Even though it is a reasonably recent category, transitional risk is going to be a significant issue for lenders, servicers or holders of buy to let mortgage assets.
Anyone hearing the “drill, baby, drill” messages originating from the USA could believe that the ‘E’ of ESG is dead. But that certainly is not the case in the UK. Rather than receiving its last rites, the recent government consultation “Improving the energy performance of private rented homes in England and Wales” brings increased focus to the EPC rating system, a significant part of ESG strategy in the housing market.
What is driving that renewed focus? A recent survey found that at least 18 million homes – over half the UK housing stock – have an EPC rating of D or below. That should not really be a surprise when the UK has the oldest housing stock in Europe, probably in the world. That is due largely to the legacy of dwellings built during the industrial revolution, which still form the backbone of our urban areas today. Therefore, any attempt to improve the quality of the housing stock is going to face significant challenges.
Even with government concerns about the exponential increase in average energy bills, that issue needs to be considered as part of a fundamental review of how to improve the stock. So where to start? It is difficult to force owner/occupiers to make choices between investing in energy saving improvements and other demands on their cash, but controls on the private rented sector are simple to enforce.
One of the proposals that really brings transitional risk into focus requires landlords to invest up to a maximum of £15,000 per property to meet an agreed standard. That could really hurt all landlords, whether they own one asset, or a portfolio. It is often the properties with lower EPC ratings that generate the lowest rent so excessive investment could wipe out profits for a period, even if the landlord has the capital to fund the improvements in the first place!
As a result, here is a ‘heads-up’ to landlords and financial institutions who hold assets belonging to these customer types. Any financial institution involved in lending to, or holding loans within, the private rented sector needs to revisit its risk register. The fog around the direction of travel is clearing, so bland statements pointing to the uncertainty of the future scope of regulation in this area are rapidly losing credibility.
Rockstead is one of the UK’s most trusted providers of governance, compliance and regulatory services. We help clients in regulated Financial Services markets grow safely and safeguard them from foreseeable harm. Our people are experienced subject matter experts, and we continue to provide independent support and oversight on these and other risk matters. Whether a lender, holder of loan assets, servicer or asset manager call us to see how we can support your business to grow safely.