Commercial Landlords Have Woken Up To Looming EPC Rules, But The Residential Sector Lags

Today, 100% of commercial landlords are aware that all rented properties need an energy performance certificate rating of E or above, compared to only 80% last year. These are the findings from Blick Rothenberg’s second annual EPC survey. 

Last year, Blick Rothenberg’s first annual EPC survey found that only 80% of commercial landlords surveyed were aware that all rented properties need an energy performance certificate rating of E or above. Today, according to the firm's second annual survey, that figure is 100%. 

Similarly, 100% either have a plan in place to make necessary changes to their properties to comply or have already made changes, compared to 70% in 2023. This year, only 10% of commercial landlords said they don’t know what the cost of energy efficiency improvement works on their properties will be, compared to 80% in 2023. 

“Commercial landlords have clearly been on a journey in the last year and they’ve worked out what they need to do,” Blick Rothenberg’s Head of Property and Construction Heather Powell said. “Not only are EPC deadlines getting closer, but landlords and tenants are looking at value in a different way. They’re looking at a property’s impact on the world, from start to finish.”

However, Blick Rothenberg’s survey results paint a very different picture of the residential landlord landscape. A fifth, 20%, of residential landlords were still not aware of new EPC rules, and 44% don’t know how much it will cost them to carry out necessary changes to their properties. 

The main reasons for the difference in outlooks are the imperative for change and the final cost to the property owner, Powell said. In the commercial property market, the financial need to improve energy efficiency is clear.

“Today, if a commercial property doesn’t have a good energy efficiency rating, it’s almost impossible to lease out,” she said. “It’s not a case of lowering the rent, it’s a no. This impacts what it’s worth, so investors are seeing the value of their portfolios fall.”

A commercial property owner will also benefit from tax deductions when carrying out the work, whether it qualifies for structural building allowance or another capital allowance, Powell said. In contrast, improvements on a residential property are a capital cost, unless that work classifies as a repair. 

Since the government removed the planned rule for a mandatory EPC of C from 2025, the immediate need for a private landlord to gain an EPC rating higher than an E has receded. The state of the residential property market means that while residents appreciate energy efficiency, it is not a deal breaker.

“There’s such high demand for rentals, particularly in the southeast, that there’s no real incentive for a landlord to carry out work to improve the energy efficiency of a home that is privately rented out,” Powell said. “Residential landlords are facing many challenges relating to affordability, due to rising interest rates without the possibility of a tax deduction, so many are either reducing their spending or leaving the market.”

Blick Rothenberg’s survey showed that a third of residential landlords are considering selling their property within the next 12-24 months, which reflects in part the onerous tax regime, Powell said. Not only are EPCs changing, but over the years landlords’ obligations have increased, such as the need to check tenants are entitled to live in the UK and to comply with fire and gas safety checks. 

Commercial landlords, in contrast, are planning to carry out work to improve properties in the most cost-effective way, Powell said. Last year, no respondents were planning to finance property changes from their own reserves, compared to 27% this year. The same percentage are planning to use shareholder investment, while 19% are considering bank debt. 

Deciding when to carry out work takes consideration, Powell said. A commercial landlord could redevelop a property with tenants in situ or during an upcoming break. Collaborating with a tenant could work well, as it is often in tenants’ interests to improve energy efficiency for their own reporting purposes.

“To decide the best approach, it can help to carry out an EPC survey because you will receive advice about specific measures to improve energy efficiency,” she said. “While some measures are as simple as changing a lighting system, others take more investment. The right advice will help you rank potential works in terms of cost and impact.”

A client can use a potential list of costs to talk to property agents about rent potential for the revamped building, Powell said. For example, if a building were improved to achieve an EPC of B instead of a previous C, an agent can provide guidance on the rent it could achieve in that area. 

EPCs are not the only sustainability methods and standards that commercial landlords are using to assess their properties, Powell said. This reflects how awareness of the impact of a building has increased over the years. 

“EPCs are a very blunt tool and don’t give a perfect answer, so the commercial sector is also driven by certification and valuation systems such as BREEAM,” she said. “When redeveloping a building, developers might now save and reuse some of the materials, which costs far more than starting again — but becomes a selling point for the property due to lower embodied carbon. This is a very different mindset to only a few years ago.”

While the commercial sector is awake to improvements, the residential sector is still a long way off, Powell said. To generate the required level of awareness and interest in energy efficiency improvements to get work going, the government will need to act.

“Residential landlords need to be encouraged to carry out energy efficiency improvements, which the government is not currently doing,” she said. “Whatever government is in power after the general election will need to consider incentives, such as a grant system that works or even a legal imperative. Without this, we are likely to see little progress in residential property soon.”

This article was produced in collaboration between Blick Rothenberg and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.