Investment in older buildings can command a ‘green premium’

The EU Energy Performance of Buildings Directive (EPBD) requires near zero-energy performance for new commercial buildings by 2030.

This may sound like an onerous burden, but the evidence shows that newly built or refurbished buildings with strong sustainability credentials command higher rents and lower vacancy rates when compared to their older, less energy efficient counterparts which risk obsolescence and capital devaluation.

“The biggest impact of the revised EPBD is likely to be its focus on improving the energy performance of existing buildings, not just new ones,” says John Delahunty, AIB’s head of real estate finance.

Ireland already has strong standards for new-build homes, but most of the buildings that will exist in 2050 have already been built, he points out.

“The directive therefore places greater emphasis on upgrading older homes and commercial properties through better energy efficiency, lower emissions and clearer information for property owners.”

In practice, this could accelerate retrofit activity, supported by measures such as improved energy certificates, renovation plans and targeted funding. “Over time, that should reduce energy costs, improve comfort and help increase the value and attractiveness of more energy-efficient properties,” he says.

AIB already supports customers through a combination of green finance, lower-cost lending for retrofit projects, and practical guidance that helps homeowners understand how to improve the energy efficiency of their properties.

For example, the bank’s Green Personal Loan is for customers investing in energy-efficiency improvements such as insulation, upgraded windows and doors, and energy-efficient heating controls, helping to reduce energy consumption and lower household emissions. Its Green Mortgage product is available to customers purchasing energy efficient homes.

Similarly, its Business Sustainability Loan helps businesses to upgrade the energy efficiency of their buildings and invest in other energy improvements.

A report last year from the Society of Chartered Surveyors Ireland (SCSI), in partnership with AIB, found a significant disparity between the progress in residential and commercial retrofitting, however.

While the residential sector is responding more positively to energy upgrade targets, it found, the commercial sector lags considerably, with a low percentage of older buildings achieving satisfactory building energy ratings.

That matters, given that the built environment accounts for approximately 37 per cent of Ireland’s emissions and is ranked as important as transport and agriculture in terms of emissions reduction.

It estimated that there are approximately 124,000 buildings in the commercial sector, with approximately 71 per cent of those being used exclusively for commercial purposes.

Here too the EPBD will have an effect. “The biggest impact on Ireland’s commercial property market is likely to be a greater focus on the energy performance of existing buildings. While newer properties already meet high standards, owners of older buildings may need to invest in upgrades to improve efficiency and reduce emissions,” says Delahunty.

The revised framework is also expected to improve transparency around building performance, with enhanced energy-rating information giving buyers, occupiers and investors a clearer view of a building’s energy use, emissions and overall efficiency.

“Over time, energy-efficient buildings could become more attractive to occupiers, investors and lenders, helping to drive increased retrofit activity across the market,” he says.

For commercial property owners, AIB provides financing to support projects such as upgrading insulation, replacing fossil fuel heating systems with lower-carbon alternatives, installing solar panels, improving building energy-management systems and enhancing the overall energy performance of office, retail and industrial buildings.

Such enhancements look to be an increasingly wise investment. Evidence from both European and UK office markets points to a growing “green premium” for high-quality sustainable buildings, says Delahunty.

In such markets, assets with leading sustainability credentials typically see stronger rental growth, higher occupancy and improved investor demand.

“Studies have identified rental premiums for certified sustainable office buildings and stronger performance for prime energy-efficient office stock compared with secondary stock,” he says.

“However, occupiers are not paying higher rents solely for environmental reasons and it is not always easy to disentangle all the factors.”

Occupiers are increasingly focused on a host of factors, he points out, including lower energy and operating costs, meeting sustainability and net-zero commitments, and reducing Scope 3 emissions reporting obligations – which relate to indirect emissions up and down a company’s value chain.

But key factors also include the need to attract and retain employees through higher quality workplaces, he points out, as well as the need to, as far as possible, “future-proof against evolving regulation and stakeholder expectations”.

It’s why sustainability is increasingly being viewed as a business and financial issue rather than simply an environmental one.

“As regulation tightens and occupier expectations evolve, we expect energy performance and carbon credentials to become a more significant determinant of rental demand, property value and long-term investment performance,” says Delahunty.

“Equally, the work done to improve the energy performance of a building is often part of an overall improvement to the building and, again, isolating the energy aspect is not always a simple process. It is also reasonable to say that this trend is most pronounced in offices and remains an emerging consideration for other asset classes.”