Why 2025 EPBD recast is a game changer for EU real estate
Five ways the new EU Directive could transform real estate. By Andrea Palmer and Stan Bertram.
You would be forgiven if you admitted never having heard of the Energy Performance of Buildings Directive (EPBD). With SFDR and the EU Taxonomy attracting the financial sector’s full attention in recent years, the real estate industry almost lost track of the EU’s ambitions regarding buildings. However, it is our view that the EU’s EPBD 2025 recast will be a game changer for Europe’s real estate sector.
Updating legacy legislation
The EPBD is not new. In fact, it has been around for more than 20 years. It was the legislation that launched Energy Performance Certificates (EPC) and that first put ESG on the map in European real estate markets.
The European Parliament has just voted for a more ambitious EPBD to achieve net-zero buildings by 2050. We are encouraging both member states and the European Parliament to maintain this level of ambition when they enter the final negotiations this spring.
Most European real estate investors are by now aware that the EPC scheme is far from perfect. For one, there is almost no correlation between EPCs and actual energy intensities. And, second, current EPC schemes are fragmented across Europe, applying different criteria and scoring methods.
The EPBD recast proposal seeks to address these challenges. Here, we summarise five reasons why we believe the legislation will be a game changer.
1. HarmoniSed EU EPCs
The EPBD revision calls for one harmonised EPC scheme to be used by all EU countries. Furthermore, it is to be largely based on actual energy intensity rather than theoretical measurements, as is the case today. In the proposal, A-ratings will be reserved for zero-emissions buildings and G-ratings for the 15% worst-performing buildings in a given market. The remaining buildings are distributed proportionately between these two ratings.
Main takeaway: There will be one EU-wide EPC scheme, with ratings based on actual energy usage instead of theoretical measurements.
2. Minimum Energy Performance Standards (MEPS)
The proposal is to introduce EU-wide “minimum energy performance standards”. These MEPS outline the minimum EPC rating a building can earn for it to be considered compliant with legislation. It is up to individual member state governments to define appropriate regulatory ‘sticks and carrots’ to mobilise real estate owners in their country.
Buildings owned by public bodies, non-residential and commercial:
- After 1 January 2027, at least EPC E; and
- After 1 January 2030, at least EPC D.
Residential buildings and units:
- After 1 January 2030, at EPC E; and
- After 1 January 2033, at EPC D.
Main takeaway: Minimum EPC requirements across the EU could mean situations where landlords are no longer able to rent space that does not comply (e.g. like is currently the case for offices in the Netherlands) or receive fines. This will vary country by country.
3. Carbon Border Adjustment Mechanism (CBAM)
The CBAM is a tariff on carbon-intensive products, such as steel, that are imported into the EU. This is a rather protectionist economic policy that aims to make EU manufacturing more competitive against foreign-produced goods that are not subject to meaningful carbon taxations.
We expect the CBAM to change the dynamics of decisions to build new or redevelop buildings. Because the most carbon-intensive materials are in properties’ foundation and frames, redevelopments that keep a building’s existing infrastructure will become more interesting to pursue.
We anticipate real estate companies that know how to effectively reposition buildings by reusing existing carbon-intensive materials to be the winners under the CBAM.
Main takeaway: CBAM will increase the cost of new real estate developments and make embodied carbon more financially material.
4. National building energy databases
The revision calls for public national databases for building energy performance to be stored. This database is to include information on buildings’ EPC ratings, building renovation passport content (explained below) and calculated/metered energy consumption. Eventually, member states will enable transfer of this data to the EU-level Building Stock Observatory, which will be used to generate denominators for the consumption-based EPC scheme (as explained above).
Main takeaway: Our expectation is that these databases will unlock greater transparency across the real estate value chain and will enable an energy consumption-based EPC system, specifically for defining the bottom 15% of real estate stock as required for EPC G.
5. Building renovation passport
Finally, the recast also calls for increased visibility of sustainability through what is called a building renovation passport. These passports should entail specific renovations that need to be implemented for a building to reach net zero, including associated costs. Based on input from site visits and energy audits, passports outline an optimal sequence of project implementation (i.e. renovation measures) to avoid energy/carbon ‘lock-ins’.
Main takeaway: Building renovation passports improve visibility on future costs for investors, valuers and lenders. We expect this level of information to help burst the carbon bubble by allowing investors to appropriately price upgrades to net zero.
Andrea Palmer is investment manager, public real estate, at PGGM. Stan Bertram is an analyst for private real estate at PGGM