Hi All - Happy Tuesday. It’s the last day of the month, which means it’s time for the Last Cast Letter.

Today we’re going to take a quick trip across the pond. But don’t worry, we’ll outline how what’s happening in Europe, doesn’t stay in Europe.

You see, when it comes to properties on the old continent, fossil-fuel boilers are out, and solar-panel-ready buildings are in — and this isn't an organic trend among eco-friendly investors… it's the law. 

Last month, the European Union passed the Energy Performance of Buildings Directive. It's a boring-sounding name, right?

Well, hidden behind that innocuous name are some serious ramifications for European real estate owners and investors.

And those ramifications could come home to roost in the US.

A Look at the EU’s “Green Homes” Directive

The new EU regulations are designed to force property owners to undertake large-scale renovations to help the region meet the environmental standards set by the Paris Agreement. 

The EU “Green Homes” directive mandates the following:

• All new buildings must be emissions-free by 2030. 

• Property owners must renovate at least 26% of the continent's most energy-intensive buildings by 2033

• Achieve a zero-emission and fully decarbonized building stock by 2050 

While those are certainly lofty goals, the EU seems serious about meeting them regardless of the economic implications.

According to its analysis, the EU believes property owners will need to cough up an additional €275 billion ($300 billion) a year to renovate properties and meet the directive's milestones. 

If anything, that cost estimate may come up short, considering a whopping 85% of European buildings were constructed before 2000, of which 75% of them have a "poor energy performance rating."

How It Will Impact Europe

In case you thought we had it rough here in America, European real estate investors have also faced historically high interest rates. And now, to top it off, they're facing substantial writedowns from the Green Homes directive… doesn't that sound fun? 

If property owners don't make costly renovations to reach those Environmental Protection Certificate (EPC) benchmarks in time, their assets' value will tank because renting the space will become illegal. 

The impact may hit hardest in the corporate real estate sector. Kim Politzer, head of European real estate research at Fidelity, sees stricter EPC rules creating a "regulatory cliff for unrentable European offices" as vacant buildings with poor environmental ratings will likely be left unrenovated. 

In practice, the EU directive means that the little guys simply won't be able to afford to comply with the legislation, while firms with massive portfolios will be able to keep their heads above water.

Will It Hit the US?

It's nice to imagine that sweeping European regulations couldn't possibly make their way across the pond and impact us domestically, but history and California have shown this to be wishful thinking. 

Let's take a walk down memory lane of just some of the times California has replicated European regulation trends: 

• EU's Emissions Trading System ➡️ CA's Global Warming Solutions Act 

• EU's REACH Regulation ➡️CA Expands Proposition 65

• EU's Waste Framework Directive ➡️ CA's CalRecyle program

• EU's Environmental Impact Assessment Directive ➡️ CA's Environmental Quality Act

• EU’s General Data Protection Regulation (GDPR) ➡️ California Consumer Privacy Act (CCPA)

European regulations make their way into the United States via the California-to-Federal government pipeline. 

We've already seen California mandate real estate reporting on climate risks, and the Biden administration announced its first-ever Federal Building Performance Standard to cut emissions on federally owned land (eerily similar in format to the EU's Energy Performance of Buildings Directive). 

In other words, if you have a long-term investing outlook, it might be time to:

• Buy eco-friendly properties in both the EU and US (unless something changes this coming November)

• Find European REITs that are overexposed to aging office space on the old continent

There you have it, that’s all for now. As always, if you’re interested in investing alongside us, fill out the form below.

— Brooks