Three key reasons Australian property investors can’t afford to ignore solar panels anymore

Uptake of solar power is surging across Australia, but renters – who make up a third of the population – are still largely locked out of accessing solar energy because few rental properties have solar panels.

However, new research has shown that renters are prepared to pay a premium to access the savings that solar power brings, creating an incentive for investors to equip their properties with solar.

A survey commissioned by Origin Energy revealed that two thirds of renters would be willing to pay at least $5 more a week for a property with solar panels, while 55 per cent would pay at least $10 more.

Solar and battery systems can reduce electricity costs by up to $2500 a year, so paying up to $500 more a year in rent is an easy decision, according to general manager of solar, storage and energy solutions at Origin Energy, Lyn Bowring.

“The benefit the tenant gets to reduce their power consumption obviously has a value attached to it,” she said.

Convincing an investor to install a solar system isn’t as easy as asking a tenant to pay for it through increased rent.

But there are a number of key reasons why landlords who fail to install panels on their properties could be left behind.   

1. Homes with solar are becoming the new normal

Solar panels are a way for landlords to differentiate their property on the rental market. Photo: zstockphotos

According to Bowring, landlords shouldn’t focus solely on higher rent. “It’s also about the increased attractiveness of their property to a tenant,” she said. “It’s a way to differentiate their property.”

Right now, properties with solar stand out in the market, but that might not be the case for long. 

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According to the Clean Energy Regulator, 3.5 million solar panels were installed in 2017, increasing installed renewable energy capacity by 41 per cent compared to 2016. Solar industry analysts expect this trend to continue as energy costs rise.

“I think we’ll see a tipping point,” Bowring said. “At some point in the future it becomes a must-have and something that’s expected from tenants.”

Once this point is reached, landlords without solar could risk their properties becoming underperforming assets, according to managing director at Flex Australia and Energy Matters Wilf Johnston.

“It’s only going to take a couple more years until it’s unusual to walk into a rental home that doesn’t have a smart energy system,” he said. 

“It may go the other way, with landlords having to drop their prices to attract tenants if the home isn’t energy smart.”

2. The break-even point could be the same as for owner-occupiers

Landlords will benefit from the extra rent money that comes with a solar powered property over time. Photo: Andrey Moisseyev

A typical solar system costs $6200, and nearly three quarters of survey respondents said the high cost of solar panels was the biggest barrier to installation.

As with any property decision, an investor needs to take a long-term view to reveal the benefits.

Assuming solar panels can return an extra $10 a week, a $6200 investment could be recouped within 10 years, factoring in annual rental increases in line with the market.

This is similar to how long homeowners can expect to wait for their system to pay for itself through lower bills – between six and 10 years.

But for a landlord, any extra rent after 10 years is money in their pocket, and the property has an increased rental yield to boot.

Investors who plan to sell a property down the track might also be able to recoup the installation costs.

The survey revealed two thirds of people would pay at least $5,000 more for a house with solar panels than one without, and more than half would pay at least $10,000 more.

3. Solar panels on rental properties are tax deductible

The tax deductible nature of solar panelling sweetens the pot even further. Photo: zstockphotos

The numbers start to make even more sense when factoring in an investor’s best friend – depreciation. Investors can claim the yearly decline in value of a newly purchased solar system as a tax deduction.

“The idea of depreciation is you claim the value of an asset over the effective life,” BMT Tax Depreciation chief executive Bradley Beer said.

The ATO has determined that the effective life of a solar system is 20 years, and investors can claim a 10 per cent decline in value each year using the diminishing value method.

For a $6200 system, an investor could claim $620 in the first year, $558 in the second year, $502.20 in the third year and so on. This equates to more than $4000 worth of deductions over 10 years, offsetting the tax payable on the majority of the extra income.

“Incentives that allow people to make deductions means they’re likely to think about it from the dollars point of view,” Beer said.