Investing in the environmental sustainability of real estate

The importance of sustainable real estate

The real estate sector has a significant carbon footprint and plays a central role in achieving climate goals. According to recent studies, buildings account for about 40% of total energy consumption and around a third of CO₂ emissions. Therefore, a sustainable transformation of the real estate sector is essential to achieve the climate targets of the European Union and Germany.

Despite numerous subsidy programmes and regulatory measures, progress in the energy-efficient modernisation of the building stock has so far been limited. The majority of real estate in Germany is more than ten years old, and many buildings even date from times with low energy requirements. Old buildings in particular often have inadequate insulation and are heated with fossil fuels, which results in high energy consumption and emissions. Considerable investments are necessary to remediate these portfolios in a climate-friendly way.

Regulatory measures such as the EU Taxonomy, the Building Energy Act (GEG) or the Corporate Sustainability Reporting Directive (CSRD) set framework conditions for sustainable investments and accelerate the switch to environmentally friendly energy sources. In addition to ecological necessity, there are also economic reasons for a sustainable real estate strategy. Energy-efficient buildings have lower operating costs in the long term, achieve higher rents and are more financially attractive due to subsidy opportunities and tax incentives.

Challenges and regulatory framework

A major obstacle to the comprehensive modernisation of the building stock is the so-called tenant-landlord dilemma. While the costs for energy-efficient renovations are usually borne by the owners, it is primarily the tenants who benefit from lower energy costs. Since tenants cannot directly determine the investment decisions of the owners and they often have no direct opportunity to fully pass on the saved energy costs in the form of higher rents, the willingness of many property owners to renovate remains limited.

Another problem is the misjudgement of future energy prices and savings potential. Investors and owners often underestimate the long-term costs of fossil fuels and the financial benefits of energy-efficient renovation measures. However, rising energy prices and regulatory requirements are increasingly exacerbating the pressure on property owners to implement measures to improve energy efficiency.

Regulatory requirements play a decisive role here. The Building Energy Act requires the use of renewable energies in new buildings and sets strict requirements for renovations. At the same time, the EU taxonomy ensures that capital flows are directed towards sustainable investments in a targeted manner. Banks and financial institutions are increasingly required to integrate sustainability risks into their risk assessments, which has an impact on funding options. Properties with poor energy efficiency could be more difficult to finance in the future or only with higher interest rates.

The increasing link between ESG (environmental, social, governance) criteria and lending and property valuation is opening up new financing incentives for energy-efficient buildings. Low-interest loans, tax advantages and subsidy programs offer owners attractive opportunities to implement sustainable measures. At the same time, pressure is increasing due to stricter legal requirements, rising energy costs and the demand for sustainable residential and commercial space.

Opportunities and future prospects

Investments in energy-efficient real estate offer a variety of advantages for owners, tenants and investors. In the long term, owners will benefit from increases in value, more attractive financing conditions and improved rentability of their properties. In addition, the attractiveness for tenants increases, as they benefit from lower operating costs and a better quality of living and working. Companies as tenants increasingly prefer buildings that support their own sustainability goals and help meet the ESG requirements of their investors and customers.

Financial institutions are also facing new challenges and opportunities. Sustainability risks must increasingly be included in the credit assessment, which means that “green” real estate loans can be granted under more favourable conditions. Properties with poor energy efficiency, on the other hand, could have higher financing costs or be more difficult to sell in the future. Initial studies already show that energy-efficient buildings usually have a higher market value and generate more stable returns in the long term.

The ecological transformation of the real estate sector is a long-term process that requires a forward-looking strategy. Investments in sustainable measures can not only reduce energy costs, but also secure competitive advantages and increase the value of real estate in the long term. In view of the tightening regulatory requirements and the growing demand for sustainable residential and commercial space, the importance of ESG criteria in real estate valuation and financing will continue to increase.

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