Matthew Allen of Addington outlines the frustrations and obstacles facing landlords trying to refurbish old apartment blocks to meet increasingly stringent building safety and energy efficiency standards.
Despite recent planning decisions, new legislation and claims that environmental issues are high on the agenda, the government appears to be doing little to support those trying to invest and upgrade our old apartment blocks – providing lots of sticks but few carrots.
This is a serious issue. A majority of the c.27m homes in the UK were built over 60 years ago. Approximately 3.1m of these older properties are made up of apartments (source: BRE Trust “Housing Stock of the UK”). If current and soon to be introduced building compliance standards were applied to most of these apartment blocks, they would probably fail.
Encouraging and incentivising investment in our existing housing stock should surely therefore be a priority?
Yet the current costs to upgrade are becoming prohibitive. The DLUHC (Dept of Levelling Up, Housing & Communities) last week has suggested higher risk buildings will cost up to £2.9bn to meet new building safety standards -and this is just the tip of the iceberg.
The Building Safety Act, which came into effect this April, continues to raise the bar on building compliance for existing blocks of apartments and EPC minimum standards are increasing in 2025 and again in 2028. In 18 months, the basis for calculating an EPC (SAPs calcs) is being overhauled.
Meanwhile, the chronic shortage of housing for rent, means professional landlords are under no pressure to invest in this older housing stock because occupancy is high, and rents are growing. In fact, the short-term viability makes no sense. The incremental returns don’t justify the investment.
Poor financial viability is therefore working against the headwinds of new regulation which prohibits modernisation. There are several key reasons for this:
i) Much of current building compliance for many old buildings is not retrospective, with the result there has been little incentive for change to date.
ii) Modernising an old building can be time consuming and complicated. It inevitably requires pragmatism and compromise. Unlike new build we are not starting with a blank canvass.
i) SAPs calculations determine the energy performance of a building and therefore the EPC rating. But these can lead to unpredictable and counter intuitive outcomes e.g., for example replacing a gas boiler with electric heating may not increase a building’s EPC, because the SAPs rating is not always correlated with low carbon emissions.
ii) There is no recognition for embodied carbon in calculating EPCs in existing buildings.
iii) The owner of a high-density block of apartments has a relatively small footprint of roof space to floor area ratio for effectively installing wind and solar. Therefore it is often not practical to do so. Using a decarbonising national grid is realistically, a more practical and bespoke solution for old residential blocks.
iv) The application of VAT on all capital expenditure in existing buildings isn’t reclaimable like investment in commercial property or exempt with the development of new residential homes.
v) Zero rated VAT is applied to the installation of energy saving materials. Unfortunately, there’s a narrow list of items which are allowable, and the policy deliberately excludes the installation of double glazing or the removal of gas boilers and installation of electric heating.
vi) The emphasis for the SAPs calculations is “fabric first”. In other words, it prioritises insulation before sourcing heating and lighting. Yet to insulate an existing building, it needs it to be vacant and you need to remove any fixtures and fittings for its installation. This usually means removing bathrooms and/or kitchens. This isn’t acknowledged in HMRC tax guidance.
A lot of these disincentives could so easily be fixed with thoughtful, educated changes to government policy and regulation. We suggest the government:
i) Zero rates VAT on the refurbishment of old residential buildings say, >50yrs old.
ii) Incentivises the installation of energy saving materials and fire safety improvements e.g., via tax breaks/capital allowances. And removes unhelpful exclusions like double glazing or the swapping of gas boilers for electricity.
iii) Recognises the physical challenges and limitations of upgrading the energy performance of high-rise apartment blocks and tailors the SAPs calculations to encourage and support investment. In doing so, recognises the important significance of embodied carbon in existing buildings.
Current frustrations could easily be overcome with a recognition by policy makers of the importance of professional landlords investing in and upgrading our old apartment blocks. Policy frameworks should be adapted to suit.
“ This article first appeared in Co Star on 31st August 2023”
