Exploring incentives for innovative energy-efficient properties

Decarbonizing the built environment remains a key priority for national governments in the face of expanding urbanization. In Europe, more than eight in 10 people (83.7%) are expected to live in towns and cities by 2050, reflecting a broader global trend. Several countries, including the 27 member states of the European Union, have committed to ‘net zero’ pledges by 2050.

As our towns and cities grow, investing in sustainable, energy-efficient building stock becomes increasingly essential to meet ambitious decarbonization targets. This doesn’t mean taking a sledgehammer to our legacy infrastructure; low-carbon retrofits and adaptive reuse projects breathe new life into old and existing buildings while retaining their historic character.

If governments are serious about carbon reduction in urban areas, then incentivizing commercial real estate (CRE) businesses to invest in energy-efficient smart building technology is a healthy policy to attract competition in the sector and support small and medium-sized (SME) firms in achieving their net-zero targets.

This ProptechOS guide explores some of the key incentives put forward by policymakers in Europe and the US and how your CRE business can utilize them to achieve low-carbon building stock that leads the industry in sustainability.

Government-led incentives for smart building technologies

The affordability of renewable energy and the cost reduction of efficient technologies are ushering in a new era of sustainability in CRE. Utilizing existing solutions in a building retrofit can cut energy use in commercial buildings by up to 40%, fast-tracking your organization toward Net Zero. However, these overhauls can be expensive and, therefore, off-putting for many SMEs. This is where government incentives can make a difference.

Federal tax credits on energy-efficient commercial buildings in the US

As part of sweeping reforms under the previous Biden administration in the US, businesses of all sizes can secure hefty tax reductions on purchases they make to improve their commercial property’s energy efficiency. Much of the regulation and incentives are rooted in the Energy Act of 2020 and the Inflation Reduction Act of 2022 (IRA), and these initiatives can help lessen the expense of new energy-efficient tech. Deductions cover a variety of investments, including:

Energy Management & Building Automation Systems: Advanced building energy management systems (BEMS) that optimize HVAC, lighting, and other building systems. These systems are often linked to smart controls and sensors for real-time monitoring and demand response.

Integration of On-site Renewable Energy and Storage: Systems such as solar arrays or geothermal heat pumps (GHPs) combined with renewable energy storage and smart controllers that facilitate demand response, create grid-interactive efficient buildings, and help lower overall emissions.

Advanced Metering & Data Analytics: Smart metering systems that record electricity, water, and gas consumption at granular time intervals enable the verification of energy savings. CRE businesses can qualify under programs that support Energy Star and performance-based contracts.

Retrofit Technologies for Existing Buildings: CRE firms can also benefit from tax deductions on retrofits on legacy building stock. These investments will include smart sensors, efficient controls, and improved insulation or glazing to reduce energy usage in older buildings.

Smart finance for smart buildings in the EU

While tax deductions for smart building investments and retrofits vary depending on the location of your business within Europe, several EU-specific initiatives aim to improve the take-up of energy-efficient equipment within the built environment. Launched in 2018, the Smart Finance for Smart Buildings initiative aims to unlock €10 billion worth of public and private finance for new technology in commercial and residential properties.

The Energy Efficiency Directive and the Energy Performance of Buildings Directive both incentivize smart building adoption. They provide a framework as to how Member States should promote sustainable technologies in efficient HVAC systems and digital building infrastructure within domestic policy.

Voluntary frameworks as ‘the gold standard’ for industry sustainability

While not strictly aligned to national governments, global environmental benchmarking organizations are highly effective at incentivizing investment in energy-efficient property development. LEED or BREEAM certification can increase rental income by more than a third (37%), with tenants willing to pay a premium to lease low-carbon commercial space. 

Environmental benchmarks can also add significant credibility to a CRE organization’s portfolio and is a clear signal to investors that sustainability is taken seriously. Investors know that commercial buildings with A/A+ EPC level ratings perform better in the market, and this, in turn, incentivizes funding for CRE firms to take the steps they need to overhaul their portfolio.

Financial returns of energy-efficient property investments

Determining a precise return on investment (ROI) in energy-efficient property technology will depend on various factors. The level of fund allocation, choice of technology and supplier, the size of commercial property, and the market in which it operates can all affect the viability of an overhaul.

That being said, investing in smart building technology is always likely to be better for CRE businesses in the long-run. From a price premium in rents resulting from new equipment to the energy cost savings from increased efficiency, incentives help CREs reduce costs while achieving decarbonization targets.

Balancing upfront costs with government support and long-term savings

Investing in these products is, understandably, a huge step for businesses to take. For a office space, a replacement HVAC system can cost from $28 to $33 per square foot – these can often exceed $100,000 for large buildings. However, this can be weighed up against the US government’s incentives for energy-efficient commercial building properties (EECBP). In this case, an organization can claim back up to $1 per square foot on 50% energy savings.

Heat pumps are another major innovation where the choice to invest may not be straightforward. On average, they will cost between $12 and $24 per square foot, depending on whether you adopt a ground or air-source pump. However, heat pumps that qualify under the IRA may receive a tax credit of up to 30% of the total system cost. Depending on the efficiency of the model of heat pump you choose, some can offer an ROI within five years, while offering three-to-five times the energy-efficiency of a conventional gas boiler. 

Proptech solutions for incentive qualification and tracking performance

While hardware solutions can significantly improve a commercial building’s sustainability record, the software that underpins it and optimizies its processes to maximize efficiency is equally crucial in the smart building formula. 

Both voluntary and market-driven sustainability initiatives are dependent on energy management systems that monitor building consumption in real-time. They reduce usage by up to 16% on their own, and are essential as part of joined-up proptech solutions to offer long-term savings for your CRE business.

Balancing software and hardware upgrades can also help organizations manage against future regulatory changes. The EU’s proposed Sustainability Omnibus package will revise the scope of its Corporate Sustainability Reporting Directive (CSRD), targeting the largest 20% of corporate entities in the bloc. 

However, as decarbonization becomes more prevalent and governments clamp down further on the built environment, those that stay ahead of the curve are more likely to remain compliant and less subject to future breaches.

Ensure long-term compliance and maximize incentive advantages with ProptechOS

We understand that funding energy-efficient technologies is a major step for your CRE business. Investor-led pressures, higher rental yields, and the pursuit of ESG targets make low-carbon building stock a vision many in the sector desire. With ProptechOS, the solutions aren’t as far away as you may think.

Our energy toolbox covers the low-hanging fruit, finding quick-wins and efficiency savings across your portfolio while working with incentive-backed hardware solutions to optimize their efficiency for the buildings they serve. Streamline your ESG compliance certification processes efficiently with our centralized utility, enabling you to establish benchmarks, track carbon footprints, and develop KPIs for sustainability. 

Your CRE business can sign up for a free trial of ProptechOS today.