Real estate: a spotlight on the Energy Performance of Buildings Directive

According to the International Energy Agency (IEA), buildings are directly and indirectly responsible for around a third of global energy- and process-related carbon dioxide (CO2) emissions [1]. The World Green Building Council estimates that around 11% of global emissions come from the extraction and manufacturing of materials, known as embodied carbon [2]. Given global climate change and the urgent need for sustainable practices, the recently revised Energy Performance of Buildings Directive (EPBD) has emerged as a crucial legislative framework. Introduced by the European Union (EU) as part of the Fit for 55 package, it aims to promote the renovation and construction of energy-efficient buildings. This directive serves as a pivotal component in the EU's broader agenda to enhance energy efficiency and reduce carbon emissions in the building sector.

What is the EPBD?

Established in 2002, the EPBD sets stringent requirements aimed at improving the energy performance of buildings throughout the EU. It encompasses both new constructions and existing buildings, thus facilitating a holistic upgrade of the entire building stock. Some key features of the EPBD include:

Minimum Energy Performance Standards (MEPS)
One of the central tenets of the EPBD is establishing MEPS for both residential and non-residential buildings. By 2030, all new buildings must adhere to zero-emission standards, effectively transitioning away from fossil-fuel reliance. It also mandates that by 2033, a quarter of the EU's most energy-inefficient buildings must undergo renovation, thereby setting ambitious benchmarks for improving energy performance.
Energy Performance Certificates (EPCs)
The EPBD introduces EPCs as a vital tool for property transactions. These certificates provide standardised and transparent assessments of a building's energy efficiency, enabling potential buyers and investors to make informed decisions. As a result, EPCs play a key role in increasing the awareness and importance of energy efficiency within the real estate market.
Focus on retrofitting
The directive emphasises retrofitting existing buildings to enhance their energy performance. With around 85% of buildings in the EU constructed before 2000, the need for comprehensive retrofitting efforts is evident. The EPBD sets clear expectations for member states to focus on renovating their least-efficient buildings, thereby driving significant improvements in energy consumption across the board.
Infrastructure for electric vehicles (EVs)
The integration of EV charging infrastructure is another vital aspect of the EPBD. By mandating the installation of EV chargers in new constructions and major renovations, the directive not only supports the growth of the EV market but also contributes to reducing greenhouse gas emissions in the transportation sector.
Sustainable heating and cooling solutions
Given that a large portion of energy consumption in buildings is dedicated to heating and cooling, the EPBD encourages a shift from traditional fossil fuel-based systems toward more sustainable alternatives. This includes promoting the installation of renewable energy technologies, such as heat pumps and solar panels.

These foundational elements form the backbone of the EPBD, illustrating its comprehensive approach to addressing the energy performance of buildings throughout the EU.

Why are we talking about the EPBD now?

The European Parliament's recent amendments to the EPBD aim to accelerate building renovations across the EU, promoting energy efficiency and reducing greenhouse gas emissions. Key updates include imposing stricter Minimum Energy Performance Standards (MEPS), which mandate that the worst-performing 15% of buildings achieve at least a Class E energy performance rating by 2030 and Class D by 2033.

Another significant revision is the increased focus on using renewable energy sources. There are targets set to ensure that 49% of all energy consumption in new and substantially renovated buildings comes from renewable sources [3]. This directive aims to support the EU’s broader goal of achieving a climate-neutral building stock by 2050 and aligning with the objectives of the European Green Deal.

Regional implications for EPBD

The EPBD's impact will vary across different regions of Europe, which reflects the diverse building stock and local energy challenges each area faces. Understanding these regional implications is crucial for gauging the directive's effectiveness and potential outcomes.

Western Europe
In countries like Germany, France, and the Netherlands, robust frameworks for sustainability are already in place. This positions these nations to effectively implement the EPBD. With growing market demand for energy-efficient buildings, these regions are poised to lead the charge in adhering to the directive's ambitious targets.
Southern Europe
Mediterranean countries, such as Spain and Italy, present unique challenges, particularly concerning their older building stock and the seasonal spikes in energy consumption. The EPBD offers these nations a strategic opportunity to enhance energy efficiency through targeted renovations, especially with the integration of solar-energy solutions that are well-suited to their climates.
Eastern Europe
Nations like Poland and Romania face significant hurdles due to a high volume of inefficient buildings. The EPBD’s mandates could impose financial challenges, but they also provide substantial opportunities for energy savings and improving living conditions. These would contribute to an enhanced quality of life for residents.
Northern Europe
Scandinavian countries, while already leaders in sustainability, will still need to increase their renovation efforts to meet the EPBD's objectives. Many older buildings require modernisation to align with contemporary energy performance standards, necessitating a concerted effort in retrofitting initiatives.

The revised EPBD directive was approved in April 2024 and came into force for all EU countries on May 28, 2024. As of now, none of the EU member states has fully transposed the new requirements into their local laws. This highlights the challenges and importance of each country's unique approach to achieving the directive's ambitious goals. The ongoing process of translating the directive into local legislation showcases the complexity and scale of ensuring compliance and achieving the broader objective of energy-efficient, decarbonised buildings across the region. An extract of the EPBD timeline co-created by the European Real Estate Association, the European Association for Investors in Non-Listed Real Estate Vehicles and the Royal Institution of Chartered Surveyors highlights the expected pace of policy implementation and specific actions needed: EPBD timeline for real estate.

What does this mean for investors?

Within the real estate universe, there is a growing emphasis on ESG (environmental, social and governance) criteria within investment portfolios. This means that properties meeting or exceeding the EPBD’s standards will likely see heightened demand and lower operating costs. Conversely, properties that fail to comply may experience declining values. It’s therefore important for investors to prioritise energy performance in their decisions. It will also be interesting to see how the EPBD aligns and interacts with other voluntary frameworks, such as the Carbon Risk Real Estate Monitor benchmarks, and how the market’s perception of a ‘future-fit’ asset may change.

Properties that fail to meet the EPBD's standards could face significant financial repercussions, including reduced interest from potential buyers or tenants. Investors must therefore stay informed about energy performance trends to navigate this evolving market successfully.

For those interested in further reading, several valuable resources shed light on the anticipated benefits of the revised EPBD:

• Publications released by Buildings Performance Institute Europe (BPIE): highlighting the multiple benefits of energy-efficient buildings into cost-optimal calculations, which include improved energy security, productivity, reduced energy poverty, and support for the energy grid.

i. EPBD-Wise_Report_Final.pdf
ii. From cost savings to societal gains: rethinking the cost-optimal methodology

• European Commissions’ release of key facts and figures on energy and EU buildings and how the EPBD contributes directly to the EU’s energy and climate goals.
i.Energy Performance of Buildings Directive

https://www.iea.org/reports/breakthrough-agenda-report-2023
World Green Building Council. (2019). Bringing embodied carbon upfront: Coordinated action for the building and construction sector to tackle embodied carbon. Retrieved from https://worldgbc.org/advancing-net-zero/embodied-carbon/
European Parliament. (2023). Amendments to the Energy Performance of Buildings Directive. Retrieved from https://www.europarl.europa.eu/doceo/document/TA-9-2023-0068_EN.pdf[1]. Is there anything else you need help with?