Morgan Stanley
  • Research
  • Apr 5, 2023

Building a Greener Future in Europe

As Europe retrofits buildings in the race to achieve net zero by 2050, manufacturers of eco-friendly materials and supplies stand to gain.

Europe has ambitious goals to clear the air, so to speak, by 2050. But reducing carbon emissions to net zero won't be easy—or cheap. Cutting emissions from buildings, which are responsible for roughly 30% of carbon dioxide emissions globally, is essential to achieving net zero.

More than €5 trillion (roughly $5.42 trillion) in investments in building energy efficiency will be required to achieve that goal by 2050, according to Morgan Stanley Research. Meanwhile, the European Commission's “Fit for 55” initiative—aiming to reduce greenhouse gasses by at least 55% in the next seven years—is estimated to require investments of €275 billion per year for a total of €2.8 trillion to upgrade old building stock.

Money isn't the only challenge. Know-how and skilled labor are also in high demand and short supply. That is particularly true for one of the most intensive and necessary projects in Europe – bringing older buildings up to new environmental standards. “Heating, cooling and lighting currently accounts for 27% of total energy sector emissions globally and 30% of global energy consumption, according to International Energy Agency (IEA) data. This means that decarbonizing building stock is essential to reach net zero by 2050,” says Cedar Ekblom, equity analyst covering European building and construction for Morgan Stanley Research. But for the moment, the market is too focused on the immediate obstacles, such as the high initial cost and, more broadly, economic uncertainty, leaving companies that would be the center of a renovation boom undervalued, says Ekblom. Investors with an eye to the long-term benefit of renovation could find opportunity in manufacturing companies that create energy-efficient materials and products.

Finding Cost Savings from Green Investment

The European Union is clearing the path toward green renovations, starting with subsidies and grants to cover the significant upfront costs of decarbonizing old and inefficient buildings.

That has helped increase the number of European consumers carrying out energy-efficient renovations at home to 46% in the last 12 months, compared with 42% the previous year, according to a Morgan Stanley Research survey of more than 4,000 consumers in the U.K., France, Spain and Germany. The survey also found that 39% of those who made upgrades last year used a grant or government subsidy to help pay for these improvements. Italians were the most likely to take advantage of assistance for energy-efficient updates, followed by the French.

Many residential and commercial building owners have undertaken renovations such as adding wall or roof insulation, replacing doors and windows with double- and triple-glazed models, upgrading heating systems and installing solar panels. Although concern for the environment is certainly a factor, saving on energy costs and collecting EU subsidies for the renovations are top of mind for many homeowners and property managers.

46% of respondents have undertaken energy renovation in their homes in the last 12 months.

Source: AlphaWise, Morgan Stanley Research

For commercial properties, becoming more energy-efficient—and therefore cutting operating costs—is a crucial step in their long-term value proposition. “In fact, we see a real risk of large swaths of Europe's commercial property becoming unleasable over time without upgrades,” Ekblom says.

Commercial property managers in Italy, Spain and France are planning to increase spend by an average of 2.7% in 2023, up from 1.8% the previous year, according to a separate survey of 125 decision makers for commercial properties. Of those surveyed, only German property managers indicated they will invest about 1% less in green renovation. However, between 2021 and 2022, Germany increased eco-friendly building projects by 18%, the most of any European country, with 35% of respondents noting they made changes last year.

Looking forward to 2023, survey respondents said they plan to increase total renovation spend by 2.7%. Total spending should increase in all countries; only building managers in Germany are expecting a net decrease in spending vs. 2022, -1%.

Source: NPD, Morgan Stanley Research

Obstacles and Opportunities

Despite this significant growth, there are plenty of obstacles to the region's continued success in decarbonizing buildings.

“While funding is key, more money alone will not solve other hurdles to lifting renovation rates,” Ekblom explains. “These include developing skills and knowledge, formalizing requirements for 'renovation passports'—which detail necessary steps in a retrofit for a specific building over a period of years—and rolling out national renovation plans to address this challenge.”

That said, most forecasts for investments in green-energy firms remain underrated. “The market seems too focused on cyclical risks, overlooking the structural tailwind from renovation,” Ekblom says. “This presents the opportunity.”

As such, Ekblom expects energy-efficient companies could see their stocks rise in the coming years.

“We forecast an average 1.8% pickup in organic growth between 2022 and 2025 for stocks related to building energy efficiency, relative to the preceding 10-year period,” Ekblom says. “We also predict higher operating margins for this group, up nearly 200 basis points on average, with higher volume growth supporting improved operating leverage.”

For more analysis on Europe’s path to achieving net zero and energy efficient buildings, ask your Morgan Stanley representative or Financial Advisor for “Energy Renovation Reality Check” (Feb. 28, 2023).

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