Real estate investors across Europe are turning to legal advisors amid a stark confrontation with new EU regulations that threaten to induce significant writedowns on property values due to stringent carbon dioxide emissions and energy consumption laws. High interest rates compound the sector’s challenges, spurring concern over the ability of investors to finance costly renovations to comply with the European Union’s ambitious environmental standards.
On March, the legislative push by the EU, the Energy Performance of Buildings Directive, came to a crucial point with its approval, setting a gradual but firm path for property owners to undertake substantial renovations. The directive mandates that by 2033, a quarter of the EU’s most energy-consuming buildings must be renovated, with the ultimate goal of all new buildings being emissions-free by 2030.
“The reality is there will be some who simply can’t afford or would choose not to comply with the legislation directive on the basis that paying a penalty is, at least in the short term, easier than having to spend a huge amount of your reserves on bringing your stock up to grade,” stated Rory Bennett, a managing associate at Linklaters.
The overarching goal is to ensure the bloc meets its commitment to the Paris Agreement. However, the current average annual reduction in energy consumption due to refurbishments stands at a meager 1%. To meet the EU’s climate requirements, the European Commission estimates a substantial increase in renovation spending, totaling approximately €275 billion ($300 billion) per year.
For the UK, similar regulatory trends are on the horizon, necessitating environmental upgrades with about 70% of the country’s commercial property needing major improvements to meet energy performance certificate (EPC) targets. “In a lot of places, you’re going to struggle,” said Jim Gott, asset surveillance manager at Mount Street, as the UK targets an EPC grade of at least C by April 2027, and no lower than B by 2030.
Meanwhile, the challenge to improve energy efficiency is not limited to the UK. About 85% of EU buildings were built before the year 2000, and due to their poor energy performance, they are the single biggest users of energy, with fossil fuels still being the dominant source for heating and cooling. The aim is to cut emissions from this sector by 60% by 2030.
As investors grapple with these impending costs, the market dynamics are shifting. Green buildings are more sought after, commanding a rental premium and experiencing demand outstripping supply by over 50% among the EU’s largest companies, as per Jones Lang LaSalle Inc. reports.
However, not all stakeholders are ready to embrace the change, with some focused on mitigating obligations rather than proactively upgrading their properties. “Poorer quality buildings in secondary locations need expensive capex renovations and the sums are getting more difficult to add up,” highlighted Kim Politzer, head of research for European real estate at Fidelity International.
Despite the daunting financial landscape, Bennett remains cautiously optimistic about the future, suggesting that an improvement in the economic environment could alleviate some pressure. “If the economic environment picks up, interest rates will come down and that’s going to really help with the decision-making,” he said, potentially affording investors the much-needed breathing space to address the regulatory challenges ahead.
Relevant articles:
– Real estate investors turn to lawyers after ‘huge’ CO₂ shock, The Economic Times, Mar 24, 2024
– Accelerating the energy efficiency renovation of residential buildings — a behavioural approach, European Environment Agency, Jun 29, 2023
– Brussels’ big building grab, politico.eu, Dec 15, 2021