Sustainability-related regulation is becoming an increasingly material driver of real estate investment decision-making, rather than just a compliance requirement. Jeremy Ho analyses the implications.
Read this article to understand:
- Why sustainability regulation is increasingly intertwined with broader policy objectives including energy security and resilience
- How regulations can influence investment fundamentals, from valuations to credit quality
- What this means for real estate equity and debt investors
Sustainability-related regulation is becoming an increasingly important consideration in investment decision-making. This is particularly evident in the European Union, where policies such as the Energy Performance of Buildings Directive (EPBD) are designed not only to support decarbonisation objectives, but also as strategic tools to strengthen energy security, resilience and economic competitiveness in an era of heightened geopolitical uncertainty.
The rationale is clear. Buildings account for around 40 per cent of the EU’s energy consumption and approximately 36 per cent of its gas imports, while roughly 80 per cent of household energy demand is associated with heating, cooling and hot water.1 As a result, improving the efficiency of the building stock represents one of the most effective opportunities to reduce energy demand and lower reliance on imported fossil fuels.
Progress is already delivering measurable results. Energy efficiency measures implemented between 2020 and 2024 are estimated to have saved around 25 million tons of oil equivalent – equal to the cumulative gross inland consumption of Hungary in 2024.2
The European Commission aims for even greater reduction targets – using the EPBD to decarbonise the EU’s buildings stock, and reduce and electrify its energy consumption. It estimates that renovating the EU’s buildings could lower the region’s gas imports by up to another 60 billion cubic meters a year by 2040. That would be a reduction of about 60 per cent from the natural gas used in buildings in 2024. It would be one of the fastest and most secure ways to boost Europe’s energy security and independence.3
These wider strategic implications give long-term relevance to sustainability-related regulations like the EPBD. For investors, the impact of these regulations on developments and renovations also make them an increasingly important component of assessing asset quality, transition risk and long-term value creation.
Complying with sustainability rules will require investment
The EPBD came into force on 28 May 2024, with a deadline to be transposed into national laws in 2026. It aims to achieve a fully decarbonised building stock by 2050 (see Figure 1).4
Figure 1: EPBD implementation timeline
Note: GWP: global warming potential; ZEB: zero-energy building; LCA: lifecycle assessment; WLC: whole-life carbon.
Source: Aviva Investors, One Click LCA. Data as of 6 August 2026.
The regulation requires existing buildings to reduce their energy consumption over time or to meet specific energy-performance standards, while all new buildings must be zero-emissions by 2030 (see Figure 2).
Delivering this transformation will require substantial capital deployment. More than three-quarters of the EU’s buildings have poor energy-performance ratings, and the European Commission estimates improvements will require annual investments of over €370 billion between 2021 and 2030.5 For investors, this represents a significant opportunity to finance the transition – and a growing risk for assets that fail to keep pace with regulatory requirements.
Without proactive investment, assets risk becoming increasingly difficult to lease, finance or sell – raising the prospect of asset stranding. Developers and asset managers will need to invest more heavily in refurbishing and modernising existing residential and commercial buildings.
At the same time, higher performance requirements for new developments are likely to increase construction costs, potentially favouring larger, well-capitalised sponsors.
Figure 2: Overview of key EPBD requirements
| Segment | Key EPBD requirements | Implications |
|---|---|---|
| Existing residential | Primary energy use must fall 16% (2020–2030) and 20–22% by 2035. 55% of required improvements must come from the worst-performing 43% of homes. | Higher capex embedded in business plans. Stranded‑asset risk for portfolios without defined renovation pathways. Increased borrower demand for capex financing to meet MEPS. Large parts of commercial stock may have to enter accelerated renovation cycles. Prime ESG-aligned assets likely to secure lower cost of financing and stronger tenant demand. Secondary offices most exposed. Limited occupier demand plus high upgrade costs raises probability of obsolescence without major capex spend. |
| Existing non‑residential | Member States must set two Minimum Energy Performance Standards (MEPS) thresholds: with 16% of stock required to be above this threshold by 2030, and 26% by 2033. Applies to offices, retail, logistics, high‑intensity assets. | |
| New builds | All new buildings must be Zero‑Emission Buildings (ZEBs) by 2030 (public buildings by 2028). Solar‑ready requirement for PV / solar‑thermal installations. Fossil‑fuel boiler phase‑out. Whole Life Carbon (WLC) reporting required for new buildings >1,000 m² from 2028, and for all new buildings from 2030. | Higher baseline construction capex for compliant developments. Increased demand for green construction financing. High capex costs will favour well capitalised sponsors who can deliver compliant product at scale. Institutional investor demand has already been focused on this segment. |
Source: European Commission, Aviva Investors, 28 May 2024.
Sustainability compliance can also drive value
The impact of sustainability credentials on factors such as asset valuation, rental growth and occupier demand is increasingly evident – particularly within European markets. This is especially true for improvements like energy efficiency, which can deliver tangible financial benefits through lower operating costs and better energy-performance ratings.6
A 2025 RICS survey of European real estate professionals found that sustainability was becoming a driver of real estate value, occupier demand and investment decision-making across Europe.7 Two-thirds of respondents said the main factor influencing ESG integration in real estate decisions was sustainability-related regulation.
The survey also highlighted a growing financial distinction between higher-performing and lower-performing assets. Nearly three-quarters of respondents said greener buildings commanded rental premiums, commonly estimated at up to ten per cent. And 63 per cent believed such assets could achieve higher sale values. Over a third viewed this as a “brown discount” more than a “green premium”, suggesting that investors and occupiers are penalising poorly performing buildings rather than simply rewarding leading assets.
This trend has been particularly obvious in the European office market, where tenant demand for sustainable, high-quality, and well-located prime buildings is growing. For example, a 2026 study in the Netherlands found that offices meeting an EPC rating of C or better saw their price rise by 21.8 per cent after minimum performance standards were introduced in 2018, while the lowest-rated offices (rated G) experienced a 51.1 per cent discount.8 A 2024 survey of the UK office rental market similarly found A and B EPC rated buildings commanding rental premiums of ten to 15 per cent.9
Against this backdrop, non-prime office assets are becoming more vulnerable, particularly where expected returns can’t justify the cost of refurbishment. As regulatory requirements tighten and occupier expectations evolve, these assets face a growing risk of obsolescence and stranding. In some cases, investors may also put pressure on the owners of poorly performing buildings to repurpose assets through redevelopment or rezoning initiatives, resulting in additional costs and value impairment.
Real estate equity case study: Office building in Amsterdam
Foz is a multi‑let office building we own in Amsterdam.
It already had strong sustainability foundations, including a BREEAM Excellent certification and an EPC A rating, and to build on this base, we led an energy audit. We identified opportunities to improve the building’s operational performance, strengthen its indoor‑environment quality and further align the building with our decarbonisation objectives.10
We upgraded the building management system and partnered with the Healthy Workers optimisation programme to install additional temperature set-points, presence-detection sensors, CO₂ and water monitoring. We also deployed smart controls to help optimise the heating, ventilation, air-conditioning and lighting in real time. We aimed to reduce the building’s operational emissions, improve its alignment with the climate transition and enhance its overall resilience.
The asset now has BREEAM’s top rating of Outstanding.
Impact on portfolio positioning
Preliminary results indicate meaningful reductions in energy requirements over the first 12 months, by approximately 40 per cent in winter and 20 per cent in summer, suggesting material operational gains and reducing tenants’ energy bills. Importantly, these improvements have contributed to a multi‑year extension of the building’s CRREM decarbonisation pathway, enhancing its long‑term transition‑risk resilience.11
The optimisation also strengthens Foz’s ability to adapt to evolving market expectations for energy‑efficient, high‑performing workspace, an increasingly important driver of tenant choice in Amsterdam. By combining strong certifications with ongoing technological improvements, we think the asset is positioned to maintain its competitiveness and remain aligned with tightening regulatory and occupier sustainability requirements.
Buildings that comply with sustainability regulations can also have better refinancing prospects, improving debt portfolios’ liquidity and credit quality.
According to the ECB, in July 2025, a net 20 per cent of European banks reported easing credit standards for green firms and 13 per cent for firms in transition, while a net 35 per cent reported tightening standards for high-emitting firms. The ECB describes this as a climate discount for greener borrowers and a climate-risk premium for high emitters.12
Similarly, 71 per cent of lenders surveyed by CBRE in 2025 said they would not lend against assets that do not meet sustainability criteria or have a plan for improvement.13
Positioning for the future
A growing divide is emerging between “future-ready” assets that are energy-efficient and well positioned for the transition, and assets that will require significant investment to remain competitive and compliant. As sustainability-related regulation becomes more intertwined with broader policy objectives, its impact on core investment considerations is likely to persist.
Proactive asset management and building upgrade strategies are essential
For real-estate equity investors, proactive asset management and building upgrade strategies are essential. They can help preserve value, improve tenant attractiveness and reduce stranded-asset risk. And for debt investors, buildings’ performance and future regulatory obligations are increasingly relevant when assessing long-term cashflow resilience, refinancing prospects and credit risk.
As long-term investors across real-estate equity and debt, we continue to position our portfolios to improve resilience, manage transition-related risks and support long-term investment outcomes. Incorporating sustainability and social value considerations into asset development, and utilising sustainability-linked financing mechanisms where appropriate are a core part of this approach.
Real estate debt case study: Student accommodation in Valencia
In 2026, we provided a €33 million green loan to support the development of two purpose-built student accommodation (PBSA) schemes in Valencia, one of Spain’s largest university cities.14 Valencia benefits from strong student demand and relatively constrained supply of high-quality PBSA. The development will provide 342 student beds across two sites, delivered through a joint venture between Amro Partners and Invesco Real Estate.
The financing was structured in line with the Loan Market Association’s Green Loan Principles. It supports the development of sustainable accommodation with ambitious environmental and wellbeing credentials, with a range of amenities designed to enhance the student experience, including dedicated study areas, gym, cinema and food and beverage facilities. The scheme is targeting BREEAM Outstanding, EPC A and Fitwel 3-Star certifications. These credentials are intended to support energy efficiency, occupant wellbeing and long-term operational performance.
From an investment perspective, the development illustrates how sustainability considerations look to support long-term asset resilience and value preservation by reducing the risks of obsolescence and significant retrofit expenditure. The combination of BREEAM Outstanding, EPC A and Fitwel certifications will demonstrate alignment with the aims of the European real-estate energy efficiency regulation and with market expectations.
The transaction therefore provides a strong example of how investors can finance assets that combine attractive credit fundamentals with best-in-class sustainability credentials, supporting both environmental outcomes and long-term investment resilience.
References
- “Energy Performance of Buildings Directive”, European Commission, accessed 11 August 2026.
- “Energy renovation of buildings”, European Commission, accessed 11 August 2026.
- Directorate-General for Energy, “In focus: Improving the energy performance of buildings”, European Commission, 16 June 2026.
- “Energy Performance of Buildings Directive”, European Commission, accessed 11 August 2026.
- “Financing building renovations”, European Commission, accessed 11 August 2026.
- “Integrating environmental considerations in real estate underwriting - Phase 2: Assessing impacts on value and returns”, INREV, December 2025.
- Edina Winkler, Valeria Sepe, “RICS in Europe: Sustainable Real Estate Survey Europe 2025”, RICS, 4 March 2026.
- Piet Eichholtz et al., “The impact of minimum energy performance standards on the commercial real estate market”, Nature Communications, 16 March 2026.
- Qiulin Ke & Michael White, “Does energy performance rating affect office rents? A study of the UK office market”, Journal of Sustainable Real Estate, 11 June 2024.
- BREEAM, accessed 11 August 2026.
- CRREM, accessed 11 August 2026.
- Petra Köhler-Ulbrich et al., “Climate performance matters for bank credit in the euro area”, European Central Bank, 10 November 2025.
- Tasos Vezyridis, Chris Gow, “Sustainability increasingly pivotal in European real estate lending, with unsustainable assets poised for devaluation”, CBRE, 3 July 2025.
- “Aviva Investors completes green financing for two student housing schemes in Valencia”, Aviva Investors, 15 July 2026.
