Sealing Drafty UK Homes to Save Energy Raises a £19 Billion Tab

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(Bloomberg) — The UK government wants landlords to plug energy-wasting leaks from their properties by 2025 in the drive toward conservation, yet the mandate raises the potential for a £19 billion tab that would inject more volatility into the real estate market.

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Almost half of privately rented homes in England and Wales have an energy performance rating of D or lower on a scale from A to G, according to broker Hamptons International. The lower the grade, the higher the energy usage and household bills. 

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The latest government proposal would require homes starting tenancies after April 2025 to have a minimum C rating — a threshold 2.45 million properties currently don’t meet. With upgrade costs averaging about £8,000, according to the English Housing Survey, owners face renovation bills north of £19 billion ($23 billion). At least some of that’s likely to be borne by renters.

“It is expected that the landlord will fund the cost of the improvement works, but in some circumstances the landlord may be able to recover these costs from the tenant,” said Jackie Bowie, head of Europe at risk consultant Chatham Financial.

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Soaring energy prices and tight supplies following Russia’s invasion of Ukraine spotlighted the need to conserve oil, gas and electricity. Almost half the UK’s consumption is for heating, and refurbishing drafty, inefficient housing stock would reduce demand and propel the nation toward meeting ambitious climate goals.

One reason Britons’ tariffs are exorbitant is that their homes, many made of brick and dating to the Victorian era, lose heat three times as fast as those in European neighbors. Well-insulated dwellings use less gas and take better advantage of electricity-powered systems such as heat pumps.

Efficiency ratings consider factors such as building materials and heating systems. The score can be raised by modernizing boilers or adding insulation, double-glazed windows and solar panels. The highest rating is A, or 92 and above.

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Chancellor of the Exchequer Jeremy Hunt pledged £6 billion to insulate homes and upgrade boilers in his budget last year, and a parliamentary committee said in January that ministers must prioritize the upgrading of leaky housing.

As the proposed efficiency deadline draws near, a potential £30,000 fine awaits landlords failing to comply. The mandate looms at a time when the economy is racked by 11.5% inflation and experiencing the fastest pace of interest-rate hikes in three decades.

“The economic climate might be different but so is the geopolitical climate,” said Sarah Olney, an opposition lawmaker from London’s Richmond Park whose bill codifying an EPC deadline will be debated next month. “We’re all more aware of the need to be energy-efficient.”

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The financial squeeze for landlords is compounded by exposure to higher mortgage rates than other borrowers. What’s more, about a third of fixed-rate mortgages are set to end within two years, leaving holders vulnerable to higher borrowing costs.

“The new energy-efficiency legislation could make math even more difficult for highly leveraged landlords,” said Iwona Hovenko, an analyst covering European real estate for Bloomberg Intelligence. “Privately rented houses are the least likely of all tenures to be insulated.”

The degree of difficulty in navigating these factors “may accelerate the withdrawal of private landlords from the market,” said Randeesh Sandhu, chief executive officer of property lender Precede Capital Partners.

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Another option for landlords is to borrow more money to fund the upgrades. Octopus Real Estate restarted refurbishment loans last month, anticipating such an influx.

Regardless of the nature of upgrades, tackling the energy inefficiency of the private rental market is seen as a crucial step in pushing the UK toward meeting emissions-reduction goals and weaning itself off fossil fuels. The target for getting all UK homes upgraded to at least a C rating and having a net zero power grid is 2035.

“The standards are only expected to get tougher as the UK strives toward net zero,” said Steve Matthews, Octopus’s head of residential lending. “There is a real concern that a substantial number of properties across the UK risk becoming unrentable.”