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FinLoop Thought Leadership: Carbon CapEx and the road to Carbon Net Zero.

22 Feb 2022

by Nicole Lux

How to navigate this journey is complex and differs by asset and building type.

With a climate emergency driving regulation, investor and tenant demand to sustainable assets – whilst very few exist – we are faced with the enormous task of having to upgrade virtually all commercial real estate investment stock. The Capital Expenditure related to this is called Carbon CapEx.

The entire real estate industry must get to grips with this process and the associated costs, and little is known of the benefits in cash terms, too. What will be the ROI, or the cost of not complying? What are the risks? Will there be fiscal incentives or penalties, or cheaper debt available for the more sustainable buildings?

Benefits of upgrading the sustainability of buildings will be:

  • lower running costs
  • longer building lifespan
  • greater desirability to tenants - i.e. lower vacancy - or future buyers
  • a rental or price 'green premium'
  • it could be about avoiding a 'brown discount'
  • avoiding becoming unlettable
  • cheaper finance
  • and a more secure exit route

Regulation differs per country and asset type, and we will delve into these details in future posts. For now let’s compare some of the energy certifications across Europe. Energy certificates are just a starting point and not the sole solution on the route to carbon net zero. Being aware of carbon and energy use by tenants all matter.

The method of assessment differs across Europe, and the exact certification used. Most countries demand an Energy Performance Certificate (EPC), such as UK, Germany, Austria, the Netherlands, Belgium, Denmark, Sweden, Norway and Spain, whilst other countries have similarly named schemes. They are mandatory when selling and renting, and minimum standards are being put in place for renting. The Netherlands and the UK are leaders with minimum EPC ratings enabling landlords to let out their properties which are being tightened slowly over time. In the Netherlands the proposal is that buildings with an EPC rating of A from 2030 onwards will be lettable. In some countries like in Ireland and Denmark EPCs are currently only required for new buildings, but mostly it covers all stock. As the main challenge is upgrading existing, older stock, more needs to be understood about how these assets will transition and what will happen to assets where the costs outweigh the benefits. We will continue this conversation and start discussions on a European-wide level.

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