From 2023 onwards, all office buildings in the Netherlands will be required by Dutch law to have an energy label of C or higher, meaning that the use of office buildings with a D energy rating or lower will become illegal. Penalties for non-compliance with these new energy performance certificate (EPC) regulations could include a government order to cease the use of the building.
The Dutch Government’s intention is that by 2030 all office buildings will have achieved an A label. Given the direction of travel, it’s most likely only a matter of time before the Government looks to the hotel, industrial and retail sectors next for similar regulatory changes. So what can investors who hold or are looking to invest in Dutch real estate stock do now to be prepared?
One of the first actions before either purchasing an asset or when already holding a real estate portfolio is to assess its age and survey the building to establish the overall technical condition and understand its current EPC label. For example, the majority of buildings built before 1999 in the Netherlands are likely to have an energy label of D or worse and therefore fall within the requirements of needing an upgrade. The second step, if a modernisation is required, is to consider whether it’s worth upgrading to an A label directly.
According to research from the Economisch Instituut voor de Bouw (Economic Institute for Construction and Housing; EIB) and the Energy Research Centre of the Netherlands (ECN), the costs per sq m associated with upgrading an existing office building from an F to a C label can be fairly small. However, when upgrading from a G label, costs can be substantial, depending on the building’s condition but mostly due to the required additional isolation of facades and roofs.
Based on estimated costs for energy in 2023, the EIB and the ECN predict that the average period to earn back the investment when upgrading to a C or B label ranges between 3 and 6.5 years while it can take up to 13.5 years to see a return on investment when upgrading from a B label to an A label.
As always it helps to look at what others are doing before making a decision and, luckily, the Netherlands is not the first European country in which energy labels are a mandatory requirement for the sale and letting of office buildings. For example, in England and Wales it has been unlawful for properties with F- or G-rated EPCs to be let since April 2018 so looking at lessons learnt since the implementation in those two countries can potentially save investors time and money.