The PRS sustainability puzzle

The PRS sustainability puzzle

Richard Rowntree is managing director of mortgages at Paragon

Passed in 2008 by an overwhelming majority across all political parties, The Climate Change Act sets out the UK’s commitment to reducing all greenhouse gas emissions to net zero by 2050.

Achieving such an ambitious target will require a significant culture shift and likely touch many different aspects of our lives, including our homes.

Responsible for 14% of total UK emissions, residential energy use is likely to be a key focus of the government’s strategy in meeting what is the first legally binding climate change target set by a country.

Over the past three decades, the contribution of homes to total UK greenhouse emissions has halved.

The fact that this has coincided with the introduction and subsequent growth of the buy-to-let tenure could be dismissed as coincidence, but the 2019-20 English Housing Survey highlighted the progress that the private rented sector (PRS) has made, its stock achieving better energy efficiency ratings than that of the owner occupied sector.

Even so, over half of properties in both tenures have an Energy Performance Rating (EPR) below C, which is the standard the Government is aiming to reach as part of The Clean Growth Strategy.

It seems that the Government has planned to remedy the PRS part of this first with proposals that would see EPRs of C or above being required for all new properties let for new tenancies by 1 April 2025. This requirement would extend to all let property by 2028.

Due to recent Minimum Energy Efficiency Standard (MESS) Regulations, improving the energy efficiency of properties will be nothing new for many landlords. Since 1 April 2020, properties with an EPC rating below E can no longer be let, unless a valid exemption is in place.

To minimise financial burden on a sector already subject to various tax squeezes in recent years, the Government has stated that landlords will never be required to spend more than £3,500 on energy efficiency improvements.

An increase of the spending cap to £10,000 has been proposed, which is an indication of the challenge faced by the PRS in complying.

In part, this is due to the make-up of PRS stock which consists of a large proportion - just under half - of buildings built pre-war that do not benefit from the energy efficient characteristics achievable through modern design and construction methods.

So, with sizeable investment needed to bring millions of aging, relatively energy inefficient homes up to date and in line with government regulations, it is clear that finance is a key piece to the puzzle.

Recognising this, the government introduced the Green Homes Grant scheme in the summer of 2020.

Our research found that just under half of landlords intended on taking advantage of the initiative which offered up to £5,000, covering two-thirds of the cost of measures such as insulation or upgrades to glazing or heating.

In response, we have launched a green further advance product range. It is directly linked to the scheme because in order to be eligible for one of the products, landlords must have been accepted for a Green Homes Grant by the government.

This is one of the first products of this type to be offered by a specialist lender in the buy-to-let space; we have more to come and I’m sure our peers, also recognising both the threats and opportunities resulting from climate change, will announce their own products that appeal to the sustainability conscious customer.

Alongside the financial incentives to drive these types of retrofitting initiatives, lenders can also encourage landlords to see investments through a sustainability lens with energy efficiency as a key consideration in the valuation and underwriting processes.

The full extent of the government’s plans for the sustainable future of the PRS are not yet known, but with the UK’s housing model so reliant on private investment to provide homes for millions of people, policymakers would be wise to work in close collaboration with landlords and the finance sector towards the net zero goal.