2021: apartments will become 25% more expensive, and heating will be free?

Domas Dargis, Head of the LNTPA NT Development Strategy Group, EIKA Development Director

 

Housing prices have been rising gradually in recent years: primarily due to the recovering economy and improving buyer expectations. It is difficult to predict economic changes, but the approved European Union (EU) directive allows us to expect that apartment prices will start to rise from 2014 due to higher technological requirements for new buildings. Of course, living in a newly built house will be cheaper.

 

European Union (EU) directives require that new homes (or parts thereof) built from this year onwards have an energy efficiency rating of at least B. Such requirements will be raised every few years, and by 2021 all new apartments will have to be A++. This means that such a building will produce more energy than it consumes.  

 

According to the Department of Statistics, today, out of approximately 400,000 residential buildings, only one is a class A apartment building and eight are individual houses of the same class. Class A+ has been awarded to only one house in Kaunas, and we do not yet have any examples of A++.

Investments in more energy-efficient buildings are large and do not necessarily pay off. The goal of implementing the EU directive is a good one, but it is not known whether buyers of new construction apartments in 2021 will be ready to invest in higher-quality, energy-efficient housing? These questions do not yet arise for future buyers, but they do arise for real estate developers who are preparing for the implementation of the directives.

 

Heating is cheaper, but investments are higher

 

In order for a building to meet energy efficiency class B, there are no special requirements for ventilation, electricity consumption, or building tightness. A class B house simply has to be warm. To achieve this goal, real estate developers additionally invest in building insulation and tighter windows. Buildings in higher (A, A+ and A++) classes are subject to additional requirements (ventilation system, building tightness, building connections), which become stricter as the class increases. The two highest classes (A+ and A++) require the use of renewable energy sources, which is not yet mandatory for class A. The implementation of all these requirements requires significant investments, so it is important to assess their payback. Will home buyers be willing to pay for these investments? Will investments that meet the requirements not be too expensive compared to the benefits received?

 

As an example, we can take a typical 7-storey 2000 sq. m multi-storey building – in such a B class building, heating per month (calculated at current prices) would cost an average of about two and a half litas per square meter, A class – 0.83 Lt/sq. m, A+ – 0.35 Lt/sq. m, and A++ class – just 0.1 Lt/sq. m. A class A multi-storey building will consume only 32% of the energy required for a B class building. The energy demand of A+ and A++ class buildings is even lower – 20% and 12% of the energy required for B class, respectively.

 

In a class A building, central city heating networks can be used as the main heat source, while in higher class buildings, renewable energy sources are mandatory. Although the energy supplied by central city heating networks is currently one of the most expensive, the investment in this system is the lowest compared to other heat sources.

 

Payback is very different

 

When evaluating the difference in investment and financial benefits between classes B and A, the average payback period is about 23 years. Between class A and A+ buildings, the payback period for investment is shortened to 15 years. Meanwhile, an A++ class building would pay for itself only after 43 years compared to an A+ class, since a lot of investment is required, and the total energy costs of the building in an A+ class house are extremely low.

 

After assessing the return on investment, it should be decided which class to stop at. Otherwise, buyers would overpay due to EU requirements or simply not buy new construction apartments.

 

For example, the price of a class A apartment building (on average, considering the total construction estimate) is about 15% higher than that of a class B apartment building. Building an A+ class apartment building will cost about a fifth more, while the construction cost of an A++ class building can increase by as much as a quarter.

 

This means that from 2016, new-build apartments will cost 15% more, from 2018 – 20%, and from 2021 – 25% more. This means that as the prices of new-build housing increase, the ability of residents to purchase quality housing will decrease. More and more buyers will be forced to choose energy-inefficient old-build housing. Is this really what we are aiming for?

 

In order to implement the new EU requirements, the state should prioritize the construction of energy-efficient houses. In this situation, the optimal solution is state subsidies for houses of a higher energy class. Such a solution would encourage the construction of energy-efficient houses, the application of technologies and innovations, improve the quality of life, and allow for the rational use of energy resources. As technologies improve and become cheaper, such subsidies may decrease or even disappear.

 

If home buyers are forced to pay the final price of implementing the EU directive, then in 2021 we will see an increase in the prices of old construction, rather than the development of quality buildings. This situation will only worsen Lithuania’s goal of using energy resources efficiently. Will apartments become 25% more expensive by 2021, and heating will become free?