05-24-2022 · Insight

The impact of deep energy retrofit costs on the real estate sector

The real estate sector is estimated to produce around 40% of annual global greenhouse gas (GHG) emissions. The sector therefore plays an important role in GHG emissions reduction plans, for countries to align with the Paris agreement. Reducing carbon emissions within the real estate sector cannot be solved solely by electrification or the use of renewable energy contracts for current building operations. Improvements in energy efficiency will also be necessary.

    Authors

  • Frank Onstwedder - Portfolio Manager

    Frank Onstwedder

    Portfolio Manager

  • Folmer Pietersma - Portfolio Manager

    Folmer Pietersma

    Portfolio Manager

For many assets a deep energy retrofit – a renovation of a building addressing all these components – will be needed. Our analysis of deep energy retrofit cases in office buildings indicates that the lower the energy consumption intensity before a retrofit, the higher the costs will be of reducing energy consumption intensity even further.

It is important that companies in the listed real estate sector address the challenges associated with energy consumption intensity policies and allocate capital accordingly. While manageable overall, we find that the additional CAPEX needed is not equally distributed among the sector’s companies. Some real estate companies seem better positioned for the energy transition than others, which might not be fully reflected in current stock price valuations.

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