The market alone won’t fix it: the dilemma of climate-neutral real estate

08 July 2025

Executive Summary

The residential real estate sector is a major yet often underestimated contributor to greenhouse gas emissions in Europe. Decarbonizing housing is crucial for achieving carbon neutrality but presents complex challenges due to the region’s outdated building stock, high renovation costs and fragmented ownership structures. In major European economies (Germany, France, Italy, Spain and the Netherlands), direct emissions from homes account from 7% (Spain) to 14% (Germany) of national totals, on par with or even exceeding industrial emissions. When indirect emissions are included, this share can double, underscoring the sector’s systemic climate impact.

Short-term pain, long-term gain: Under a net-zero scenario, house prices could be 10bps (France) to 50bps (Germany) higher. In a net-zero scenario, by 2030, the effective carbon tax in the real estate sector is expected to be 80% higher on average relative to the likely scenario (mid-way between the two NGFS scenarios Below 2°C and NDCs), as still-high emissions contend with elevated carbon prices. However, as decarbonization efforts, such as retrofitting, fuel switching and efficiency improvements, take effect, real estate emissions will fall and the effective carbon tax decline. By 2040, the sector would become more cost-efficient under the net-zero path than in a likely scenario, reducing exposure to future carbon costs. This transformation has direct implications for investment activities in the real estate sector. By 2050, housing market activity (investment in renovation, construction of new energy-efficient buildings etc.) under the net-zero scenario exceeds the likely scenario by 38% to 58% across major European economies. As a result, house prices are projected to be 10bps (France) to 50bps (Germany) higher than in the likely scenario.

Under a net-zero real estate transition, GDP could rise by EUR120.7bn in Germany, EUR39.4bn in Italy, EUR26.3bn in the Netherlands, EUR25.8bn in France and EUR12.3bn in Spain. While the early years (2030–2040) see only modest gains in gross value added (GVA) of the real estate sector, about 5% above the likely scenario, this changes markedly from 2040 onward as operational costs fall, demand rises and energy efficiency improves. Between 2041 and 2050, real estate GVA is projected to exceed the baseline by 20–30%, especially in Spain and the Netherlands. Cumulatively, the sector could generate nearly EUR1trn in additional value in Germany alone by 2050. The transition also acts as a job engine, with real estate employment growing 9% annually under the net-zero pathway, adding over 345,000 new jobs across Europe’s five largest economies (106,600 additional real estate jobs in Germany, 98,300 in France, 70,800 in Spain, 52,400 in Italy and 16,800 in the Netherlands). Overall, the net-zero real estate transition could lower unemployment by an average of 0.2pp and increase GDP by EUR120.7bn in Germany, EUR39.4bn in Italy, EUR26.3bn in the Netherlands, EUR25.8bn in France and EUR12.3bn in Spain.

Achieving net-zero targets by 2050 will require a substantial investment of approximately EUR3trn in cumulative energy-related renovations across the continent's four largest economies. This equates to an annual investment of around EUR121bn. Investment requirements vary considerably among countries due to differences in climate, building age and existing energy-efficiency levels. With the highest demand, Germany requires EUR1382bn for the residential sector alone, plus an additional EUR103bn for commercial properties. France follows with an estimated investment need of EUR936bn by 2050. In contrast, Italy and Spain, which have smaller building stocks and more favorable energy consumption profiles, have a combined lower investment requirement of EUR604bn.

Energy savings alone will not foot the bill for renovations. Much higher carbon prices are crucial, but unrealistic. Assuming renovations align with a 1.5°C pathway, energy savings over a 20-year period can reduce overall expenses by 41-77%, resulting in discounted net costs of EUR677bn in Germany and EUR80bn in Spain. While energy savings provide some financial relief, they alone cannot incentivize the necessary increase in renovation activity. Carbon prices have to play a pivotal role in bridging the investment gap. Our analysis of various carbon price scenarios indicates that only high price levels, projected at approximately EUR350/tCO2 by 2035, can effectively offset the initial expenditures required. However, such price levels seem political and social infeasible.

Solving the dilemma of climate-neutral real estate requires a policy mix of higher carbon prices, targeted financial support and enhanced policy frameworks. Addressing funding and incentivization gaps is crucial as current cost savings and projected emission pricing may not suffice to cover high upfront investment costs. Establishing accessible one-stop shops for tailored guidance and financial support, along with fast-track certification programs for critical roles, can help overcome barriers and accelerate renovation efforts. On the energy supply side, binding timelines for phasing out fossil fuel boilers and targeted subsidies for heat pumps are essential to drive the transition toward cleaner energy solutions. Policymakers should allow carbon prices to rise more swiftly to reduce the need for market-distorting measures like bans and subsidies. In this case, timely and transparent communication is crucial to ensure stakeholders can effectively adjust and invest in necessary renovations.

Hazem Krichene  
Allianz SE

Yao Lu

Allianz Trade

Patrick Hoffmann
Allianz SE
Arne Holzhausen
Allianz SE