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Germany: The Coalition Agreement and the Real Estate Industry – From Climate-Neutral Heating to Mandatory Rooftop-Solar and Embodied Carbon

The upcoming traffic light coalition has published its coalition agreement and defined its priorities for the 20th legislative period in it. For the German real estate industry, there are some exciting announcements that will further accelerate the dynamic development.

One of the most striking and very concrete planned changes concerns the Building Energy Act (“Gebäudeenergiegesetz”, GEG). From 2025, every newly installed heating system is to be powered by 65% renewable energy. From 2024, the replaced parts of buildings must meet at least efficiency house standard 70 in the case of significant renovation works, conversions and extensions to existing buildings. The standard for new buildings will be KfW Efficiency House 40 from 2025. The level of ambition for the planning of calculated energy requirements will therefore be raised further. At the same time, the transformation of the national heating infrastructure will be driven forward.

Beyond that, there are a number of concrete measures to be found in the agreement:

  • Suitable roof areas are to be used for solar energy. For new commercial buildings, there will even be an obligation to install rooftop solar installations.
  • In data centers, waste heat is to be recovered. New data centers are to be operated in a climate-neutral manner from 2027.
  • The CO2 price should not fall below €60 per ton in the long term.
  • At several points in the contract, reference is made to the importance of neighbourhood solutions for the sustainable provision of heat. Heat networks are to be further expanded and 50% of heat is to be generated in a climate-neutral manner by 2030. The primary energy factors of many heat networks will benefit from this.
  • Tenants can also look forward with anticipation to the new legislative period. The construction of 400,000 new housing units, 100,000 of which are to be publicly subsidised, is to contribute to further easing the situation on the housing market. There are also concrete targets for the distribution of the additional burden of heating costs due to the additional CO2 price to be paid: The traffic light coalition wants to introduce a model that defines how the additional costs are shared between tenant and landlord according to the building energy performance certificates by June 1, 2022. The worse the EPC of the building, the higher the share of the CO2 price that the landlord has to pay. If no agreement is reached on the concrete design of this EPC-dependent model, the CO2 price is to be split 50% each between tenant and landlord from June 2022. 

Other measures announced have not yet been described in concrete terms, but they show the direction in which the coalition partners would like to steer the industry.

  • The legal and financial structuring of tenant electricity and neighbourhood concepts is to be simplified.
  • A so-called “construction, housing costs and climate check” is to be introduced. It remains to be seen what exactly is meant by this.
  • Serial construction and refurbishment are to be simplified – especially with regard to approval processes.
  • Grey energy (“embodied carbon”) and life cycle costs are to be considered more closely and stored in a digital building resource passport. This is intended to stimulate the circular economy in the construction industry. The keywords timber construction, lightweight construction and strategies for securing raw materials also come up here.
  • Renovation roadmaps are to be “widely and systematically used” and even become free of charge for condominium owners’ associations when they purchase a building.
  • The building energy certificate is to be improved and digitised. The creation of a digital building energy register is being examined.
  • ESG ratings are to be included in the credit ratings of the major rating agencies on a mandatory basis. The EU’s Corporate Sustainability Reporting Directive (CSRD) is supported and is to be supplemented by European minimum requirements.

And then the traffic light coalition has a surprisingly concrete opinion on one of the big trend topics since the start of the Covid-19 pandemic: the home office. Here, employees are to be given a so-called right to discussion (“Erörterungsanspruch“) about mobile working and home office in the future. The employer should only be allowed to object to the employee’s wish for mobile working if there are operational reasons for doing so. Mobile working should then be “possible without any problems” throughout the EU. So it appears that German offices in the future must evolve if they want to remain an attractive and productive place that attracts employees.

In some places, the coalition agreement is very precise with regard to the real estate sector and also wants to quickly follow up words with deeds. Instead of describing target values for the coming decades, some of the implementation deadlines are only a few years long. If the announced measures are actually implemented, this will provide a strong tailwind for the transformation of the real estate industry and the decarbonization of our buildings. We at EVORA very much welcome this.

Investors and developers are therefore well advised to incorporate meaningful and ambitious sustainability KPIs and ESG targets into all decisions already today. We are happy to support you!

It is less than a month until the introduction of CO2 pricing in the German building sector – are property owners and tenants prepared?

On January 1, 2021, the CO2 price will be introduced in the German heating market. It will start at EUR 25/t and then rise in a predictable manner to EUR 65 by 2026, before the price is freely determined via emissions trading from 2027.  Most estimates predict that they will then quickly reach triple digits.

In 2019, when the then German ‘Klimakabinett’ made its decisions it was still seen as one of the key drivers for achieving Germany’s CO2 reduction targets. Today, there is little sign of that. The price is considered too low to have a strong steering effect. The governing coalition is also divided on the question of who should carry the costs: is it the tenants, the landlords, or both? If no cap is introduced, and it does not look like it will, landlords will initially be allowed to pass on the full CO2 price to tenants as part of their normal heating costs. In this scenario the energy supplier would simply add the CO2 price to the energy bill and currently doesn’t even have to declare it separately.

Have you already talked to your key tenants about what the CO2 price will cost them in the next few years and how these added costs can be reduced? Have you analysed the impact that this levy could have on the value development of your assets?

Let’s talk about it. For 10 years, EVORA has been successfully helping clients with understanding climate policy risks and opportunities and with positioning themselves strategically, making their funds or individual assets productive, profitable, and resilient to change. Now also in Germany.

EVORA Global is delighted to announce that Meike Borchers has joined as Head of Germany and the wider DACH region.

Meike joins EVORA at a hugely significant time as we continue with our international growth strategy, having recently opened offices in Frankfurt, Milan and India. This is another landmark appointment for EVORA and further underpins capabilities as we develop both depth of expertise and geographies for the real estate investment market. Meike brings with her a wealth of expertise, having spent a number of years in the US, UK and most recently in Germany.  She has a strong technical background, which is critical for our end-to-end service offerings, and is an expert in building assessment and certification. As such she embodies EVORA’s holistic approach to long term value.

Meike will be responsible for introducing the EVORA suite of  ESG services to the real estate sector in Germany and the wider DACH region, with a particular understanding and focus on the specific national and regional aspects as well client expectations.

The timing of the entry into the German market couldn’t be better; it coincides with the introduction of a number of game-changing developments in the real estate sector such as the adoption of the Taxonomy Regulation by the European Commission, the development of the EU’s Green Deal components and most recently the European commitment to speed up effort and to cut greenhouse gas emissions by at least 55% by 2030 while still targeting climate neutrality by 2050.

‘Having worked in sustainable real estate consulting for over a decade, it seems to me that the time is finally ripe for big meaningful steps to a low carbon future and a sustainable and healthy built environment. Shaping this future takes a range of technical and economic expertise paired with passion and innovative tools which I am very happy to have found with the EVORA team. Auf geht’s!’   

Meike Borchers. Head of Germany

Also joining the German team is Melf Asmussen who will be leading our technical services and certifications work. While EVORA has deep expertise in ESG Strategies and GRESB reporting, the ability to drive these policies into the buildings themselves is a critical element in our approach.  Melf has a Masters in Energy and Environmental Management as is perfectly placed to lead our technical teams in the DACH region.

“We are delighted to welcome Meike and Melf to the EVORA family at such a critical time for our market and the wider investment community. Public perception, investor expectations and regulatory disclosure requirements are combining to create a time of unprecedented change and the formal opening of our office in Germany allows us to support our existing and new German clients more fully in their transition to a low carbon economy. Only 10 years to meet a 60% reduction in emissions!”

Philippa Gill , Director – Europe