New EU Directive: Threat or opportunity?

Article published in Union Investment's Places & Spaces Magazine, by Paul Allen - Interview with Marcus Siggelow, Head of Asset Management at Propreal

Revisions to the Energy Performance of Buildings Directive (EPBD) currently moving through the EU legislative process set out how Europe can achieve a zero-emission and fully decarbonised building stock by 2050, with huge near-term implications for the business models of real estate developers and investors. By Paul Allen

Proposed updates to the EU’s Energy Performance of Buildings Directive (EPBD) raise the spectre of a surge in “stranded” real estate assets across Europe.

“Buildings that meet the requirements are more ‘future proof’ and therefore may be easier to lease or sell, possibly even at a premium,” observes Jeff Rupp, Director of Public Affairs at the European Association for Investors in Non-Listed Real Estate (INREV). Buildings that don’t comply risk becoming stranded assets, unable to be leased or sold – especially with higher interest rates and tighter financing standards making redevelopment harder.

Harmonised energy performance classes from A to G

To achieve a decarbonised building stock by 2050 – a massive but imperative task given buildings contribute almost 40 percent of global CO2 emissions – the International Energy Agency calculates new buildings after 2030 must be built as net zero, and 2.5 percent a year of old stock should be retrofitted to produce zero emissions. The EPBD revisions are at the heart of the EU strategy to meet that goal.

All new builds will be required to be zero-emission and incorporate solar panels by 2028. The proposals introduce national bans on fossil-fuel heating systems and a harmonised system of energy performance classes, ranging from A (zero-emission) to G at the bottom end, Union Investment Real Estate’s Head of Sustainability Jan von Mallinckrodt explains. Harmonisation is crucial, since countries’ current ratings are not comparable in terms of the “letter” itself, he adds. Class G buildings must be renovated to achieve a minimum class F by 2027 at the latest, and E by 2030. Residential buildings have an additional three years to meet the energy efficiency label minimums.

Discussions between the European Parliament, Commission and Council to agree the final standards are in the trilogue phase. “The changes most likely to be seen are earlier implementation dates of the new requirements than originally proposed by the Commission,” INREV’s Rupp notes.

Differences in implementation create new issues

Linking A-level energy performance certificates (EPCs) to an absolute threshold (zero-emission buildings) is a massive change, as it repositions the EPC concept to better fit a world with limited resources, says Charles van Thiel, Director of Real Estate at GRESB. Achieving real-world progress, though, will depend on the absolute threshold definition, which still hasn’t been agreed, he adds. The lower EPC levels should reference an absolute threshold too. Aligning distributions across member states, as opposed to the top level only, he argues, could facilitate cross-country comparison and identification of assets subject to stranding risk at a European level.

Because EPBD implementation is a national matter, inevitable differences in countries’ approaches pose further issues. EPC labels will be based on different national performance standards, Rupp notes.

Data also needs to be collected before the precise energy performance of the highest and lowest labels are established. ­Politically-motivated weakening of efforts, such as postponing compliance dates, could result in too little time to meet set targets, UI’s Von Mallinckrodt adds. What is clear is that the EPBD revisions will reshape Europe’s real estate landscape. Because a big portion of companies’ emissions resides in their real estate, tenant demand for sustainable buildings is rising inexorably, driving rents with it, says Marcus Siggelow, Head of Asset Management at Geneva-based Propreal Capital Partners.

Institutional investor flows are likewise being directed towards sustainable investments and the highest-ranking SFDR “­Article 9” denominated funds, heightening demand and prices for green assets.

Green retrofitting offers opportunities for investors

Since a large chunk of the current building stock doesn’t meet the revised EPBD standards, the demand/supply imbalance, and resulting price impact, will only become more pronounced as 2030 nears. Building new green projects, especially in city centres with limited space, is difficult and won’t eradicate the supply gap, Siggelow argues. In any case, embodied carbon in building materials means the most sustainable buildings are retrofitted existing constructions. “Clearly the opportunity for investors today lies in buying ‘brown’ buildings and renovating them into something that is fully green and decarbonised. By doing so, they will reap the benefits that flow from the regulations and sustainable practices,” he concludes.