Sunday Supplement – “There is only one way to eat an elephant: a bite at a time” – Desmond Tutu

by Feb 13, 2022

“There is only one way to eat an elephant: a bite at a time” – Desmond Tutu
 
 
I’ve gone for something different this week because this situation doesn’t seem to be in hand given the timescales that have been set. It is frustrating me looking at a relatively workable and “easy” solution or at least significant contribution to what is a complex problem. The below will be circulated to:
 
 
The Rt Hon Michael Gove MP (Secretary of State for Housing, Communities and Local Government)
The Rt Hon George Eustice MP (Secretary of State for Environment, Food and Rural Affairs)
Stuart Andrew MP (Minister of State for Housing)
Please share it far and wide if you agree or at least believe I’ve hit the barn door even if it isn’t the bullseye!
 
 
 
Adam Lawrence
13th February 2022
Dear Messrs. Gove, Eustice and Andrew,
 
 
I am writing this as an open letter to attempt to solve a situation that is looming over the UK housing market before it becomes a crisis. We know that climate change is, rightly, at the top of the agenda for the oncoming decades. We also know that there are significant emissions issues from existing older housing stock, and the UK has the oldest housing stock in Europe and nearly 20% is over 100 years old. We also know that electricity consumption is growing and with current policy being to move towards phasing out gas boilers and gas as a fuel in general, combined with the policy to stop making petrol and diesel cars within only 8 years now, and electric cars looking like the only reasonable substitute for this – we know this is likely to increase even more significantly in coming years. There is also the carbon footprint of electricity generation issue to consider as we are still only generating around 35-40% of our electricity from renewable sources.
 
 
Policy has led rental stock to be in the firing line. Existing policy has moved sub-standard properties rated “F” and “G” on the Energy Performance Certificate (EPC) to be unlettable with some exemptions. This affected a very small proportion of rental stock, around 5%. The next move in England is to move to a “C” grade on the EPC by 2026. This affects an estimated 67% of the rental stock.
 
 
The private rental sector represents around 19-20% of the households in the UK. Given that the vast majority of landlords (as a landlord, I would very much encourage the movement away from the archaic feudal term and I know many others that would also, as an aside – perhaps in favour of housing provider?) rent their properties out for commercial reasons, it is understandable why policy would start here. The current consultation has in mind moving to EPC C for new tenancies by 2026 and all tenancies by 2028. Non-residential buildings are also subject to the Minimum Energy Efficiency Standards (MEES) at a slower rate.
 
 
First hand experience of the increasing compliance, which I wholeheartedly support as do many forward-thinking housing providers that I am in contact with, has led to selling off of PRS stock, with the size of the sector shrinking over the past several years, alongside demand continuing to increase. The pandemic has accelerated rental growth which is in danger of becoming out of control, and further upward pressures are being felt by the oncoming EPC legislation. The Price Elasticity of Demand for housing is accepted as being inelastic, with studies suggesting around -0.6 is the correct number – so for every 1% increase in price, demand only falls by 0.6%. Knowledge of business and economics tells us that as the price of providing a good or service increases, thus the price will increase.
 
 
To solar: The Feed-in-Tariff scheme was introduced under the Labour Government of 2005-2010 but presided over by the Coalition Government since it was not introduced until 1 April 2010. The scheme was successful in deploying circa 4.7GW of Solar capacity throughout the UK, from nowhere in 2010. The cost of the scheme and the incentives were worked out on the legacy price of the panels, inverter and installation in or before 2010 – in reality the price of the equipment absolutely crashed for a number of reasons, innovation and Moore’s law of course being two. Unfortunately, the incentive for Government-backed, index-linked revenue streams over 25 years led to commercial incentives taking over from the best interests of the householders. I was an early adopter in 2010 of the original scheme on my own home and the payback period and security of the income stream made it an extremely attractive investment at the time.
 
 
Commercially companies sprang up and propagated a “rent-a-roof” scheme – legislation could not keep up and many tens of thousands of householders were left with issues around leasing their roof space under unfavourable terms – as always a few bad actors spoiled it for everyone else. Returns in the industry were known to approach 50-65% per annum without leverage, based on such a secure income stream – and the decision of the time was to scrap the scheme as opposed to legislating correctly and appropriately and re-pricing the tariff but keeping an incentive in place.
 
 
A further consultation has already taken place in 2020 with mortgage lenders – the rental market carries a far higher level of gearing/mortgage debt than the residential sector, and lenders also demand higher margins for lending against rental property. The suggestions in the consultation include requiring lenders to balance their mortgage books to have an average EPC of C or above in the future, incentivizing those who fuel the sector with lending. This has already led to some “green” mortgages although it is early days, and the discounts are very small indeed – perhaps a few percent, although that area is of course being developed by the privately owned banks, lenders and financial packagers.
 
 
Given the broader macro points raised above, it seems clear that now is the time to revisit a potential solution here in a more climate-change aware world. Solar photovoltaic panels (PV) can produce a large amount of the requirement of a household’s electricity – more than 50% and more than 80%, on many houses, with intelligent usage and/or a battery solution that stores excess electricity in the daytime/during generation, drawing from it in the evening. This is renewable, guaranteed, and in a time of rising rents and with pressures on the cost of living, would also pass some benefits to those who live in rental properties.
 
 
There are several potential solutions here which would work well in concert with broader policy, and I have presented my thoughts on them below in a “pick-and-mix” format:
 
 
Solar PV panels on rental (or all) properties with a government-backed incentive – considering a shorter timeframe of payback, looking at aiming at a far lower return than was guaranteed in the past – perhaps 6-8% on the basis that interest rates are rising but property owners can borrow at or below this rate to invest in their properties and futureproof them. Prices of equipment and labour are much more stable than the period of 2010-17 when the feed in tariff was active, and indeed have potentially found their bottom and are inflating alongside everything else at this time.
 
 
Working alongside the Royal Institute of Chartered Surveyors (RICS) to start to see the EPC actually form a much more significant part of a property’s value. To incentivize the private sector if they can spend 5k to add 7.5k to the value of a property, for example, they will likely do it. This is a “tail wagging the dog” scenario because currently there is limited evidence (there is some, but the existing analysis is quite weak because it is not considering the new build tilt that the current figures contain) that homebuyers, when making a purchasing decision, are considering the EPC as a major part of their choice.
 
 
If looking at a solution that keeps the government contribution down, then for property owners it could be that they recharge the party using the electricity at a “national” rate of electricity for electricity that the user saves by not paying it to the utility supplier. This could alternatively be reflected in higher rents for these properties of course, but the same comments around considering the value of the better/higher EPC grade as in 2) would apply. A modified version of the “green deal” of the past decade, if you will.
 
 
A significantly large grant scheme is inevitably planned in order to minimise disruption to many housing providers who, I have no doubt you understand, are either asset rich and cash poor, or are genuinely struggling themselves but do own more than one property. The sector is incredibly fragmented and is likely a couple of decades away from significant consolidation as has happened in many other Western democracies. The traditional path here is that qualifying contractors increase prices by a gigantic margin, effectively transferring all of the grant money from the public purse to their own pockets, with very little being transferred back to the theoretical beneficiary of the grant. By transferring the benefit directly to the person or entity paying for it, this removes this incentive to carve out/overprice/price gouge.
 
 
This is not to undermine or interfere with other initiatives around removing gas, converting heating systems to heat pumps (which sadly is only realistic in a very small percentage of housing stock in the UK), new build energy efficiency requirements and electric car charging point install, and the many other schemes and policies that relate to this space.
 
 
The alternatives include an incredible investment in external wall insulation, which has a number of issues that it needs to contend with – cost, environmental impact, appearance to name just three – worthy of consideration but under any comparable analysis, this is less bang for buck alongside a smaller impact.
 
 
I feel strongly that the answer is there for us, and needs harnessing – and can genuinely benefit all – a functioning private rental sector is a fundamental requirement for those who are transitory from area to area and country to country because of the nature of their work, for those who provide enhanced services to a growing social housing and support sector, for those who choose to “try before they buy” – affordability is at risk and there is a clear and present danger that many will be priced out of the sector before long, which of course increases pressure on the public purse significantly alongside leading to suboptimal outcomes for those at the sharp end. The grid needs significant upgrading to allow for the larger demand on electricity that is inevitable as we attempt to meet the 2050 net zero target – this could make a significant difference.
 
 
I would be very pleased to discuss any of these points further at your convenience.
 
Yours sincerely,
 
Adam Lawrence
 
As always, thoughts, comments, likes and shares are very welcomed indeed – tag an MP or their staffers if you know any!!