Megatrend decarbonization
Energy-efficient renovations of residential properties are becoming increasingly important in view of rising energy costs, strict regulations and decarbonisation pressure. The megatrend of decarbonization calls on the real estate industry to massively reduce CO₂ emissions. But the question remains for investors: Is it worth the effort?
In addition to advantages such as lower energy costs, value appreciation and government subsidies, possible rent adjustments and long-term market attractiveness also count. With the Paris Agreement, 197 countries committed themselves to keeping global warming below 2 degrees. The EU is aiming for climate neutrality by 2050, Germany by 2045, and buildings play a key role as they contribute significantly to emissions. The Building Energy Act (GEG) requires energy-efficient renovations: new buildings are to be emission-free by 2030, and existing buildings are to achieve at least energy efficiency class (EEK) “D” by 2033.
Renewable energies and modern building technology offer CO₂ savings potential, but high costs and complex specifications are unsettling investors. Data from Europace shows that existing properties of medium quality are losing value compared to new buildings. This article sheds light on the strategic and economic advantages of energy-efficient renovations and shows their importance as a key to sustainable value creation in the real estate sector.
Energy efficiency classes (EEK) in the focus of the needs analysis
The need for energy-efficient renovation of residential properties in Germany is immense. Energy efficiency classes (EEK), which assess the annual energy consumption of a building, range from “A+” (very efficient) to “H” (very inefficient). Buildings of classes “E” to “H” in particular have considerable deficits.
Regional differences arise from building structures: apartment buildings dominate in cities, single-family houses in rural areas. Properties with low EEK are mainly found in rural and structurally weak regions. According to the IW Cologne, 70% of buildings in Saarland are inefficient (“E” and worse) – the highest value nationwide. NRW (50%) and eastern German states are also severely affected. However, many East German cities benefited from investments and tax incentives such as the AfA after reunification.
There is a great deal of pressure to act in order to achieve legal requirements and climate targets. Nevertheless, the renovation rate remains low. According to DIW Berlin, it was only 0.7% in 2023, well below the target of 2%.
Success Strategies for Efficient Remediation: Best Practices at a Glance
An energy certificate shows the energetic condition of a building. If it is missing, electricity and heat bills with Annex 10 of the Building Energy Act (GEG) can be used to determine the energy efficiency class (“A+” to “H”). Efficiency gains can be achieved by replacing windows and doors, insulating facades and ceilings, using modern heating systems such as heat pumps or photovoltaic systems to generate electricity.
- Replacement of windows and doors: Outdated windows and doors lose up to 20% of their heat. Modern double or triple glazing minimizes this loss and improves sound insulation. The Building Energy Act (GEG) defines maximum U-values for this purpose.
- Insulation of facades and ceilings: The insulation of the top floor ceiling is cost-efficient and often sufficient. Materials such as wood fibres, polystyrene or mineral wool effectively reduce heat losses. Good façade insulation further increases efficiency.
- Heating: If a district heating connection is planned, a new heating system is usually unnecessary. Otherwise, optimised systems and renewable energies such as heat pumps, which are quickly amortised by subsidies, offer a good alternative.
- Photovoltaic systems: PV systems ideally complement heat pumps and provide cost-effective solar power. In apartment buildings, tenant electricity concepts and use for common areas offer additional advantages. Surplus electricity can be used for charging infrastructure or feed-in.
Energy efficiency and savings potential: measures, costs and benefits for tenants
The CapEx analysis shows the investments (capital expenditures) for energy-efficient renovation measures and their effects on energy efficiency. Moderate measures cost about 250 EUR/m² and bring about fundamental improvements with an increase in RE by one class. Average measures (“On Average”) for about 380 EUR/m² include more extensive work on the building envelope and heating system, which allows for an improvement of two classes. Intensive measures (“intensive”) with costs of about 520 EUR/m² are the most comprehensive renovations. They rely on a complete energy-efficient modernisation that both greatly reduces energy consumption and significantly increases living comfort. Intensive measures enable an improvement of up to three energy efficiency classes (EEK).
Heating ancillary costs such as heating costs and hot water account for around 25% of the total rent. Apartments with higher energy efficiency (EEK “A+”) reduce these costs considerably: According to an evaluation by the IW Cologne, the discounts here are 1.2 EUR/m², compared to 2.0 EUR/m² in class “F” and worse – a difference of 64%. This shows how strongly energy efficiency influences the financial burden on tenants. Efficient construction and renovation measures reduce energy costs, promote climate protection and increase the attractiveness of the property through lower operating costs, better rentability and a reduced CO₂ footprint.
Tenants and landlords share the costs of energy-efficient investments, as only part of it can be passed on to the tenants. According to §559 BGB, landlords are allowed to pass on 8% of the modernization costs, for example for insulation, window replacement or heating modernization, to the annual rent. This levy was reduced from 11% to 8% in 2019 to relieve tenants. In addition, capping limits apply: If the net cold rent is above 7 EUR/m², the rent may increase by a maximum of 3 EUR/m², below that a limit of 2 EUR/m² applies. These fixed limits pose a challenge in view of rising construction costs and influence the scope for renovations.

Energy-efficient refurbishment: State subsidies – more than just the icing on the cake
State subsidies for energy-efficient renovations offer attractive opportunities for institutional investors. KfW Bank supports up to 25% of the investment costs with low-interest loans and repayment subsidies, depending on the KfW Efficiency House standard achieved. Among other things, insulation, window replacement and the installation of heat pumps or photovoltaic systems are funded. BAFA reimburses up to 40% of the costs for climate-friendly heating systems such as heat pumps and offers additional bonuses for replacing old oil heating systems.
The Federal Funding for Efficient Buildings (BEG) combines various programs and allows grants of up to 45% of the costs for comprehensive renovations. In addition, municipalities often offer subsidies, for example for district heating connections. For investors, these programs significantly reduce renovation costs and create a financial incentive to efficiently combine environmental and economic benefits.
How energy-efficient renovations affect property values
The BGB requirements around the apportionability of modernization costs de facto represent a limitation of cash flows. Many risk-averse investors and investment managers do not see residential units from the lower distribution of energy efficiency classes as a suitable investment product, as the elasticity between CapEx and cash flow growth could be below the 1 percent mark in the worst-case scenario. Investments are then considered unprofitable.
However, such an assessment is certainly vague, and does not distinguish between the immediately effective contractual rent and the market rent, which will only be relevant for payment in the future. Each relevant CapEx amount directly leads to better asset quality. An increase in quality reflects a higher market rent for the space and a higher factor. Both components result in higher estimates for real estate values. In contrast to private owners, institutional investors are generally subject to market-based accounting rules (“Market Valuation Approach”) and can realize the better valuation approaches through profit or loss. The extent of the increase in cash flow potential and valuation factors depends in particular on the CapEx intensity, but also generally on the EEK classification before the respective investment and on the relevant city type.

Regional differences in energy-efficient renovations: Where are investments worthwhile?
The dynamics of local real estate markets and city types differ greatly due to varying supply, demand, income structures and demographic developments. These factors significantly influence the effect of renovation strategies on rents and increases in value, depending on the type of city.
In less attractive D cities, moderate or average renovations (“moderate” & “on average”) are often not sufficient to cover the costs through increases in value alone, especially for properties with low initial quality. However, investments in mid-quality real estate can generate positive net value contributions. A sound knowledge of the market is crucial here in order to correctly assess potential.
In B-cities and metropolises, renovations usually offer positive earnings opportunities, regardless of the investment intensity. However, the purchase of low-quality real estate in conjunction with mid-cap strategies is less attractive. In addition, the change from EEK “A” to “A+” often does not show any significant added value. Precise local analysis remains essential to develop profitable investment strategies.
Energy-efficient renovations of residential properties are indispensable in the age of decarbonisation. However, investment success is strongly regionally influenced.
Summary and outlook
Energy-efficient renovations are indispensable in the age of decarbonisation. Stricter laws and climate targets are challenging investors to implement measures in an economically sensible way. Profitability depends on location, property quality and investment scope, while subsidies from KfW, BAFA and BEG cushion high costs and enable value increases.
However, the success is strongly regional: In A and B cities, renovations promise consistently positive returns, while D cities require a differentiated analysis. High-quality properties offer significant increases in value, while investments in low-quality properties are often less attractive with mid-range strategies.
The future remains promising: With an expected market stabilisation, interest rate cuts and government support, energy-efficient renovations create a sustainable opportunity. They combine climate protection with economic benefits and secure the long-term value of real estate portfolios – a decisive lever for ecological and financial success.