Planned changes to France’s EPC scheme could hit prices of the country’s least energy efficient housing by highlighting refurbishment costs necessary to improve their classification, and also render some buy-to-lets unviable, according to Fitch, although covered bond ratings are not under threat.

In a bid to improve transparency and disclosure of energy consumption, a proposed “climate and resilience” law will require all energy performance certificates (EPCs) to include details of refurbishment costs needed to bring the least energy-efficient properties up to legally defined energy-efficiency standards when they are on sale. For the two lowest EPC categories, classes F and G, the law is expected to come into effect on 1 January 2022, and then for class E from 1 January 2025. The three worst performing categories cover over a third of France’s housing stock, according to recent government estimates.

Refurbishment costs cited in the EPCs could be factored into potential buyers’ offers and hence depress the prices of the affected properties when they are sold, Fitch said yesterday (Tuesday).

However, the rating agency noted that any price correction will occur slowly as, except for rental properties, an EPC will only be required when a property is for sale and currently only 3% of the French housing stock changes hands each year. The size of any discount may also be cushioned by financial aid for home energy-efficiency works or localised supply and demand dynamics, it added.

Fitch said it will monitor the situation and how it may affect recovery expectations for defaulted loans in French covered bond and RMBS portfolios.

Rental properties will also be affected by the new law, being required to have an EPC of at least class F by 1 January 2025, class E by 2028, and class D by 2034 to meet “acceptable housing” standards – only properties that can meet acceptable housing standards can legally be rented out in France. Rental properties in EPC classes E to G will therefore have to be refurbished to meet new energy efficiency standards or they will no longer be allowed to be rented. Rent increases will also not be permitted for properties in EPC classes F and G from one year after the law comes into force.

Fitch said the timeframe as well as possible financial support should allow some owners to carry out necessary works.

“But the costs of bringing properties up to the required EPC levels may result in a number of buy-to-let owners selling properties that they can no longer rent out,” it added. “Again, the sale price of these properties would probably incorporate a discount for refurbishment costs.”

Fitch said this could cause borrowers with the highest available loan-to-value ratios on buy-to-let investments to default if the discounted sale price were insufficient to repay outstanding mortgage debt.

However, the rating agency does not expect such defaults to affect its ratings of covered bonds and RMBS backed by French residential loans, as buy-to-let properties made up on average only 17% of the cover pools of Fitch-rated covered bonds and 10% of Fitch-rated RMBS as of March 2021, with only a small portion of these exposures expected to be affected by these changes.

Photo: Barbara Pompili, French minister for ecological transition; Credit: France in India/Flickr