In May 2024, the recast European Parliament and the Council directive on the energy performance of buildings came into force, quite clearly stating that all new buildings must be zero-emission buildings by 2030 and that existing buildings should be converted to zero-emission buildings by 2050. This is a change from the NZEB (nearly zero energy buildings) standard, which is widely recognised in the industry, to the ZEB (zero-emission buildings) standard. The directive requires immediate action and a plan from the Latvian state to achieve the targets set at the local level. However, it seems that the country is not in a hurry to take concrete steps, at least not now.
Defined plan for renovation of buildings
What do zero-emission buildings mean? The technical definition can be found in the Directive, but these are inherently highly energy-efficient buildings that consume no fossil energy, generate their own energy and produce a minimum of greenhouse gas emissions.
The year 2050 sounds a long way off and will probably already be a problem for other decision-makers, but the first targets need to be set much earlier, e.g. by the end of May 2026, the Member States must set national targets for a gradual renovation of the housing stock and ensure that the average primary energy consumption of the entire housing stock (KWh/m2/p.a.) is reduced to a minimum:
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by at least 16% by 2030 compared to 2020;
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by at least 20-22% by 2035 compared to 2020.
It is important to note that 55% of primary energy savings should be achieved by renovating 43% of the most energy-efficient residential buildings.
In the non-residential sector, Member States should set minimum standards and thresholds for energy efficiency and ensure that all non-residential buildings are below:
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16% of the threshold from 2030;
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26% of the threshold from 2033.
This means that 16% of non-residential buildings with the worst energy performance must be renovated by 2030, and a further 10% by 2033.
Will it be easy to achieve these goals?
As a matter of fact, everything is clear and there could be a full stop rather than a question mark at the end of the heading. However, if one analyses how Latvia has proceeded so far, one realises that the results have not been too rosy, to say the least. The legal framework for the energy certification of buildings came into force in 2013 and already stipulated that the energy certification of buildings intended for sale, rent or lease must be carried out and that energy efficiency indicators must be included in the advertisement text. The slow progress is giving rise to serious concerns as to whether Latvia will be able to achieve the targets set.
After over ten years, the BIS (Building Information System) finds certificates for less than 5% of registered buildings subject to the energy performance certificate obligation. The available data does not allow us to conclude what the actual situation is today and what needs to be done to achieve the targets set.
We also often hear that every new project in Riga is the greenest and most energy-efficient, but what does that mean? At the moment, it is quite easy to shake up the market given the regulatory gaps and the drive for lower energy consumption figures and better classes in business interest. However, the state should ensure that regulation is well organised and that such situations do not arise in the first place. Otherwise, it is very easy to mislead investors, financiers and, above all, the end users of property. Even the current regulation does not help you to understand what poor energy efficiency is. How do you automatically understand class A+ or A, but which class starts with poor energy efficiency? Whether it's just class F or class C – it is unclear.
New potential risks for building owners
Each Member State is responsible for determining possible sanctions and penalties. So it will be interesting to see how Latvia will act. If you look at the experiences of other countries, you can see significant differences. Some countries have decided not to introduce additional sanctions. But some countries have introduced quite far-reaching sanctions. In France, a ban on rent increases has been imposed on buildings in energy classes G and F, while buildings with an energy consumption of over 450 kWh/m2/year are completely banned from letting. In the Netherlands, too, it will no longer be possible to rent out buildings in energy classes E, F and G from 2030. The United Kingdom is also active and, although it is not part of the EU, is one of the largest property markets in Europe. There, the letting of properties with an energy class lower than E has been prohibited since 2018 and building owners can be fined if they do not carry out renovation work. In addition, the UK government's plan for all non-residential buildings to be at least B-rated from 2030 has been well received. To understand how difficult this is, it is worth noting that at least 70% of commercial properties do not currently fulfil this requirement.
Although the energy classes are not yet comparable between countries, the recast of the directive aims to harmonise the energy classification in all countries, which means that we expect changes in this area as well. In any case, the importance of the energy performance certificate for buildings will increase in the future, especially if rental or sales restrictions apply to buildings with lower energy efficiency.
To understand what the portfolio looks like and to fulfil the regulator's requirements and set energy efficiency targets for their loan portfolio, banks have already started to require energy performance certificates for buildings. You will not be surprised if we soon hear of properties being refused finance if they do not meet certain energy efficiency criteria, as the value of these properties will fall in the future and the risk of refinancing will increase significantly.
The owners of non-residential buildings with poor energy efficiency are likely to be the most affected. There will certainly be less interest in them on the market and they will only be able to sell to investors who have access to capital for a complete renovation. As renovations are associated with considerable costs, but rents on the market are only rising slowly, such properties will only be able to be sold at a low price.
What changes might the directive bring?
One scenario is that nothing will change – but that is unlikely. As far as renovating the housing stock is concerned, in theory, low-income residents live in the worst-performing homes, which means thinking about more generous subsidy programmes. Some of the money will come from European funds, but certainly not all of it, so the question arises as to how this will all be financed Part will be financed by the banks, but thought also needs to be given at national and local levels to financing, which may come from further borrowing or increased revenue (taxes).
For some years now, there have been discussions about cadastral values and property tax rates (RET). One possibility would therefore be to change the RET rates according to the energy efficiency of the building. Increasing the tax rate for private homes would not be a popular decision, so someone might come up with the idea of extending this to non-residential property owners. Either way, tax rates or rebates should be an incentive to build better buildings and renovate existing ones.
The changes could also have an impact on building managers, who would find it quite easy to impose additional obligations to renovate the buildings they manage to ensure the one-stop-shop principle mentioned in the Directive and to ensure quality project management, from advice to attracting funding, quality architects and contractors.
If the decision to renovate the building has so far been taken by the owners' vote, it is also more likely to be enforced in the least energy efficient buildings, further increasing the need for solid financial support mechanisms.
If the renovation loans in residential buildings come from the flat owners themselves and the risk is relatively low, there could be greater problems in the non-residential segment. To be able to carry out in-depth renovation in old buildings, they have to be partially vacant, i.e. there is no rental income to repay the loan - there is only the hope that the buildings will be rented out after renovation. From the financiers' point of view, this can be seen as high-risk speculative financing, so thoughtful support options in the form of loans or guarantees should be considered in advance, as the building owners will not be able to do this at their own expense.
An even more dramatic situation can arise if there is a ban on renting or selling property for buildings with poor energy efficiency. This means that nobody will be willing to finance them and nobody will want to buy them. As a result, we may end up with the Pompeii City option – if nothing is done, we will see more and more empty slums or buildings that simply have to be demolished.
There is not much time left
Latvia has two years to draw up a plan for the implementation of the directive at the local level. This should not be underestimated as the directive is one of the strongest legal drivers in the property sector. Several steps need to be considered, as the renovation should not only focus on fulfilling the required minimum energy efficiency criteria but also on improving the buildings that are already in the energy efficiency class. Therefore, the next renovation should not be carried out in ten years.
It should be borne in mind that in Latvia the experts who can issue energy performance certificates for buildings that do not currently have a valid certificate are already overworked. With the current prices of energy performance certificates, it is not possible to establish and maintain a functioning office that is limited to energy performance certificates, so the experts focus on other services and the energy performance certificates remain somewhere in the background. As the importance of the energy performance certificate increases, it is essential to pay attention to its quality and the transparency of the calculations, so that the new regulation should not only be formulated correctly in legal terms but also be correct in terms of content and easy to understand.
The recast Directive not only sets out the requirements for the renovation of buildings but also obliges Member States to provide financial and advisory support for the implementation of these plans. Consequently, information on possible support mechanisms should be easily accessible and understandable, and financial support instruments should be created to compensate for market failures. You can certainly also think about tax rates for intellectual property or a reduced VAT rate for renovations to create a balance between carrots and sticks.
It is very important to act in good time and provide clarity on what building owners can expect. Otherwise, someone will decide to wait and do nothing, hoping for better subsidy conditions now. But perhaps there is nothing to look forward to?
When working on the new framework conditions, it is important to remember that Latvia is competing with Lithuania and Estonia. If we want to attract new investments and make Latvian cities more modern, regulation should be at least as good as in neighbouring countries, ideally even better. Investors see the Baltics as one region and have no patriotic feelings for one country or another. Therefore, investments are made in the country where the rules of the game are clearest and where companies can achieve the highest returns.
There is not much time left, so it is necessary to act quickly and responsibly and not wait until the last minute to fulfil the requirements. Again, you can apply the paradox in business that three things are important – speed (fast), costs (low) and quality. Unfortunately, only two of the three components can be present at the same time – if the solution is fast and cheap, it will not be of quality, but if we want the solution to be fast and of high quality, it will certainly not be cheap.
Jānis Ozoliņš,
Head of Large corporates department
