelling the book to an amazing No 5 in the Amazon UK book charts – ahead of regular bestsellers like Jamie Oliver’s 30 Minute Meals and The Fast Diet Recipe Book. The clue to such unprecedented popularity for a Haynes Manual can be gleaned from the book’s subtitle: ‘How to cut energy bills and make your home warm and comfortable’, something that for many people the recent spell of arctic weather brought sharply into focus. For savvy landlords, this is a subject that comes laden with meaty financial incentives for those who are ready to snap them up – but there’s also a distinct risk of penalties for those who lag behind.
Earning a decent livelihood as a residential landlord is about to get a whole lot harder. Increasingly, properties will need to meet minimum EPC ratings to qualify for various types of funding - for example you currently need at least a ‘D’ rating to get the highest Feed In Tariff payments with solar PV installations. It has even been mooted that Council Tax charges could in future be reduced for homes with better EPC ratings.
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You need to be especially aware of energy efficiency issues if you’re managing a portfolio of investment properties because from 2016 landlords will be legally obliged to give consent where tenants request energy efficiency improvements to their properties. And from 2018, it will be unlawful to rent out any property scoring lower than an EPC rating of ‘E’. In subsequent years these targets are likely to become ever more challenging. It will be a case of comply, or wave goodbye to grants and funding – and get stung with higher property taxes. Don’t be surprised if, in a few years’ time, Domestic Energy Assessors will be employed to point thermal imaging camera at let properties, with warnings and penalties directed at owners of buildings shown to be leaking heat (the colours that signify serious heat loss are whites, yellows, oranges and reds).
There are already a number of areas where your property’s energy performance is taken into account by the authorities. For example if you apply for planning consent to extend or convert a property, demonstrating that your proposals would boosting the whole building’s thermal efficiency would help your application be regarded favourably. Perhaps more significantly, the Building Regulations currently require that where you’re carrying out work to renovate part of your property’s thermal envelope (ie its walls, roofs or floors) you are legally required to upgrade it as part of the job so it meets minimum insulation standards. For example if you need to replace an old felt flat roof covering, to comply with Building Regulations the roof must be fully insulated at the same time.
The drive to make the UK’s existing housing stock more energy efficient isn’t all about government wielding a big stick. There are also some tempting ‘carrots’ being dangled in front of our noses. But to see the benefits of such incentives from a landlord’s perspective, you first need to get past the obvious objection that it’s the occupants who pay the energy bills, so why should landlords invest good money helping reduce someone else’s outgoings? You could also reasonably point out that EPCs aren’t currently a major factor for tenants looking for somewhere to rent.
But here’s the thing. This same logic can be made to work in your favour. Because it’s the tenants who pay the bills, they have a vested interest in making improvements that will save them money. And there’s a whole range of things that can be done to make homes energy efficient and slash fuel bills – everything from draught-proofing, lagging pipes & tanks, insulating lofts and fitting secondary glazing, through to more advanced projects like lining walls with insulated plasterboard and insulating timber floors.
This presents a potential opportunity for landlords. Next time you visit the property, leave your copy of the Haynes Home Insulation Manual for the tenants to have a read through. Even if they only have fairly basic DIY skills, there are a number of easy projects that anyone can carry out to make their home warmer in the cold winter months whilst using less energy and saving money on bills.
One possible scenario is where you offer to pay for the materials on the condition that the tenants provide the manpower. With no labour charges and no contractor’s profit margin, the work should end up costing less than half of the normal installers’ price. This could also save you a substantial sum in rent where you would otherwise have had to programme the works to be done during a void period in between lets. This way, everyone wins; the tenants get a more comfortable home with lower bills, and you benefit from a thermally upgraded property with a better EPC rating, boosting the ‘letting appeal’ and capital value of your investment, at minimal cost. But it gets even better because you can offset your expenditure against tax. Allowances can be claimed on a range of thermal efficiency improvements under the LESA scheme (landlords Energy Saving Allowance).
The Green Deal is an alternative way to get your properties upgraded and in some cases may be worth considering. On the plus side, you (or your tenants) could sign up for a range of improvements, such as injecting cavity walls, loft insulation, or fitting a new boiler. The work is carried out with no upfront cost, but is recouped over a maximum period of 25 years via electricity bills. There is a possible downside when you come to sell the property since prospective buyers may not be overjoyed with the prospect of their future bills being ‘loaded’ to pay back money for old improvements. There’s also been a lot of media speculation about hidden interest charges and possible penalties for early repayment. Nonetheless, if you need a new boiler for example, and don’t have ready funds to pay upfront, the Green Deal might be worth exploring.
The subject of upgrading existing housing stock won’t be going away any time soon. Governments are increasingly under pressure to be seen to be doing something about rising energy bills and fuel poverty. It’s also becoming increasingly clear that cutting consumption is the most intelligent (and cheapest) way to prevent the nightmare scenario of ‘the lights going out’. The fact is, by incentivising owners of large portfolios of property to insulate and reduce energy consumption en masse, the cumulative saving could be equivalent to building a new power station or two.
Professional landlords who have gone to the trouble of upgrading the energy efficiency of their properties will be first in line to benefit as financial incentives are increasingly geared to EPC ratings. In contrast, lax landlords whose properties continue to leak heat will get left behind, as more and more penalties are introduced for non-compliance.
So it makes sense to explore the idea of encouraging your tenants to take measures to reduce their fuel bills - by helping to improve your property. Like anyone faced with ever rising energy charges they will be interested to see what measures can be taken to make their home environment more comfortable and cheaper to run. And with the right technical guidance, plus the offer of help with materials, both parties should benefit.
Ian Rock MRICS
Click here to Order your Copy of the Haynes Home Insulation Manual
Ian Rock MRICS is the author of the new Haynes Home Insulation Manual: