Rising interest rates, renovation compulsion and the lift sector

Currently, we have a situation in the real estate sector that has not existed in recent years and decades. ...

Drastically increased interest rates, combined with spiralling construction costs and at the same time enormous planning uncertainty, caused, among other things, by the conditions for energy-related building renovation. This will also have repercussions for the lift sector.

A comment by Volker Hager

I am writing this article for a change from a somewhat different perspective. To do so, I simply tried to find out more about current developments as well as I could as a normal property owner. But of course, I also refer to the consequences for the lift sector.

It was undoubtedly foreseeable that an increase would come, after interest rates had been stuck at 0.9 per cent or even lower for the last 15 years. However, the increase in the last two years has been very marked. During this brief period, borrowing costs have quadrupled and strangled off, and continue to strangle off, investments. Building owners, companies and project developers, who have a high proportion of loans with variable interest rates, are currently clearly feeling the effects of this - as can be seen in the prominent bankruptcies in recent months. We are already seeing what this is doing in the lift sector to the new lift business, which has plunged. If fewer new buildings go up, there is also less need for new lifts and correspondingly fewer new components.

At the moment, there are already initial indications that interest rates will probably come down a little. At the same time, the conditions of the new German Building Energy Act (GEG) and state building codes make construction much more expensive. Whereas building a square metre of residential space was still possible for 1,472 euros in 2013, these costs had already reached 2,062 euros per square metre for residential space with more than three residential units in 2021.

Building renovation compulsion

The vexing discussion about the replacement of heating systems in existing buildings in Germany and an impending mandatory requirement to undertake energy-related building renovation have created enormous uncertainty. The good news in advance: the building renovation compulsion is no longer on the table, due to the EU Commission.

Agreement was reached on a new building efficiency regulation on 7 December 2023 in the so-called trilogue proceedings between the European Parliament, the European Commission and Council. Formal conclusion of the legislative process in the first quarter of 2024 now only requires the European Parliament and Council to agree, according to the lawyer, Erik Uwe Amaya, director of the association "Haus & Grund in Rheinland/Westfalen" in its member journal. The member states will then have time to implement this in national law.

However, member states will still have to reduce primary energy consumption by 16 percent by 2030 and by another 20-22 percent compared to 2020. This is to be achieved primarily through buildings with the poorest energy characteristics. However, the important point is that the EU regulation no longer includes any minimum energy standards for existing buildings.

Different standards

Discussions did actually occur whether, for example, buildings with energy standard F and those with class E would have had to be energy renovated by 2030 and 2033 respectively. What is fascinating is that in the EU, energy efficiency classes are not defined according to uniform final energy consumption.

A residential building in Germany with class F is regarded as class B in Belgium and the Netherlands with the same consumption. This would have meant that the building in Germany would have had to be renovated but not in our neighbours.

However, from 2030, the GWP (global warming potential) calculation is to apply to new buildings. The criteria and identification methods for this still have to be defined by member states though. But what has to be borne in mind is that the different federal state building codes in Germany already prescribe different guidelines. For example, in North Rhine Westphalia, all newly roofed parking areas and residential buildings must have a photovoltaic system.

Built-in "reprieve"

When it comes to existing buildings, I am directly affected with my existing properties and their gas heating systems. Primarily, the GEG continues to apply. According to it, the installation of a heating system with fossil fuels remains possible provided it can be operated to 65 percent with renewable fuels. The built-in "reprieve" refers to communal heating planning. For large cities with more than 100,000 inhabitants, this must be available by 30 June 2026 and for all other communities by 30 June 2028. Up to then, old gas heating systems can still be replaced with new gas heating systems.

If a community is unable to submit a heating plan, old gas heating systems will still have to be replaced by new ones, but the owner must ensure that the building is supplied by renewable energy sources, from 2029 to 15 percent, from 2035 to at least 30 percent, from 2040 to 60 and at the latest from 2045 to 100 percent. Whether an owner can ensure this is doubtful.

It will tie up capital …

Consequently, I will have to look into the energy-related renovation of my properties in detail and this will definitely tie up capital. This also includes a protected building. It will be fascinating to see what the monument protection authority has to say about solar panels on the roof. Energy-related renovation of the timber-framed building is out of the question. To date, I have been unable to find an architect or specialist engineer who wants to deal with this.

The costs of energy-related renovation of a building in energy class "E" could quickly reach 800 – 1,000 euros per square metre. On average, about 30 percent qualify for subsidies. Eleven percent of the remaining costs could theoretically be shifted onto the tenants. But this would exceed the financial means of many tenants. They could then apply for a "hardship case exception". All the application palaver would be too much for many private homeowners and eat up their financial resources.

Oh yes, and then were would still be my lifts, which I’d completely forgotten! But you won’t be surprised to learn that my budget is already all planned for the energy-related renovation. Every reader can imagine that this is not just so in my case but also for large and middling investors and what the future consequences of this will be for the lift sector.

The author is not only property owner but also managing director of Hydroware Germany. He is a member of the Advisory Board of the LIFTjournal.