Investment Property Opportunities In Properties With Energy-efficient Upgrades And Eco-friendly Features – The topic of energy efficiency has been very prominent in recent months. Of course, the need to reduce carbon emissions remains an important cause, but the rapidly increasing cost of energy has become a more powerful driver of public awareness.

As world economies recovered from the Covid pandemic, industry and travel resumed in earnest and energy demand returned to more normal levels. As a result, wholesale oil and gas prices rose significantly, and since then, countries around the world have struggled with massive price increases.

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Following the chancellor’s spring statement on 23 March, economists, charities and think tanks responded with their unique views on the cost of living crisis and how the energy price cap will affect ordinary household budgets. We will explore these issues in more detail later, but in summary, high inflation and rising domestic energy costs are likely to push more than a million people into poverty.

Why You May Want An Energy Efficient Home

With average incomes well below the rate of inflation, real incomes are falling as energy bills rise and higher taxes add to the costs of a typical household. The government’s own Office for Budget Responsibility calculates that this would lead to the biggest drop in living standards since 1956.

The purpose of this article is not to address the seriousness of the economic situation. Instead, the focus is on the issue of energy efficiency and how high energy costs may affect property investment options in the coming years.

Even before energy prices started to rise, various surveys from the UK showed that issues of energy efficiency and sustainability were becoming increasingly important to tenants. Some of these were the result of personal beliefs and principles, and some were due to financial concerns.

Energy Efficient New Build Homes

Now, following widespread media coverage and comments from celebrities such as Martin Lewis, tenants have never been more wary of rising energy costs. In recent weeks, in the responses to the spring statement, the coverage of the increase in the energy price ceiling, and of course the war in Ukraine, this issue has been strongly emphasized.

Through this constant media exposure, the issue of energy costs is now well known to ordinary Britons. Therefore, if and when they switch between rental properties or start renting for the first time, it is almost inevitable that this will affect their choice of property. This in turn could shift market demand in favor of newer, more energy efficient homes. For investors considering their next purchase or making strategic changes to their portfolio, this is likely to be an important consideration.

The UK has the oldest and most underutilized housing stock in Europe, and this is one of the main reasons for the fuel poverty that now affects millions of people. According to a 2021 Government/ONS press release, “the average energy efficiency score for residential homes in England was 66 and in Wales 64…equivalent to Band D.” In contrast, “housing built after 2012 in England and Wales has an average energy efficiency score of 83, equivalent to band B”.

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On 18 March 2022, the House Builders’ Federation (HBF) published a report saying: “In the year to September 2021, 84% of new-build properties received an A or B EPC rating for energy efficiency, with only 3% rated Is. The existing properties reached the same standard. In contrast, 58 percent of existing homes had an efficiency rating of D-G.

The difference in these ratings can have a significant impact on the fees that tenants must pay. HBF calculates that “new homes save an average of £435 a year on household energy bills per property.”

Similarly, the ONS writes: “The average estimated annual energy cost for an existing home is more than double the estimated cost for a new home.” This is particularly important at a time when millions of people are facing energy price rises of around £1,300 a year and the war in Ukraine threatens to increase prices in the future. For many renters, choosing an energy efficient home can mean the difference between financial survival and unsustainable levels of debt.

Legislation Changes For Energy Performance Certificates In Rental Properties

Tenants have not always been particularly aware of energy efficiency. In March last year, the Energy Savings Fund wrote: “Renters don’t always apply the same level of scrutiny to their potential new home as buyers do. “But if you’re going to rent a place, it’s more important than ever to make sure it’s energy efficient.”

Since then, awareness has improved, largely in response to rising costs. For example, in November 2021, Energy Live News wrote that “the number of Google searches for ‘billability’ was reported to have increased by more than 1,300% (and) … 400%.”

In February 2022, Ofgem announced that the energy price cap would be removed from April 2022. It said: “Those on default tariffs who pay by direct debit will see an increase of £693 from £1,277 to £1,971 a year… Prepaid customers will see an increase of £708 from £1,309 Pounds to 2017 pounds.

Energy Efficient Homes

The price cap is updated twice a year, with the next review due in October 2022. It is expected to rise by 12% to around £2,240, but given the uncertainty surrounding Russia’s invasion of Ukraine, some predict that average costs could rise even further to over £3,000.

Given this situation, it seems that tenants are choosing energy efficient locations wherever possible. In the coming years, this is likely to mean that, in general, investors will see stronger demand for newer, more efficient properties. This power, in turn, enables them to earn relatively higher rental income and enjoy higher rates of capital appreciation.

That doesn’t mean older, less energy-efficient homes are going away. Rental demand is almost certainly too strong for that. However, tenants will be exposed to significantly higher energy costs due to these features and these costs are not expected to increase. As a result, tenants in those homes could see their real incomes fall more quickly and thus likely pay less to pay rent. This can mean less potential for long-term rent increases and a higher risk of default. As an investment class, newer properties seem to offer better and more reliable returns.

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Many commentators have said that more families will fall into poverty in the coming years as a result of rising energy costs and general inflation. This can lead to increased debt, especially for low-income tenants. It can also mean an increase in average vacancy if, for example, non-paying tenants move out and a replacement tenant is found.

To protect themselves against such risks, many investors may focus on properties with higher-income tenants or higher-yielding markets. An example would be higher quality properties in city centers which could be attractive to people in better paid professional roles. Often young graduates are rapidly moving up the career ladder and may be in a better position to absorb any increases in energy or rental costs.

Another option is to choose a property that appeals to a lucrative short-term market: vacationers, conference delegates, etc. Here, especially when the property is rented out as serviced housing, energy costs are not a major concern for visiting tenants. Location, amenities and visual appeal are usually more important criteria.

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In addition, as real incomes fall across the UK, demand for luxury holidays abroad is likely to fall and Britons are more likely to stay on holiday in the UK. Therefore, well-furnished properties in popular cities, beach resorts and other tourist spots can be a reliable and profitable option.

So far, we’ve looked at what rising energy costs do to tenant demand in the equation. However, there is another important reason why investors may want to use newer, more energy-efficient features, and that is a simple matter of legal compliance and associated maintenance costs.

Currently, to rent, a property must have an EPC rating of E or better. However, this is a low standard and by 2025 the threshold will increase to 100°C. This must be a challenge because, according to many media reports, “only a third of properties currently have an EPC rating of C or higher. This means thousands of owners with older properties are forced to sell or make potentially expensive energy efficiency improvements.” will be in the next three years.

What Is An Energy Performance Certificate?

If owners sell too many underperforming properties, the increase in supply can reduce their average capital value, which can reduce overall returns for those who buy.

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