The Government is consulting on how a £5 billion Warm Homes Fund can be used to accelerate energy-efficiency improvements and attract private investment into home upgrades, although the scale of the financial challenge facing landlords is far greater than the funding currently available.
Rightmove estimates that around 2.9 million rental properties would need improvements to reach EPC C under the Government’s proposals, at an average cost of £8,074 each. That equates to a potential bill of around £23.4 billion for the private rented sector (PRS).
Even if all £5 billion of the Warm Homes Fund were spent on improving rental properties, it would leave a funding gap of around £18.4 billion. In reality, though, the fund is intended to support a much wider range of households and retrofit projects, meaning only a proportion of the money is likely to reach landlords.
The scale of the challenge
The Government has said it wants privately rented homes in England and Wales to achieve an EPC rating of C by 2030 as part of its wider drive to improve energy efficiency and reduce household energy bills.
The cost of compliance is likely to vary significantly. Some landlords may only need relatively modest measures such as loft insulation, cavity wall insulation or low-energy lighting, while others, particularly those with older properties, could face substantial expenditure on glazing, heating systems, solid wall insulation and ventilation upgrades.
And it is not just an issue for the PRS. UK Finance has estimated that bringing the UK’s entire housing stock up to EPC C could require investment approaching £250 billion, underlining the scale of the challenge facing homeowners, landlords and policymakers alike.
Bridging the funding gap
The Government hopes the Warm Homes Fund will help unlock the private capital needed to bridge that gap.
Of the £5 billion package, £3.3 billion has been earmarked for innovative finance solutions intended to support lending and investment into home improvements. The Government hopes the money will help unlock additional private capital through co-investment, lending and other finance structures designed to reduce risk and encourage private-sector participation.
Potential solutions include specialist retrofit loans, blended finance models and other funding arrangements designed to spread costs over longer periods.
Landlords want targeted support
The National Residential Landlords Association (NRLA) has welcomed the ambition behind the proposals but says landlords need more than finance alone if EPC targets are to be achieved.
It argues that a lack of clarity over future energy-efficiency requirements, difficulties accessing suitable finance and the practical challenges of carrying out retrofit work are significant obstacles for landlords seeking to improve the energy performance of their properties.
Among its recommendations are calls for lenders to develop products specifically aimed at properties with lower energy-efficiency ratings, where the cost of reaching EPC C can be significantly higher and access to finance may be more challenging.
It also wants funding models that combine private finance with grants and tax incentives. In addition, it has urged ministers to recognise the different needs of small landlords, larger portfolio operators and leaseholder landlords.
The fund, the NRLA says, should “not only be a source of finance, but a market enabler”, helping to tackle wider barriers to retrofit, including skills shortages, limited awareness of support schemes and difficulties accessing green finance.
What it means for investors
Because the Warm Homes Fund is intended to support a broad range of energy-efficiency projects rather than landlords alone, much of the investment needed to bring rental homes up to EPC C will ultimately have to come from lenders, investors and other private sources.
As a result, access to affordable finance is likely to become an increasingly important factor in investment decisions. With the funding available falling well short of the estimated cost of upgrading the PRS, some landlords, particularly those with older and less energy-efficient properties, may ultimately decide whether to upgrade, refinance or dispose of parts of their portfolio based on the availability and cost of funding.
