EU Climate Initiatives: Impact of Energy Efficiency on Real Estate Valuation - Insights by CBRE
The European Union (EU) has outlined a strategic plan to address climate change, which includes initiatives aimed at enhancing the energy efficiency of buildings. Through directives like the Energy Performance of Buildings Directive and the Energy Efficiency Directive, the EU aims to foster energy-efficient and low-carbon building structures by 2050. These directives also introduce Minimum Energy Performance Standards (MEPS) gradually to support this goal.
CBRE has conducted an assessment to gauge the impact of energy efficiency enhancements in multifamily housing (MFH) on asset valuation.
Key findings:
CBRE has conducted an assessment to gauge the impact of energy efficiency enhancements in multifamily housing (MFH) on asset valuation.
Key findings:
- While asset-stranding is not novel in real estate, the potential scale of stranding linked to MEPS-driven transition risk could be significant.
- MEPS-related transition risk could pose substantial challenges for the financial sector, particularly regarding buildings serving as collateral. Financial institutions, aligning with carbon footprint reduction strategies, may become more discerning in refinancing assets requiring upgrades.
- There's an observable trend of cap rate compression for top-performing assets across the region, notably in countries like The Netherlands and Germany.
- Establishing the capitalization of energy efficiency into rents is crucial for property owners and investors, serving as a financial incentive for asset upgrades.
- Analysis indicates that energy efficiency attributes, as reflected in EPC ratings, influence MFH rental rates. However, the financial benefits must outweigh retrofit costs to justify premiums.
- In the Danish market, building a business case for upgrading an MFH asset from EPC B to EPC A is challenging. Conversely, transitioning a building from EPC C to EPC B yields a 9% increase in asset value.
Additional insights:
- 56% of European residential properties have EPC ratings lower than D.
- Upgrading a building from EPC rating C to B results in a 9% increase in asset value.
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