Energy squeeze threatens financial nightmare for tenants and landlords

It’s not an easy time for many renters (and homeowners). The cost of living is going up across the board for residents all over the UK, coupled with low wage growth, increasing rents, and rising house prices in the market that add to the burdens of tenants and first-time buyers looking to get on the ladder.

One of the latest challenges adding fuel to the fire is the rise in energy costs that is only going to put further pressure on consumer finances, and it is an unfortunate reality that the war in Ukraine has geopolitical consequences that will drive up energy costs more in the year ahead.

Indeed, the price spike has already started, with research by the Trade Union Congress (TUC) suggesting that energy bills are due to rise at least 14 times faster than wages this year. Many low-income earners will also struggle with the £1.25p in the pound National Insurance increase that is due to come into force in April.

And in addition, the energy price cap is also set to rise from 1 April which will see bills increase £693 from £1,277 up to £1,971 – a rise of 54%. UK inflation may also hit a 40-year high this year, which will only compound the cost-of-living crisis even further for consumers, particularly for those on the lower-income spectrum.

Fuel poverty is therefore a real concern for many in the year ahead, as is the means to adequately heat one’s home in the middle of a cold winter. The National Energy Agency (NEA) fuel poverty charity estimates that following the energy price cap increase the number of households in fuel poverty across the UK will soar from the 4.5 million estimated last October to 6.5 million in April.

That’s a huge number, and it may rise further in the year ahead with the End Fuel Poverty Coalition (EFPC) warning that the war in Ukraine could push wholesale prices up to £3,000 per annum, pushing the number of households in fuel poverty up to 8.5 million – affecting one in three households overall in the UK.

Fuelling costs in the private rented sector

It goes without saying that consumers already face significant financial challenges in addition to the daily cost-of-living crisis. Average rents in the UK were up 8.6% year-on-year in February according to Homelet, and Zoopla’s UK latest House Price Index for January reveals that house prices have increased by 7.8% over the annual period.

So, on top of rising energy bills, tenants are increasingly struggling with rental payments, and they also face pressure on their deposit-raising potential – a particular struggle for first-time buyers who are finding it increasingly difficult to buy a home in their price range.

Whilst many people may be happy renting in the long term, this imbalance will only fuel demand and pressure to the lettings which also faces supply issues. Indeed, the cost-of-living crisis will only exacerbate existing issue in the housing market.

But it’s not just tenants who are affected, landlords will also face challenges, particularly with new EPC regulations proposed that would require all rental properties to meet a compulsory energy performance certificate rating of band ‘C’ on new tenancies by December 2025, and by 2028 for existing tenancies, as part of the government’s push to achieve net zero emissions by 2050.

According to a recent report from Shawbrook Bank, landlords have to date spent an average of £8,900 updating their properties – nearly 50% more than landlords expected they will need to spend.

There’s a long way to go here yet. New research from the Open Property Group has found that only 40% of homes in England meet the recommended EPC rating of ‘C’, with many of these sub-standard properties likely to be in the rented sector. Upgrading buy-to-let properties to meet the new minimum is already proving financially challenging for landlords, with the Shawbrook report finding that when landlords were asked if they have the necessary funds available to pay for any required energy efficiency changes, 31% said they would only just have enough, 14% don’t have access to the funds, and 6% simply don’t know.

Another Shawbrook report on the changing face of buy-to let found that 19% of landlords are currently funding refurbishments with credit cards or short-term finance products, and in addition, 60% are utilising their personal savings or investments to pay for a refurbishment.

Costs and opportunities for the property market

Upgrading properties to meet EPC requirements will undoubtably affect landlord yields, and Shawbrook’s research found that more than half of landlords are likely to pass on at least some of the costs over to tenants, this rises to 68% of landlords in London where costs are higher.

Landlords might bemoan EPC changes and the costs they bring, but tenants are likely to regard them as increasingly important as they consider their potential bills – energy efficient homes will have lower costs overall, and properties with a higher EPC rating are going to be more attractive to tenants (and homebuyers) when they consider their potential energy expenditure.  

It may mean that tenants will be forced to choose between higher rents or higher energy bills when they look for their next property, and for agents that means that highlighting the EPC rating of property could become increasingly valuable as a means of attracting tenants in the years to come; consumers might not view EPC ratings as particularly important right now, but younger generations are increasingly cost-conscious (and eco-conscientious), which could see the market landscape shift in favour of greener properties in future.

There is an upside to this. Landlords may seek to rebalance their portfolios to mitigate against future costs as a result of EPC changes, and buy-to-let homes in the new-build sector are likely to become more attractive as they already have much higher EPC ratings. The green mortgage market is also growing, with Landbay research finding that 84% of landlords who are aware of the green mortgages are attracted by the incentive of discounted interest rates.

The bottom line is that while circumstances may be difficult for landlords and tenants at the moment, change is not necessarily a bad thing, and all stakeholders in the market could potentially benefit from this shift.

*Adrian Gill is a Non-Executive Board Member at Reapit