Today, The Mortgage Works (TMW) Nationwide Building Society’s buy-to-let lending only arm released their energy efficiency report for the private buy-to-let rental sector. The latest report from The Mortgage Works explores the energy efficiency of the UK’s private rental sector and how evolving regulations and market dynamics are shaping buy-to-let investments. As the UK strives to meet its 2050 decarbonisation goals, landlords face mounting pressure to improve the energy performance of their properties, but this also presents new opportunities for those in the BTL market. In this blog, I will run through the overall messages shared in TMW’s report, and what their message seems to be to buy-to-let investors.
Mixed Energy Performance In The Private Rental Sector
To say that owning buy-to-let property has been a struggle over the last couple of years would be a huge understatement. And increased pressure to upgrade energy performance has meant that a lot of landlords are having to dig deep to make necessary improvements. Energy performance in the private rental sector shows a wide variation, especially compared to other housing types. While social housing leads the way with 70% of properties rated between A and C grades, the private sector lags behind with only 45% achieving these top ratings. Despite this, the private rented stock is still more energy efficient than the owner-occupied sector in some respects, boasting a higher proportion of A to C rated homes. However, it also has a greater share of poorly performing properties, with many falling into the F and G categories.
Regionally, energy performance within the private rental sector varies significantly. London has the most efficient rental properties, with 60% rated C or above. In contrast, Yorkshire and The Humber have the least efficient stock, with only 25% of homes achieving these top ratings. This regional variation is largely driven by differences in property types and ages, with older, detached homes often scoring worse than more modern, purpose-built flats.
Premiums For Energy Efficient Properties
Landlords who invest in energy-efficient properties are increasingly seeing a return on their investment, with higher premiums attached to properties with better energy performance ratings. According to the report, BTL investors can expect a premium of 10.9% for properties rated A or B, compared to those with a D rating. Properties rated C also attract a modest premium of 3.4%. Interestingly, BTL investors place a higher value on energy efficiency than owner-occupiers. For example, while landlords might pay 10.9% more for an A or B rated property, owner-occupiers only pay a 2.2% premium. Regional differences are again evident, with the highest price premiums found in the North of England (15%) and the Midlands (12.5%), while the South of England sees a smaller uplift of just 5.6%.
Impact Of Minimum Energy Efficiency Standards
The introduction of the Minimum Energy Efficiency Standards (MEES) in 2018 has played a pivotal role in shaping the market’s response to energy efficiency. Before MEES, BTL investors attached less value to energy efficiency, with premiums for A or B rated homes sitting at just 3.2% in 2015. However, following the introduction of regulations requiring rental properties to meet minimum energy standards, the premium for efficient homes has risen significantly, underscoring the role policy plays in driving market behaviour. The government’s recent announcement that all rental homes must have a minimum energy rating of C by 2030 further raises the stakes. As a result, landlords are increasingly factoring energy efficiency into their purchasing decisions, knowing that non-compliant properties may require significant investment to meet the upcoming standards.
Rental Premiums For Energy Efficient Homes
Energy efficiency not only affects property values but also rental income. According to the report, properties with an A or B rating command 7% higher rents compared to D-rated properties, translating into an additional £70 per month on a typical rent of £1,025. C-rated properties offer a smaller premium of 2%, or around £20 extra per month. However, no significant rent discounts were found for properties with lower energy ratings, suggesting that energy efficiency is more of a bonus than a penalty in the rental market. Once again, regional variations exist, with London seeing the highest rental premiums for energy-efficient homes (12% for A/B rated properties), while the South of England lags with just a 3% premium.
The Cost Of Energy Efficiency Upgrades
Upgrading properties to meet energy efficiency standards comes at a cost. The report estimates that the average expense to bring a property up to a C rating is around £7,400. Older properties, especially those built before 1919, face even higher costs, averaging over £10,000. Regional factors also play a role, with the highest upgrade costs found in the East of England and the South West, where costs exceed £8,000, while the North East has the lowest average costs at just over £5,000.
Balancing Costs And Benefits
For landlords, the decision to invest in energy efficiency upgrades hinges on balancing the cost of improvements with the potential benefits in terms of higher property values and rents. The report indicates that in many cases, the increase in property value from improving energy efficiency can cover a significant portion of the initial investment. In the South of England, the price premium for upgrading a D-rated property to a C exceeds the cost of improvements. Additionally, the higher rents achievable on energy-efficient homes mean that many landlords could recoup their investment within five years.
Speak To A Buy-To-Let Expert
Owning rental property is a great way to invest your money and also make a living, and improving the energy performance of your property can have lots of added benefits. If you are a buy-to-let landlord looking to refinance your property or are perhaps hoping to get into the btl market, then please do feel free to get in touch with our buy-to-let broker team here at Oportfolio. We are here to help.
