Renovation obligation included in European, Flemish, Walloon and Brussels building policy

What is the renovation obligation?

Charlotte: The renovation obligation is a policy tool designed to gradually absorb the climate transition costs into the market. It does so after the so-called "polluter pays principle," about which there has long been a consensus within the scientific community that this is a good way to recover societal pollution costs. To maximize Pareto efficiency the renovation cost is included.
 

How does this work exactly?

Charlotte: The renovation obligation actually consists of three components that ensure that climate neutrality becomes a part of the factors that determine property value. A common misconception is that there is such a thing as THE renovation obligation. In reality, there are several obligations that are different depending on the market segment characteristics. For example, for the rental market it consists of minimum performance requirements, while for the owner-occupier market there is a post-sale obligation. This is because market dynamics are different for each of these target groups. For example, a new owner has more financing options when taking out a mortgage than an existing owner-occupant. 
 

 
How did the agreement for a renovation obligation come about?

Charlotte: The origins of the current renovation obligation lie in a Flemish Climate Agreement, which was concluded just before COP26, the annual climate meeting of the United Nations. In response to the enhanced climate ambitions set from Europe earlier in the year, a discussion arose about what measures could fulfill those ambitions. The policies that had been pursued up to that point were mainly incentive based and had not yielded sufficient results. So the discussion of introducing a housing renovation requirement came back on the table. This is also where the design of the renovation obligation by market segment came up for the first time, ultimately resulting in the inclusion of a renovation obligation five years after sale for the owner-occupier market and minimum requirements for the rental market with the necessary support measures in the Flemish Energy and Climate Plan (VEKP). Not long after, Brussels and Wallonia also included renovation obligations in their climate plans.

To give a sneak peek behind the scenes. If there was one remarkable thing about the renovation obligation development process, it was that pretty much the entire industry agreed that this was a necessary step to take. Flanders had also made a really good turn at the European level, by demonstrating an approach through which implementation could be achieved without problematic market disruption. The Directive including the renovation obligation finally passed the European Council with 20 votes in favor and 2 against. This is also of huge credit to the team of Ciarán Cuffe, MEP and rapporteur on the dossier, who conducted tough negotiations to ensure that the renovation obligation could be approved with solid support. It is fair to say that the implementation of this measure did not happen overnight.
 

Which actions has Agoria taken?

Charlotte: Within the Climate Neutral Construction project, a lot of hard work has been done to build knowledge around the renovation obligation. Over the past 5 years Agoria has held many discussions with representatives of both Belgian, regional and European authorities to share that knowledge. 

However, one of the most memorable actions must have been the much-discussed study around financing capacity for climate renovation. The Agoria study, conducted by Prof. Johan Albrecht and Sam Hamels, found that about half of today's homeowners have insufficient budget to finance a climate renovation. At the same time, the other half of owners with sufficient budget also appeared not to undertake any renovation action. In case of a deficit, it involved significant amounts of more than 25,000 euros, making regular grants too small to have an effect. This triggered a fairly large debate around the need for market segmentation to increase the impact of climate policies, which thus ended up being applied to the renovation obligation as well. 

Perhaps a funny detail is that even today the study regularly passes in stakeholder consultations. It happens now and then that other stakeholders ask me if I have already read that interesting study around financing capacity for climate renovation....
 

What does this mean for Agoria members?

Charlotte: The renovation obligation is expected to generate a larger number of climate renovation projects. The technology sector can expect an increase in the demand for climate technology as a result. Think for example about building technologies such as heating, cooling, ventilation, lighting, windows, doors, insulation, control and automation systems, electric mobility and renewable energy. The gradual way in which the renovation obligation triggers the transition in the market serves to allow both the real estate and construction sectors to make the necessary adaptation for scale-up. For companies whose technology still runs on fossil fuels, the message is to keep in mind that their demand will increasingly decline. Agoria offers support in this area through its expertise in technical building regulations. More information can be found here.
 

Recently, there has been much criticism of the renovation obligation. Is it justified in your opinion?

Charlotte: The critique does indeed refer to the renovation obligation, but when you read the content carefully you will see that this really concerns the energy performance certificate (EPC). The EPC is part of technical regulation that is used as an assessment tool within the renovation obligation. As a result, the role has changed. It was originally developed to objectively compare the climate impact of homes and buildings. Now that role is evolving towards a testing tool, so the calculation margins that were less of a problem in the comparison functionality are now much more under a magnifying glass. Further professionalization of the EPC is therefore certainly desirable, as well as the much-needed evolution from a focus on energy efficiency to climate neutrality that is coming from the European building regulations. This is expected to answer most of the criticisms.
 

What about the criticism that the renovation obligation would make housing more expensive?

Charlotte: It is important to understand that property prices do not add up to the renovation cost on top of the offer price. Real estate prices are determined by supply and demand. What the renovation obligation does is ensure that within the mortgage discussion, the renovation cost is already included. As a result, a new buyer will be able to offer the maximum mortgage amount minus the renovation budget as an offer, relatively reducing the value of buildings with a large renovation cost. So the cost is on the seller rather than the buyer. This has also been taken into account in the set-up of the renovation obligation through a comprehensive package of supportive financing measures.
 

Do we already have a view of the impact of the renovation obligation?

Charlotte: Given that the renovation obligation for homes did not take effect until 2023 and a new owner has 5 years to renovate, we will not really be able to see how many renovations were successfully completed until the 2028 figures at the earliest. Despite this, there are already some indications that the climate transition in the real estate market is underway. A recent ING study shows that unlike our neighboring countries, energy efficiency is number one in the top five considerations when buying a new home in Belgium. We will certainly still have to await the emission figures, but there already seem to be very tentative indications that a trend reversal is taking place.
 

 
What makes the renovation obligation so special?

Charlotte: Climate policy has long been dominated by technical expertise, which has resulted in an underutilization of the potential offered from the social sciences to accelerate the climate transition. The renovation obligation combines aspects of market policy, technical regulation and financial policy to create a movement in the market. In the Netherlands, the Advisory Council for Science, Technology and Innovation (AWTI) recently called for better utilization of social sciences and the humanities in solving complex social issues, such as climate change. The renovation obligation is actually a good example of how this can take shape in practice. 
 

What can we expect as the next steps?

Charlotte: With the recent adoption on April 16 of the new Energy Performance of Buildings Directive (EPBD), each European member state will have to consider how to implement it over the next 2 years. Except for Flanders of course, given that the renovation obligation is already in place here. Brussels and Wallonia have also included renovation obligations in their climate plans starting in 2025. In this sense, the renovation obligation is a unique piece of policy history that Belgium can be quite proud of. 

As indicated, the renovation obligation has changed the role of the energy performance certificate (EPC). We can therefore certainly still expect discussions on this instrument, especially on the approach for further professionalization and the evolution towards climate neutrality as the objective. Government financing is certainly another debate that we may get ready for. Today, a generous package of supportive financing measures is in place, but the question is to what extent this will remain sustainable with high levels of public debt.
 

For more information on the renovation requirement, click here.