A report from Morningstar DBRS assessed the landlord response to MEES, which the government first considered in 2014.
Morningstar DBRS looked at rental properties that were inspected both before and after 2014 and found that landlords “largely complied with the regulation”. According to its analysis, 13.8% of rental properties were initially rated F or G, and this improved to only 1.9% falling within the same category at their most recent inspection.
Of the rental homes rated F or G, 1.2% stayed in the same category while 0.7% declined in standard from higher-rated bands.
By contrast, the share of owner-occupied homes rated F or G decreased by 4.6% to 14%, with 2.3% continuing to have a rating of F or G and 2.3% moving down from band E or higher.
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Landlords make necessary changes
The research showed that many landlords made the minimum changes needed. Among the properties originally rated F or G, 51.8% only improved to band E, compared to 28.2% of owner-occupied homes. However, most owner-occupied properties that were improved for efficiency moved to band D or above.
Nearly all properties that were previously rated F or G moved into higher Energy Performance Certificate (EPC) bands by their most recent inspection, and this was most concentrated across homes rated F-E.
Just 0.3% of rental homes had scores between 36 and 38, the last three scores for the band F rating, and 3.2% had scores between 31 and 41, the first three scores of band E.
The report said this represented a 2.9-percentage-point improvement at these bands.
This trend was weaker across the E-D and D-C thresholds. Some 4.7% of rental homes had scores between 52 and 54, the end of band E, while 6.9% had scores between 55 and 57, the start of band D. Further, 10.8% of rental homes had a score between 66 and 68, the end of band D, compared to 12.4% of homes between 69 and 71, the beginning of band C.
Morningstar DBRS said upgrades were concentrated in lower efficiency bands, with 51.8% of properties improving to band E and 31.3% to band D.
Further, the share of properties at the regulatory threshold peaked, then showed declines afterwards.
This indicated that landlords were complying with legal requirements, but only doing the minimum necessary works to meet standards, rather than significantly investing in energy efficiency.
Impact on the quality of loans
Morningstar DBRS also assessed what impact this would have on the UK residential mortgage-backed securitisation (RMBS) sector and credit risk.
It found that potential vacancy periods could impact defaults and arrears, as a newly originated buy-to-let (BTL) loan against a property still undergoing renovations may not generate income immediately.
A landlord borrower might need time to plan and complete work, obtain a compliance EPC, and let the property. For those relying on rental income to service the mortgage, this could create an early cash flow challenge.
It said the concentration of inspections between 2018 and 2020 – the MEES compliance dates – suggested that the timing of works was also a key consideration for landlords.
From 2030, when BTL landlords must bring properties up to a C rating, Morningstar DBRS said they could face longer vacancy periods when an existing tenant leaves and the property cannot be re-let until improvements have been made.
Further, properties that do not meet MEES standards at the time of a foreclosure could attract interest from investors looking for a discount. It said the evidence showing that upgrades were mainly taking place on properties in band E suggested that some landlords improved properties to bring them back to a rental standard.
Due to this, BTL properties may need additional investment, which could increase refurbishment costs, execution risk and a potentially discounted selling price.
