Policy Brief: The Efficiency Reckoning Begins

Regulation, enforcement, and valuation standards are reshaping European real estate.

2024 marks the beginning of a market-wide recalibration for commercial real estate in Europe. A long-building convergence of regulation, valuation practice, and investor pressure is turning energy efficiency from an ESG concern into a capital markets issue.

"...18,000 commercial buildings with EPC ratings of F or G have become legally unlettable".  [1]

Policy Enforcement Replaces Policy Debate

Across the UK and EU, regulatory frameworks are shifting from ambition to enforcement. In the UK, the Minimum Energy Efficiency Standards (MEES) regime, in place since 2023, reached a new threshold in 2024:

• 18,000 commercial buildings are now legally unlettable, including over 7,700 offices - 43% of non-compliant stock [1].

• Financial penalties can reach £150,000 per property.

MEES is also tightening further. All leased commercial properties must meet EPC C by 2027 and EPC B by 2030 [2], yet retrofit activity remains well behind schedule. Many assets may remain non-compliant until the next decade.

Meanwhile, the revised Energy Performance of Buildings Directive (EPBD IV) came into force across the EU in 2024. It requires member states to deliver a zero-emission building stock by 2050, and introduces minimum energy performance standards beginning in 2027 [3].

Although implementation details are still evolving, the message is clear: non-efficient buildings face legal, operational, and valuation risk.

Valuation Standards are Catching Up

Starting January 2025, the new RICS Valuation – Global Standards (Red Book) will require formal inclusion of ESG and transition risk into all real estate appraisals [4].

This update means that:

• Energy performance, EPC ratings, and climate resilience are no longer advisory.

• They will be integrated into income assumptions, risk premia, and marketability assessments.

• Transition risk will be embedded in financial modeling—not treated as a disclosure appendix.

The result is a more standardized pricing mechanism for inefficiency, and a stronger link between asset quality and capital access.

Market Signals Are Emerging, If Uneven

While the repricing of inefficient assets is still early-stage, market signals are already visible.

• In the UK, 5% of all commercial floor area (roughly 364 million sq. ft.) is rated EPC F or G [2].

• Office space is most exposed, with 7.5% failing MEES thresholds.

• In Ireland, investment volumes dropped 60% YoY in Q3 2023, and office values fell 14% [5].

While these shifts reflect multiple macro factors, investor caution around retrofit risk and tenant expectations is playing a clear role.

On the debt side, green discounts are also emerging. The Bank of England found that borrowers with EPC A-rated properties receive modest but consistent mortgage rate advantages [6]. Risk-based pricing is expanding into the real estate financing landscape.

CRREM Use Grows, But Strategic Adoption Lags

The Carbon Risk Real Estate Monitor (CRREM) model is gaining traction with institutional owners, including AEW, Nuveen, Castellum, and Nordea [7].

CRREM:

• Aligns with IEA and SBTi decarbonisation targets

• Offers stranding thresholds by asset type and location

• Supports integration with fund-level climate disclosures and acquisition screening

But market-wide adoption is still uneven. Many asset managers treat retrofitting as a compliance obligation, not a strategic lever. That mindset is increasingly out of sync with regulators, lenders, and occupiers.

Strategic Drift or Strategic Clarity?

As 2024 closes, European CRE is facing a strategic inflection point:

• Regulatory timelines are locked

• Valuation standards are evolving

• Occupier demands are intensifying

Yet much of the industry remains in transition limbo, trapped between legacy exposure and an unclear roadmap for adaptation.

By the time the market fully prices energy performance risk, the first-mover advantage will be gone.

The coming year will reward institutional capital that shifts from awareness to execution. The efficiency reckoning has begun. It is no longer about late compliance. It is about early positioning.

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[1] Department for Business, Energy & Industrial Strategy. (2023). Minimum Energy Efficiency Standards: Enforcement data. Link; Search Acumen. (2024, June 12). Commercial landlords to miss MEES targets by nearly a decade, costing £750m in rents a year. Link

[2] Knight Frank. (2024). Meeting the commercial property retrofit challenge.

[3] European Commission. (2024). Energy Performance of Buildings Directive (EPBD IV), EU/2024/1275.

[4] Royal Institution of Chartered Surveyors. (2024). RICS valuation – Global standards 2025 (Red Book).

[5] CBRE Ireland. (2023). Commercial property investment market update: Q3 2023.

[6] Bank of England. (2024). Energy efficiency and mortgage rates: Quantifying the price signal.

[7] CRREM. (2024). Carbon risk real estate monitor: Decarbonisation pathways and guidelines v2.