Building the future

European sustainability regulation is creating a widening investment divide between energy-efficient, future-ready buildings and assets exposed to rising retrofit costs, weaker financing prospects and obsolescence.

• Buildings account for around 40 per cent of EU energy consumption and approximately 36 per cent of gas imports, while about 80 per cent of household energy demand comes from heating, cooling and hot water.
• The Energy Performance of Buildings Directive entered into force on 28 May 2024, must be transposed into national law in 2026, requires existing buildings to improve performance, and mandates zero-emission new buildings by 2030.
• More than three-quarters of EU buildings have poor energy-performance ratings, while the European Commission estimates that upgrades will require more than €370 billion of annual investment between 2021 and 2030; renovations could reduce building-related gas imports by up to 60 billion cubic metres a year by 2040.
• Market evidence points to a material valuation gap: Dutch offices rated EPC C or better gained 21.8 per cent after minimum standards were introduced, while EPC G offices suffered a 51.1 per cent discount; UK A- and B-rated offices achieved rental premiums of 10 to 15 per cent.
• Aviva Investors’ Foz office in Amsterdam, already rated BREEAM Excellent and EPC A, achieved preliminary energy-requirement reductions of approximately 40 per cent in winter and 20 per cent in summer after smart-control upgrades; the firm also provided a €33 million green loan for 342 student beds in Valencia.

Takeaway: Equity investors should prioritise proactive refurbishment and asset management, while debt investors should incorporate regulatory obligations into cash-flow, refinancing and credit-risk analysis; secondary offices and other poorly performing assets face the greatest risk of value impairment and stranding.