The influence of energy efficiency on the sales value of a property: prospects for investors and lenders

In view of the European Union's declared goal of climate neutrality by 2050, the regulatory requirements for the property sector have been tightened considerably in recent years. This development affects both the private and commercial property sector, with the focus in this context being on residential properties. At European level, the Energy Performance of Buildings Directive, which is part of the "Fit for 55" package as part of the EU Green Deal, should be mentioned. At a national level, the much-discussed Building Energy Act (GEG), which has been in force since January 2024 and aims to promote more energy-efficient heating of buildings, should be mentioned. The property sector also comes into indirect contact with ESG regulations. This may be the case, for example, if property companies or groups are subject to the disclosure requirements of the Corporate Sustainability Reporting Directive (CSRD) due to their size or the fact that they are listed within the EU. This obliges them to define sustainability targets in their annual financial statements. EU regulations also have an indirect impact on corporate/group financing. For example, financial market participants must publish information on the investments of sustainably launched funds. To be or remain considered a suitable investment object here, a sustainable company/group orientation must be considered.

Due to increasing regulatory requirements, the energy efficiency of a residential property has become a focal point in the valuation of the asset in recent years. The characteristic of energy efficiency is considered in various concepts, whereby the weighting within the various concepts varies. In addition to the certification of buildings by the German Sustainable Building Council (DGNB) or Leadership in Energy and Environmental Design (LEED), the concept of "green value", which attempts to determine the increase in value of a property through high energy efficiency and environmental performance in comparison with other properties that otherwise have comparable characteristics, should be mentioned here in particular.

First effects on the sales price of private property

In the residential property sector, a high energy efficiency class has already had an impact on the sales value over the last two years. A recent analysis by property portal ImmoScout24 shows a rise in prices for energy-efficient residential properties over the last two years. Despite falling demand on the market, prices for properties in energy efficiency classes A and B rose by 2.2% in Q4 '2023 compared to Q4 2022. The decline in prices for properties in energy efficiency classes C to H is particularly noteworthy. In classes C and D, a fall of -7.2% was recorded in the period indicated, and a fall of -6.8% in classes E to H. The increasing demand from investors for energy-efficient residential properties is confirmed by the data collected by the Royal Institution of Chartered Surveyors (RICS) in the Sustainability Report 2023.

It should be emphasised that the impact on the sales price of properties is less pronounced in tight markets (especially conurbations in popular cities), where sales prices are largely determined by the respective location of the property due to high demand.

Implications for investors and banks

If the trend described above continues, the energy efficiency factor of a residential property is likely to play an even more decisive role for investors and lenders soon. 

High energy efficiency is of interest to investors, particularly regarding the potential returns that can be achieved. Maintaining high energy standards in new builds and refurbishments is currently a significant financial challenge for investors due to high commodity prices and stricter regulatory requirements combined with an increasing risk of rising operating costs. The operating costs of a sustainable property are significantly lower than those with a poor green value, which reduces the risk of so-called "stranded assets". The term stranded asset refers to properties that are no longer able to generate returns. In addition, buildings with high energy efficiency are less volatile compared to the economy and the property market.

Energy efficiency will also play a key role in property financing in the future. Most of all property financing is secured by mortgages. The energy efficiency class therefore has a significant impact not only on the sales value, but also on the value of the collateral. It is in the lender's fundamental interest to ensure that the credit default risk it assumes is secured by collateral that is as sustainable and stable in value as possible. In this respect, as explained above, a poor energy efficiency class poses a risk to the value stability of the collateral on which the financing is based. From the banks' perspective, a high energy efficiency rating could minimise the risk of significant value adjustments to the property during the term of the financing.

At present, many financing agreements already contain assurances from the borrower in relation to sustainability criteria in addition to ESG reporting obligations, which are often defined by so-called covenants in an ESG compliance certificate. Covenants are agreements that precisely define specific performance indicators and which the borrower undertakes to comply with. Financial covenants are particularly important in financing agreements, the breach of which often leads to substantial contractual penalties or the lender's right of cancellation. In the ESG compliance certificate, the existence of a recognised certificate (such as LEED or DGNB) is regularly required for the property being financed. In contrast to breaches of the financial covenants, a breach of the sustainability standards set out in the ESG compliance certificate currently only rarely leads to further consequences. Depending on the structure and measurability of the covenants, these can sometimes also provide suitable anchor points for presenting the financing as a sustainability-linked loan or similar (we have already reported on this here (in German)).

One possible approach to securing the energy efficiency class of properties during the financing period could therefore be to include a contractually agreed energy efficiency area in the covenants of the loan agreement in addition to detailed ESG reporting. In the medium and long term, consideration could be given to harmonising the financial covenants regarding the consequences of a breach in order to increase the pressure on the borrower to comply. The inclusion of a margin grid as part of the interest rate is already being discussed in some cases. It would be conceivable, for example, to structure a variable interest rate that is linked to compliance with a certain energy efficiency class, among other things. If the property on which the financing is based falls outside this range, this could lead to an increase in the variable interest rate.

Key takeaways

For both investors and credit institutions, the assessment of a property's energy efficiency is likely to play an even more prominent role in the future. For investors, the focus is likely to be on the higher sales price that can be achieved on exit, while for lenders the focus will be on the sustainable value of the properties to be collateralised. In view of the climate targets to be achieved, the need for action due to regulatory requirements is likely to increase further in the coming years, meaning that early positioning in the market could pay off for both investors and lenders.