Green Deal
Climate change is leading to extreme weather conditions, which is why Europe developed the Green Deal. The objective of this new growth strategy is to make the EU a modern, resource-efficient and competitive economy. Let’s discuss the impact of this Green Deal on the real-estate sector with Davy Demuynck, CEO of ION, Iwan Barrez, Sustainability Manager at KBC Bank and Insurance, and Nele Pieters, Chief Strategy Officer at Encon.
What exactly does the Green Deal entail?
Barrez: "The European Green Deal is an offshoot of the 'Paris Agreement' in which 200 countries agreed to curb greenhouse gas emissions. In 2019, Europe translated this intention into a strategic plan, the Green Deal, which states that Europe as a region must become climate-neutral by 2050. As an intermediate step, Europe defined that by 2030 greenhouse gas emissions must be 55% lower than in the reference year 1990. This is an important step in the transition to sustainability, yet it remains a great challenge."
What impact will this Green Deal have on the business model of Belgian construction and real-estate companies?
Demuynck: "The impact will be enormous. Today, more than 75 per cent of greenhouse gas emissions come from energy generation and consumption. If you look at real estate, the culprit is mainly the heating and cooling of buildings. We therefore need to move away from fossil fuels and make use of new technologies. To do this, the government must provide a legislative framework that prohibits the use of fossil fuels. Currently, there is too little focus on CO2 emissions in the total real-estate value chain. Of course, any adjustment will have an impact on prices, but producers are currently already offering alternatives in the same price range as traditional systems."
How big is the challenge to come up with creative and innovative solutions?
Pieters: "We see it as an opportunity. We are working to increase the intrinsic motivation of companies to grow in terms of sustainability and we are focusing on ways in which they can integrate sustainability into their business operations. As such, we aim to create a win-win situation for companies and consequently also for the world. Energy prices, meanwhile, continue to soar, so companies must urgently turn to renewable energy. If this becomes a big movement, it will bring about cost savings, making it even more interesting to jump on board."
If there were an obligation to build sustainably, what would be the consequences for construction and real-estate companies?
Barrez: "In any case, there would be an impact on financing. As a bank, we are obliged by our European regulators to report on the financing of projects and on their traditional or green character. Today, the capital cost is the same for both types of projects, but we think that an evolution is coming in which the capital cost will be higher for non-green financing. We continue to look at the repayment capacity, and that increases if you think long-term. That way of thinking means implementing a sustainable vision in your project.
If you are still using traditional methods today, this will affect the value retention of the building. Of course, renewable methods are more expensive to implement into a building, but that is because we, as a society, mainly look at the investment cost. We should focus more on the long-term Total Cost of Ownership. Certain technologies have a relatively long payback period and our financing is limited in duration, so that is sometimes the mismatch. That is where the challenges for the future lie."
How is the sector responding to this evolution?
Demuynck: "The basic premise in any sector is supply and demand. We have noticed that the demand from large institutional investors for more sustainable real estate is increasing every year. There is more demand, so property developers are generating more supply. Generally, the supply follows the demand, not the other way around. Initially, the intention was to make buildings energy-efficient and we solved that by using more insulation. We also focused on technologies and products that can perform better with less energy, such as heat pumps and geothermal energy. These are now being increasingly used by owners of private buildings. This is a must if we want to achieve the targets of the Green Deal, because the first deadline of 2030 is getting closer. 2050 is a bit further away, but we need a change in mentality among investors, who need to look more at the green character of a building and less at its return. There is a lot of money involved, of course, and as long as traditional energy sources are cheaper, there will always be players who will offer just that."
How can the transition to sustainable construction be accelerated?
Pieters: "As soon as the demand for sustainable buildings increases, the supply will follow. It is therefore particularly important that the demand also comes from the consumer. Apart from that, we must avoid ending up in a system where more money and energy is spent on reporting and proving things than on actually supporting the transition. We must make the transition from a shareholder economy to a stakeholder economy. If we manage to achieve this, we will undoubtedly accelerate the move to greater sustainability. I am convinced that the government also has a role to play, but first and foremost, everyone most understand the need for sustainable construction."
Demuynck: "That is indeed a must. We need to consider that the structure of a building lasts longer than the methods used to build it. So, even if traditional methods are still used in construction today, we still have to ensure that the facilities are compatible with new techniques. At ION, for example, we are striving to work with a collective boiler room in new apartment buildings, rather than with an individual boiler room for each apartment. This will allow for new techniques to be easily implemented in the future thanks to certain facilities, such as shafts that are wide enough to accommodate the water pipes."
Barrez: "I agree. We also make a distinction between new and existing buildings. For new buildings, the challenge lies in local energy generation and in the circularity and carbon neutrality of the materials used. The legislative framework is already imposing strict energy standards. For existing buildings, we are facing a huge challenge in terms of energy performance, and here too, a legal obligation. From 2022 onwards, in Flanders it will be compulsory for non-residential buildings to improve their energy management. Currently, we have a renovation rate of one percent. Europe wants to raise that to two per cent, which means that our local renovation rate has to double. Europe is trying to play its part in this development with the Renovation Wave, which is part of the Green Deal. The aim is to remove barriers and obstacles that prevent people from renovating in order to get that renovation wave moving. That's a major challenge."
Are people aware of the need to build sustainably?
Pieters: "It's true that this necessity is not yet clear enough to many people. I am convinced that many efforts are still needed to bring it to people's attention. Perhaps the government can also play its part by raising awareness, so that people understand what is interesting in terms of energy management and what must perhaps be rejected in the future."
Demuynck: "That is indeed a phenomenon that we are also seeing in the sector itself. There are innovators who are ahead of the game and then there are people who tend to follow the herd. We are seeing engineering firms, architects and consultants advise clients to invest more in sustainability. Ultimately it is the client who makes the final decision, but overall our experiences have been very positive. With ION, for example, we have initiated the development of various heat networks and helped to construct them. We are seeing that the younger generation even prefers to buy green, energy-efficient installations. So there is no disadvantage in terms of commercialisation, as people do believe that this technology works. Moreover, it is much more efficient to have a single, professional installation with a professional maintenance contract than an individual installation that is much less well maintained. Consumers and businesses are starting to see the advantages more and more. Large companies are leading the way with their sustainability efforts. Medium-sized companies are not yet moving at the same speed, but they will eventually follow suit, as will consumers. I am very hopeful about that."
Barrez: "Absolutely. Investors are also becoming increasingly aware of the fact that not only the return of activities is important but also their sustainable character. That is why this aspect is so high on the agenda of listed companies. Traditional financing revolves around the asset financing of the underlying goods, but today we are also focusing on green loans and green bonds in which the climate impact of business activities is also taken into consideration when determining the interest component. This is an evolution that we are mainly seeing in large listed companies, but if everyone joins in this movement, it will bring about a major revolution."
The Green Deal is definitely creating a new dynamic in the real-estate sector. It is a path towards greater sustainability in which the government, businesses and individuals can and must assume their responsibilities.