ESG in focus: how sellers and buyers of residential and commercial buildings should act now

The role of the real estate sector in decarbonization

With approximately 38% of energy consumption and 29% of all greenhouse gas emissions in the EU, the real estate sector carries immense responsibility. Germany has set the goal of becoming climate-neutral by 2045, while Europe aims to follow by 2050. Against this backdrop, the EU taxonomy has increasingly come into focus, even though its visibility in public perception has somewhat declined due to other crises.

The previously looming mandatory renovation for existing buildings has, for the time being, been put on hold. In theory, old heating systems could continue to operate with fossil fuels until 2044, provided they are regularly maintained. This has led many investment managers to avoid rushed modernizations or sales. Yet in the real estate sector, even existing properties can no longer escape the need for action.

ESG from the seller’s perspective: from peripheral topic to sales argument

ESG has evolved from a theoretical concept into a decisive sales argument. What a few years ago was primarily anchored in the institutional world has now entered the market for residential and commercial buildings. The relevance of ESG as a sales factor has risen rapidly and now holds a firm place among the top factors influencing property value.

Today, ESG is calculated as Capex in every due diligence process, and a new discipline, ESG due diligence, complements the classic review modules such as financial, tax, legal, and technical due diligence. This development has far-reaching effects on purchase prices, Capex requirements, financial modeling, and contract design.

Even for owners not currently intending to sell, ESG is becoming increasingly important. When refinancing, banks’ questions are fundamentally changing. While many owners previously followed a “head-in-the-sand” approach by ignoring ESG issues, this will hardly be possible in the future. Without appropriate renovations, properties – particularly commercial spaces – could become unsellable or unlettable in the long term. The question of whether renovation financing is even feasible and economically viable is increasingly coming to the forefront.

Banks as drivers of the ESG transformation

Banks play a central role in implementing ESG criteria. The European Central Bank (ECB) and the Bundesbank are increasing pressure on lending institutions, which are already increasingly engaging with their existing clients regarding the energy future-proofing of their properties. The background to this development is rising requirements that banks will in the future likely only receive funds if they can demonstrate a sufficient share of energy-efficient properties in their portfolios. For real estate buyers and owners alike, this means that loans for energy-weak properties will either be denied or granted only under unfavorable conditions.

Some banks are thus increasing pressure on their existing clients to achieve energy-efficient renovations of properties already on their books. The role of banks therefore goes far beyond traditional lending: they are becoming central actors in enforcing ESG standards.

ESG from the buyer’s perspective: opportunities and risks

On the buyer side, investors are increasingly willing to pay a premium for ESG-compliant properties. Funds that comply with Articles 8 and 9 of the EU taxonomy are growing in popularity, as they provide investors access to “green” financing, loans, or bonds. At the same time, demand is rising for “green” spaces, especially in the commercial sector, but also in the residential sector, where sharply increased heating costs play a role.

In the medium term, it is expected that prices for residential buildings with the best energy efficiency ratings will rise, while prices for properties with the worst energy efficiency ratings (G and H) will continue to fall. Here, banks play a role again: they impose higher financing margins for poorly performing properties or may refuse financing entirely. Conversely, they offer interest rate reductions for well-performing properties, although these are not yet significant. Banks expect their clients to have clear plans to improve the energy efficiency of their buildings, which directly affects financing conditions.

Conclusion: ESG is here to stay

The importance of ESG in the real estate sector will continue to grow. For sellers, buyers, and banks, there is no way around it. Those who anticipate this development early and act proactively can not only minimize risks but also seize opportunities. We are here as a competent partner, with our network, to support you as effectively as possible in this complex environment.