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Savills Takes Stock:Annual review of global real estate capital markets 2025After a chastening few years,the tide is turning.The cyclical factors weighing on property values and investment activity are beginning to unwind and the nascent recovery in real estate capital markets should gather momentum in the coming year.In some markets,2025 will represent a vintage year and the buying opportunity this cycle.This report,based on a series of in-depth interviews with key stakeholders across the global Savills business,as well as data and analysis from the wider research network,outlines the outlook for global capital markets in 2025.We hope you enjoy reading it.Savills Takes Stock:Annual review of global real estate capital markets 2025Oliver SalmonDirector,World ResearchGlobal Capital Markets 44(0)20 7535 Rasheed HassanHead of Global Cross Border InvestmentGlobal Capital Markets 44(0)20 7409 ContentsSavills Takes Stock:Annual review of global real estate capital markets 20253Global 04-06Asia Pacific 07-14EMEA 15-25North America 26-30GlobalAfter treading water for much of the year,real estate capital markets ended 2024 on a bright note.Overall liquidity remains well down on past levels,but turnover in the final quarter rose by more than 25%,providing good momentum entering the new year.As a result,total global investment of US$828bn represented a near 8%increase in comparison with 2023.The recovery is broad-based,extending beyond a particular market or region and not concentrated in one sector.Beds and sheds are leading the recovery from a sectoral perspective,with the living,industrial&logistics and hotel sectors all registering double-digit growth in turnover.But the stabilisation in the office sector was perhaps the story of 2024,with investment rising by 7%.Most major markets returned to growth in 2024.Australia stands out,underpinned by several major transactions,while growth in South Korea was supported by extremely strong fundamentals in the office sector.Japan,meanwhile,is the only market that has also outperformed pre-pandemic levels.Underperforming markets,such as China,Germany and France,continue to struggle via a combination of political or geopolitical uncertainty,cyclical economic challenges and in the case of China,weak property fundamentals.In these markets,investment also remains materially down on 2019 levels.Global:Real estate investment Q1 Q2 Q3 Q4 Forecast Investment to GDP ratio(RHS)1800160014001200100080060040020002.5%2.0%1.5%1.0%0.5%0%US$bnPercent of GDPSource:Savills Research using MSCI RCA.Excludes development sites20062007200820092010201120122013201420152016201720182019202020212022202320242025Savills Takes Stock:Annual review of global real estate capital markets 20255Savills Takes Stock:Annual review of global real estate capital markets 2025The average deal size rose by 10%globally in 2024 and major institutions are back in the market,with portfolio and M&A deals rising by nearly 50%in the final quarter.Both cross border and domestic institutional investors increased spending last year,taking back some market share from the smaller private investors,who have been most active in recent years.There is still some way to go to recover their pre-pandemic market share,but wherever you look in the data there is evidence of a nascent recovery in activity.The same cannot be said for fundraising activity.In normal market conditions,fundraising would be expected to lead deal activity.If this pattern would hold true,the outlook for dealmaking would be somewhat muted,as it remains a challenging environment to raise capital.Larger funds with a strong track record are generally performing well,as are smaller more specialised funds in line with the growing interest in alternatives.But everything in the middle is struggling and total capital raised in 2024 was the lowest since 2012.Global:Real estate investment,top 10 markets vs.2019 vs.202360 %0%-20%-40%-60%-80%Percent change(US$)Source:Savills Research using MSCI RCA.Excludes development sitesFranceChinaCanadaGermanyUSJapanNetherlandsUKSouth KoreaAustraliaGlobal:Real estate fundraising Capital raised Funds closed(RHS)35030025020015010050010009008007006005004003002000US$bnTotal fundsSource:Savills Research using RealfinX20052006200720082009201020112012201320142015201620172018201920202021202220232024Savills Takes Stock:Annual review of global real estate capital markets 2025But in this cycle,a recovery in transactional activity is not contingent on fundraising.Instead,the correlation will run the other way.First,there is plenty of dry powder to underwrite an increase in deal flow and we are beginning to see this come through already.In particular,private equity groups have been very active,looking to cement first-mover advantage in the recovery.Second,with institutional target allocations remaining broadly stable,it is the recycling of capital through the transactional market that will allow for new fundraising commitments.Many closed-ended funds launched in the late 2010s have delayed exits through the downturn,preventing a recovery in fundraising.But they will now face growing pressure to speed up the recycling of assets and capital as a recovery takes hold.This process will provide important impetus to deal activity over the next few years,as more product is released for sale.In a number of markets,volumes remain subdued due to a lack of available stock,as opposed to a lack of active buyers.We are also likely to see more motivated sellers next year.There is some distress in the market,but it has not been anywhere near the levels most expected when central banks started ratcheting up interest rates.As explained by Andrew McMurdo,Co-Head of Savills Capital Advisors,“it has been surprising just how robust credit markets have been over the last 12 months,when you think about the level of uncertainty in the underlying asset class and the prevailing rate environment.”But the refinancing challenge remains acute in both the US and Europe and property owners may find that their lenders are less amenable to continuing to extend-and-pretend in an environment where liquidity is improving.According to McMurdo,“lenders have been very reluctant to force the issue,because they know it would be counterproductive to push assets into a falling market.However,as we see greater conviction on value and investment volumes pick up,that dynamic may change.”Underpinning all of this is a more stable macroeconomic environment with a global easing cycle now well established following the US Feds 50bps rate cut back in September,and some of the political uncertainty now removed following a year of elections.This has helped to support a recovery in investor sentiment.In the view of Alex Jeffrey,CEO of Savills Investment Management,“institutions and managers need more behind them to accelerate a return back into the market,but I do think 2025 will be better than last year,simply because the interest rate cycle has turned and the political outlook in many countries is looking more stable.”Investors are generally showing an increased appetite for risk.In part,this reflects an early cycle dynamic;for high-conviction investors,now is the time to take on more risk and maximise returns.But the return of institutional capital will be key in sustaining a recovery in liquidity,not least because higher risk strategies rely on it for an exit plan.Jeffrey is relatively optimistic about this dynamic;“I fundamentally believe that most of the underlying institutions pension funds,insurance companies etc.are conservative at heart and understand that,in the long run,most of the returns from real estate comes from income.So while they might invest tactically in recovery strategies or distress strategies for higher returns,their base level of investment will always be core or core plus.I think core will come back,perhaps more than people expect.”7Savills Takes Stock:Annual review of global real estate capital markets 2025Asia Pacific Slowing inflation and more accommodative monetary policy should support growth across much of Asia Pacific in 2025,but China casts a long shadow over the outlook.The Chinese economy will continue to struggle amidst an ongoing property market downturn and weak household consumption.External demand was a bright spot in 2024,but the prospects for a repeat in 2025 are somewhat diminished given expectations of an escalating trade war with the US.The central government has been ramping up stimulus efforts in the second half of 2024 and there remains plenty of fiscal space to support the economy.Deflationary risks are elevated given weak domestic demand,suggesting more is needed to offset the various headwinds to private sector activity.But authorities are trying to strike a balance,not wanting to exacerbate issues around the indebtedness of certain parts of the economy.Economic growth will continue to trend lower as a consequence,not least due to a demographic outlook that is drawing comparisons with Japan of the 1990s.This will feed into the wider region;China is the largest export market for many East Asian economies,including Japan and South Korea,while also playing a key role in anchoring global commodity prices which is important for large producers such as Australia.Elsewhere,a recovery in real wage growth is helping to support activity in key markets,including in Australia and South Korea.A continued reallocation of global capital away from China also stands to benefit the rest of the region while strong demand for semiconductors and related products,particularly from the large US tech firms,will help to offset any weakness in demand from China.Asia Pacific:GDP growth in key markets 2017-19 average 2024 2025 forecast7%6%5%4%3%2%1%0%-1%Year-on-year,local currency,constant pricesSource:Savills Research using IMF WEO January 2025JapanHong Kong SARAustraliaSouth KoreaSingaporeIndiaChinaAsset:KM Nishi-Umeda Building,Osaka,JapanSector:OfficeSavills Role:Advised VendorPurchaser:ConfidentialVendor:ConfidentialNIY:ConfidentialPrice:JPY 14.6bnSavills Takes Stock:Annual review of global real estate capital markets 2025Inflation remains largely a positive phenomenon in Japan,supporting a long-awaited exit from a deflationary spiral that has beset the economy over the last two decades.A recovery in real wages is supporting private consumption,following annual wage negotiations and a rise in the minimum wage.Meanwhile,the weak yen is boosting business profitability and feeding into an improved outlook for investment.This has allowed the Bank of Japan to raise the policy rate with little disruption to financial markets and further modest tightening is expected this year.The regional outlook for 2025 is also contingent on events in the US.Trade policy under the new administration is a key risk;while China is a clear focal point,Japan,Taiwan,and South Korea also operate large trade surpluses with the US and so may attract the ire of the new US President.Meanwhile higher-for-longer in the US will have implications for monetary policy in markets such as Hong Kong SAR,South Korea,and Singapore.Asia Pacific real estate capital markets have been notably resilient in recent years.The US$190bn invested across the region last year represented a near 13%increase on 2023 and was just 8low the pre-Covid average,comparing favourably with EMEA(-45%)and North America(-25%).Markets have largely followed the business cycle in this regard,with much of the region less disrupted by the inflation and interest rate dynamics that have so besieged the Western world.Additionally,we havent seen the same shift in sentiment against the office sector,compared with the rest of the world.Asia Pacific:Real estate investment 2019 2024 2025 forecast6050403020100US$bnSource:Savills Research using MSCI RCA.Excludes development sites ChinaJapanSouth KoreaAustraliaSingaporeHong Kong SARIndiaAsset:Concorde Hotel&Shopping Centre,SingaporeSector:Hotel/RetailSavills Role:Advised VendorPurchaser:HPL Vendor:Collective SaleNIY:ConfidentialPrice:SGD821m10Savills Takes Stock:Annual review of global real estate capital markets 2025This is particularly true of Japan,where capital markets have continued to function as normal in an ultra-low rate environment.The JPY7.8tn(US$52bn)invested in 2024 represented the strongest year on record,spanning 17 years of data.“Japan has been the outlier in terms of market strength in recent years,it hasnt been impacted by the significant increase in base rates that weve seen elsewhere”explains Andy Hurfurt,Managing Director of Institutional Investment Advisory at Savills Japan,“the cost of funding has remained extremely attractive and the fundamentals of the real estate market have been largely positive.”Investor appetite is likely to remain robust in the year ahead,with institutional investors expected to be more active amidst some stability in the prevailing macroeconomic environment.Liquidity could receive a boost as a number of Japanese corporates look to offload assets,buoyed by the success of recent transactions such as the sale of Tokyo Garden Terrace Kioicho by Seibu Group to Blackstone for JPY400bn(US$2.6bn).Similar mixed-use developments are likely to attract interest from core investors.Fundamentals in the office sector are reasonably strong.Vacancy risk is largely restricted to non-core peripheral locations,with the growing bifurcation in the market driven by location rather than quality.Ongoing demand should be sufficient to absorb the new supply expected this year.The logistics sector will be more compelling for investors with a higher risk profile.The onboarding of new supply initiated during the 2021-23 construction cycle has pushed up vacancy in the sector.In Tokyo,the vacancy rate has doubled since the beginning of 2023 to 8.6%.Pricing is holding firm at the moment,but there is“plenty of dry powder waiting for a slight correction in market,”according to Hurfurt.The longer-term fundamentals remain compelling,underpinned by a low ecommerce penetration rate,presenting“an opportunity for investors willing to accept some leasing risk over the next 12-18 months.”Japan:New construction starts400 %0%-10%-20%-30%-40%Year-on-year,floor areaSource:Savills Research using Macrobond Office Retail Industrial&Logistics Residential2018 2019 2020 2021 2022 2023 2024Core investors will likely focus on stabilised assets in the multifamily sector,where they can achieve a solid cash-on-cash yield of around 5.5%-6.O%.There is strong conviction in the outlook for rental growth in the sector,supported by rising real incomes and robust demand,with low housing affordability pushing more people into the rental sector.Prime retail also remains a highly sought-after asset,particularly in high-footfall locations that are popular with tourists.In contrast,real estate markets in China and Hong Kong SAR remain entrenched in a downturn,with no immediate end in sight.Many global investors are approaching China with more caution and wider trends in FDI are mirrored by real estate investment cross border flows.11Savills Takes Stock:Annual review of global real estate capital markets 2025For some,Chinas commercial real estate sector is largely uninvestable due to the fundamentals;occupational markets are challenged by very high vacancy,which is putting downward pressure on rents and prices across much of the office,logistics,and retail sectors.This is unlikely to materially change in the near term,given continued development activity,as explained by James MacDonald,Head of Research at Savills China,“we still have a healthy pipeline of new projects over the next 5-6 years and nearly everything is speculatively built.As a result,they may have limited,if any,pre-commitments when they come to market.”Most foreign investors are either looking to exit the market,or in the case of the large Singaporean money managers,being more selective in their acquisitions.Domestic insurance,private equity groups,and end-users are providing liquidity on the buy-side.According to Louisa Luo,Head of Capital Markets at Savills China,“Chinese institutions prefer to buy logistics,industrial,retail,and rental apartments,because many find themselves with an overweight exposure to the traditional office market.”But with little competition,they can afford to remain disciplined;“buyers have a lot of opportunities and they are very selective.”Logistics facilities located in manufacturing hubs such as the Greater Bay Area in Southern China will attract core investors,while sluggish residential sales and increased government support will favour multifamily in Tier 1 cities.Opportunistic investors will be looking to pick up distressed assets at discounted prices.While avoiding the Chinese market,global institutions are not reducing their exposure to the wider region.Asia Pacific is also the only region where institutions continue to increase their allocations to real estate,according to the latest Real Estate Allocations Monitor,which should support a recovery in fundraising activity in 2025.Investors will increasingly look to large liquid markets in the region to deploy capital,including Australia,Japan,South Korea,and to a lesser extent,Singapore.Australia is perhaps the most accessible market for cross border investors,and there is plenty of offshore interest at the beginning of this year.Pricing was slow to move in this cycle,but most of the correction has now come through in the last 12 months,as highlighted by Paul Craig,CEO of Savills Australia and New Zealand,“the main thing thats happened here in 2024 is the asset repricing and the general view is that if were not at the cyclical bottom of the market,then were fairly close to it,which has resulted in a significant increase in investor sentiment.”This should support deal momentum early in the year;total investment of AUD50bn(US$33bn)rose by nearly 50%in 2024,but this was largely due to several major transactions,including Blackstones AUD 24bn(US$16bn)acquisition of the data centre operator AirTrunk.In the office sector,a series of marquee transactions are providing the transactional evidence to support this narrative.According to Craig,“investors are more comfortable with the new regime on rates and dont want to miss out on the recovery.”Leasing markets are reasonably strong in prime locations and rental growth should continue to come through,particularly in the premium segment of the market,given limited development activity.“Secondary stock repositioning will China:FDI and cross border real estate investment FDI Cross border real estate investment(RHS)4003503002502001501005002520151050US$bnUS$bnSource:Savills Research using Macrobond and MSCI RCA.Real estate cross border investment excludes Hong Kong SAR2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Savills Takes Stock:Annual review of global real estate capital markets 2025be key theme for high risk investors,supported by new legislation on the energy efficiency of buildings due in July 2025.”By contrast,the logistics sector is moving in the opposite direction,with rental growth slowing to a standstill in 2024.New supply is pushing up vacancy at a time when sub-lease space has also increased.Core investors will still be attracted to stabilised assets in prime or infill locations,however the market environment probably suits value-add or opportunistic investors,who will look for secondary stock in high-demand locations with some redevelopment and reversionary potential.Institutional investors are re-entering the retail sector,attracted by stabilised yields and solid income growth.As retailers grapple with store availability shortages and rising occupancy costs,opportunities for value-add investments and redevelopment projects are expected to grow.Appreciating home values and low vacancy will support established multifamily and well-located student accommodation,and we expect increased investment in the data centre pipeline,with competition against traditional industrial users set to rise.In Singapore,pricing has been more resilient through this cycle and this is inhibiting activity particularly in sectors where benchmark yields are not supported by the underlying fundamentals.While headline investment of SGD15bn(US$11bn)was broadly stable on the year,the last 12 months were somewhat“underwhelming relative to expectations,”in the opinion of Jeremy Lake,Managing Director of Investment Sales&Capital Markets at Savills Singapore,due to a“price gap across most asset classes,resulting in deals not closing.”This has resulted in an increased frequency of failed sales mandates through the year.The office sector in particular is difficult to justify,at a benchmark prime yield of around 3.6-3.8%,given ongoing weakness in occupational demand.Most deals are core in nature and lumpy in size,neither of which are in high demand in the current market environment.The rental outlook for this year is stable at best,with the limited supply pipeline providing an important backstop by keeping vacancy in check.Instead,the logistics sector is again likely to be popular,where the unique land lease system means that a prevailing yield of around 6.4%continues to attract investors.This is where the global property funds have been most active,headlined by the SGD1.6bn(US$1.2bn)acquisition by Warburg Pincus and Lendlease of a portfolio of industrial assets in August.A diversity in lot sizes is also more palatable in comparison with other sectors,particularly for private investors,who continue to view Singapore as a regional safe haven market.Ramp-up logistics and cold storage are likely to be favoured among the myriad of sub-sectors.The retail sector sits somewhere in the middle;yields are more attractive than in the office sector,but the lumpy deal sizes can be a challenge too far for many investors particular when accompanied by the additional operational requirements of the sector.Asset:Daedeok Logistics Centre,Greater Seoul,South KoreaSector:Industrial and LogisticsSavills Role:Advised PurchaserPurchaser:LaSalle Investment ManagementVendor:Jisan IndustrialNIY:5.75%Price:KRW618bnSavills Takes Stock:Annual review of global real estate capital markets 2025Finally,the South Korean market is somewhat of a mixed bag.At one end of the scale,the office market in Seoul is perhaps the strongest globally right now,in terms of fundamentals.Landlords are enjoying healthy rental growth,with a vacancy rate of sub-3ross the major CBD markets and limited new supply expected until 2027.Several of the largest deals of 2024 were in Seoul,including The Asset,which Savills traded in September for over KRW1.1tn(US$825m).More major transactions are expected this year,with some vendors looking to exit before the onboarding of new supply,according to Crystal Soojeong Lee,CEO and Head of Investment Advisory at Savills Korea.“A number of high-profile trophy assets are expected to hit the market this year and from an investors perspective,if they compare these deals with investment opportunities in offices in other markets,they will be attractive.So there will be good interest from both domestic and foreign capital.”This contrasts with the logistics sector,where vacancy rates are high and rising,particularly in cold storage.However,similar to trends in other markets such as Japan,there is a silver lining in the downturn in development activity.“Within two years,we are likely to see a more balanced rental market,so now may be a good opportunity for investors to re-enter the market,”explains Lee.International investors,who are generally value-add in nature,are more active in the sector,given the higher returns on offer relative to offices.Dry storage assets present a better opportunity right now,particularly in core locations,supported by strong structural demand from trade growth and less vacancy risk.Investors continue to explore areas of the living sector,particularly in healthcare,senior living,and student accommodation.However,there are very few opportunities to deploy at any great scale and the Jeonse rental system will restrict the development of an institutional multifamily sector.Access to power remains a key constraint on data centre development,but we are likely to see some stabilised assets trade next year after the first successful deal completed last year with Macquarie Asset Management acquiring a 40MW data centre near Seoul for KRW734bn(US$530m)in August.Asset:Nasu Garden Outlet,Nasushiobara,JapanSector:RetailSavills Role:Advised VendorPurchaser:Mitsui Digital ManagementVendor:Sojitz CorporationNIY:ConfidentialPrice:JPY 20.8bnAsset:The Asset,Gangnam,Seoul,South KoreaSector:OfficeSavills Role:Advised VendorPurchaser:Samsung SRA AMCVendor:Koramco REITsNIY:3.50%Price:KRW 1,104bn6%5%4%3%2%1%0%-1%Year-on-year,lcoal currency,constant pricesEurope:GDP growth in key markets 2017-19 average 2024 2025 forecastSource:Savills Research using IMF WEO January 2025The European economy is expected to gather momentum this year,but forecasts are generally moving in the wrong direction.Fundamentally,a recovery in real household incomes and easing financial conditions should support some strengthening in domestic demand.But a weak end to 2024,in sentiment and activity,is providing some concern that the economy will continue to struggle.The IMF is forecasting growth of 1.0%for the euro area,up from around 0.7%in 2024.Back in July last year,they had pencilled in a 1.5%expansion for 2025.A similar trend is playing out in the UK,albeit with growth expected to see a more healthy recovery this year.Consumer and business sentiment remains fragile across much of the region.Households have responded to a recovery in real incomes by building their precautionary savings,rather than to increase spending and expectations of an economic recovery largely hinge on this dynamic reversing.This,in turn,is contingent on a resilient labour market,but there is evidence of some softening in this regard.EMEASavills Takes Stock:Annual review of global real estate capital markets 202515Euro areaGermanyFranceItalySpainNetherlandsUnited KingdomPolandSwedenSavills Takes Stock:Annual review of global real estate capital markets 2025Europe:Household savings rate30% %5%0%Gross savings rateSource:Savills Research using Macrobond2018 2019 2020 2021 2022 2023 2024 France Germany Italy Spain UKInflation continues to trend towards target.A weaker growth outlook does at least imply limited domestic price pressures,allowing regional central banks to ease policy relatively quickly.The ECB is expected to cut rates by around 100bps this year,bringing the policy rate down to around 2%in line with estimates of the neutral rate.But they may go further,especially given fiscal policy is acting as a headwind in the region.The Bank of England is likely to be more circumspect,owing to some stickiness in inflation.Risks to the outlook are skewed to the downside.Clearly,there is significant uncertainty surrounding US President Trump,both in terms of trade policy,as well as foreign policy,particularly in relation to the ongoing conflict in Ukraine.Meanwhile,domestic political uncertainty in France and Germany continues to weigh on sentiment and activity in these markets.Real estate capital markets in Europe have experienced a significant correction in recent years,not unlike that experienced through the global financial crisis.Total investment in the region fell by nearly 60%peak-to-trough and activity continues to track at more than a decade-long low.But the market stabilised in mid-2024 and a good second half means that total investment across EMEA of 187bn(US$202bn)for the year represented a near 11%increase on 2023.Asset:Cromwell Retail Portfolio,Poland Sector:RetailSavills Role:Advised PurchaserPurchaser:Star Capital Finance Vendor:Cromwell Property GroupNIY:10%(blended)Price:285mSavills Takes Stock:Annual review of global real estate capital markets 2025Europe:Total real estate investment1009080706050403020100Peak=100(4QMA)Source:Savills Research using MSCI RCA.Excluding development sites 2007 Q1-2010 Q4 Current cycle2021 Q42022 Q12022 Q22022 Q32022 Q42023 Q12003 Q22023 Q32023 Q42024 Q12024 Q22024 Q32024 Q4This recovery is broad-based,albeit with France and Germany as very notable exceptions.The strongest recovery is evident in the UK,where investment rose by 21%in 2024 to 47bn(US$60bn).“First,prices corrected quicker than anywhere else,thats the number one driver.Without that,there would be far less volume”explains James Gulliford,UK Managing Director Markets.But this has been supported by an increase in M&A activity.“Second,there is a change in institutional ownership of real estate in the UK.”Many investors have also been attracted to Southern Europe,with a tourism-led recovery in growth supporting unexpected strength in leasing activity across the region.Central and Eastern European markets are also in recovery,albeit from a low base.As outlined by Stuart Jordan,CEO of Savills Central&Eastern Europe,“Poland was a huge attraction for inbound global capital in the past,but that ceased following rate increases and the onset of the Ukraine crisis.2025 looks much more positive with scale investors coming back to a high growth market.The Czech Republic has been a bubble of calm,supported by domestic vehicles that raised so much capital they expanded their footprint beyond the domestic market.Asset:Vita,Barcelona,Spain Sector:Purpose Built Student AccomodationSavills Role:Advised VendorPurchaser:Morgan Stanley Vendor:Vita Student HousingNIY:ConfidentialPrice:250m18Savills Takes Stock:Annual review of global real estate capital markets 20251009080706050403020100US$bnEurope:Real estate investment 2019 2024 2025 forecastSource:Savills Research using MSCI RCA.Excludes development sitesUKGermanyFranceItalySpainSwedenNetherlandsThe nascent recovery in activity is supported by a greater acceptance of the prevailing market price.As outlined by Matthias Pink,Head of Research Germany,“last year was characterised by increasing price transparency or discovery,which has translated into the market.The gap between buyers and sellers in most places has closed,and expectations are clear.”This is reflected in the data commercial real estate prices are now broadly stable,which implicitly assumes some acceptance,or at the very least acquiescence,of fair value.In some markets,the recovery is being inhibited by a lack of available stock,as opposed to a lack of active buyers.As Pink goes on to explain,“there is clearly demand for really prime product at the new discounted price level,but thats not currently on the market.And there would be more interest to buy value-add at distressed pricing,but again there isnt any.”But there is a noticeable increase in sell-side liquidity,particularly from some European open-ended funds under redemption pressure,increasing the supply of assets in the market.Larger transactions are also becoming more common.Sentiment is leading the recovery in activity,closely tracking interest rate dynamics through the cycle.The strong correlation between the two is unsurprising;this past real estate downturn remains predominantly a capital markets downturn driven by the steep rise in interest rates.This is particularly true of Europe,which has not experienced the level of structural upheaval in the office sector relative to the US.In aggregate,the fundamentals have delivered consistent income returns to investors throughout,which is part of the reason why the level of distress is so low.Europe:Real estate sentiment and bond yields Euro area average 10yr bond yield Real estate sentiment(RHS)4.0%3.5%3.0%2.5%2.0%1.5%1.0%0.5%0.0%-0.5%-3.5-3.0-2.5-2.0-1.5-1.0-0.5-01.01.5PercentZ-score(inverted)Source:Savills Research using MacrobondCorrelation coefficient0.10.92015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025Savills Takes Stock:Annual review of global real estate capital markets 2025This recovery in sentiment is mirrored in credit markets.According to Andrew McMurdo,Co-Head of Savills Capital Advisors,there is plenty of liquidity to support a recovery in activity.“Financing has become increasingly competitive and with investment volumes being so low,there is a mismatch between supply and demand of credit.Institutions with the money to deploy are competing for the few new deals out there,where someone is purchasing an asset at rebased pricing,across all asset classes.As such,spread are tighter now than they have been for a while.”According to the CREEFC Europe Market Sentiment Survey of European lenders,sentiment is back at levels not seen since 2021.Europe:CREFC Europe Market Sentiment Survey1.51.00.50.0-0.5-1.0-1.5-2.0IndexSource:Savills Research using CREFC Europe Overall Liquidity New business Pricing/margins Lending terms2019 2020 2021 2022 2023 2024Asset:Project Union,Europe Sector:Industrial and LogisticsSavills Role:Advised PurchaserPurchaser:Australian Super Vendor:M7/Oxford PropertiesNIY:ConfidentialPrice:ConfidentialSavills Takes Stock:Annual review of global real estate capital markets 2025From an individual market perspective,investors are generally looking at those markets that have performed well in 2024.This is evident in Savills recent EME Sentiment Survey.Topping the list is Spain,where Alejandro Campoy Zuasti,Managing Director of Savills Spain,emphasises the importance of occupational markets;“the leasing market in Spain has been very good across all sectors,which is incredible,and at the end of the day that is what supports the investor interest.”Do not discount a stronger recovery in activity in Germany and France in 2025;these are the largest,most liquid markets in the region(in addition to the UK),which offer a level of scale to investors that is not so easy to achieve elsewhere.Combined,the professionally-managed real estate market of Germany and France is 60%larger than the rest of the euro area combined.90pP0 %0%Share of respondentsEurope:In which countries do you plan to invest in the next 12 months?2024 2025Source:Savills Europe and Middle East(EME)Investor Sentiment Survey 2025Other EuropeGermanyUKFranceItalySpainNetherlandsBelgiumIrelandAustriaCzech RepublicNorwayPortugalSwedenDenmarkPolandAsset:40 Molesworth Street,Dublin,IrelandSector:OfficeSavills Role:Advised VendorPurchaser:DekaVendor:State StreetNIY:5.19%Price:37.3mSavills Takes Stock:Annual review of global real estate capital markets 2025Supply-side dynamics are presenting a clear buying opportunity in the office sector.A scarcity of well-located Grade A space across much of Europe will support solid rental growth,even if the economic outlook is consistent with relatively muted tenant demand.This was true in 2024 and it will again be true in 2025.This optimism is mirrored in the EME Sentiment Survey,which highlights a clear uptick in the number of investors looking at offices again.In this regard,the recovery may be self-fulfilling.The sharp decline in activity also provides space for a V-shaped recovery.The return of US private equity to this sector will be a key bellwether for a wider shift in attitudes.90pP0 %0%Share of respondentsEurope:In which sectors do you plan to invest in the next 12 months?2024 2025Source:Savills Europe and Middle East(EME)Investor Sentiment Survey 2025Big box logisticsUrban logisticsStudent housingMultifamilyCBD officesHotelsRetail warehouseData centresLife sciences/labsSenior livingHigh street retailCare homesNon-CBD officesShopping centreAssets:30 Golden Square,London,UKSector:OfficeSavills Role:Advised VendorPurchaser:Legal&GeneralVendor:Aviva/PSPNIY:4.50%Price:72.25mThis view is shared by Matthias Pink,Head of Research Germany,“the recovery will be led by offices.Structurally its beds and sheds,and real estate portfolios are still underweight beds and sheds,so in that sense that is a macro theme that will continue to drive investment activity.But the base effect is going to see offices bounce back.”The opportunity is fundamentally grounded in the mismatch between the capital markets and the occupational markets.While many investors have pulled back from the sector,occupational demand has held steady throughout this cycle.Take-up rose by 8.5%in 2024,leaving overall leasing activity just 10low pre-pandemic levels.Meanwhile vacancy rates have stabilised and tenants are beginning to withdraw grey space.A constrained development pipeline will provide an important backstop to the market.Savills Takes Stock:Annual review of global real estate capital markets 2025Europe:office take-up Q1 Q2 Q3 Q4 Forecast Pre-pandemic average121086420Million sq mSource:Savills ResearchAssets:Central Square,Leeds,UKSector:OfficeSavills Role:Advised VendorPurchaser:Ashtrom PropertiesVendor:M&G Real EstateNIY:8.00%Price:78.0m2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025The decline in interest rates is beginning to deliver accretive returns.Prime yields have stabilised,with downward pressure building in some markets,including in Southern European hotspots such as Madrid and Milan.In the UK,the City of London prime yield compares favourably to peer markets on the continent.Core investors will do well to transact early in the cycle,before a weight of capital bids away the opportunity.Private investors will continue to seek core stock,but as debt costs fall we will see insurance companies and other larger institutions become more acquisitive for larger lot sizes.Value-add investors,meanwhile,will look to acquire Grade B stock in Grade A locations and there is plenty of reversionary potential in delivering adequate offices without the need to drain capital reserves aiming for LEED Platinum or equivalent.The logistics sector remains a key pick for investors;big box and urban logistics occupy the top two spots in the EME Sentiment Survey,with around 70%of investors looking to deploy into the sector.While investment activity remains well down from the recent peak,a high share of portfolio and M&A activity shows that appetite to deploy into the sector remains undiminished including Brookfields takeover of Tritax EuroBox in September for 1.4bn.“Investors love income,the simplicity of ownership and little exposure to unplanned capex”according to James Gulliford,“its no coincidence that simple,single-storey boxes have seen the early inward yield movement in this cycle.”Take-up has normalised back to pre-pandemic levels,and rents are moving sideways.Supply has risen in the last two years,with the volume of speculative development and returned second-hand space exceeding overall take-up,pushing vacancy higher.But the development cycle is beginning to turn,and the market for high-quality Grade A space is likely to be tighter than the overall market.Location remains a key differentiator.Land-constrained markets such as the Netherlands have been less impacted by new development,but London,Poland and Madrid have all seen vacancy rise following the onboarding of new supply.But modern warehouses remain in high demand,as occupiers look to be more efficient in their operations leading to an increased focus on ESG credentials and access to power etc.In the retail sector,while investment was broadly stable on the year,there was a notable pick-up in activity in the second half.This was supported by an increase in liquidity,with more assets and larger lot sizes released to the market.Two major transactions helped to anchor the market around the mid-year;first was the sale of KeWeDe in Berlin to the Thai-based private investor Central Group for 1.2bn and the second was the Kerings 1.4bn acquisition of Via Montenapoleone 8 in Milan.Institutional investors are also becoming more active in the sector,most notably with Blackstone acquiring 130-134 New Bond Street in London for 227m,representing a seminal moment in the recovery.The broad-based interest in the retail sector is supported by a relatively strong occupational backdrop.The rebasing of rents since the pandemic is encouraging occupiers to take more space.For shopping centres and prime high streets,this is driven by a recovery in Savills Takes Stock:Annual review of global real estate capital markets 2025Asset:The Tiger Portfolio,UKSector:Industrial and Logistics/OfficeSavills Role:Advised PurchaserPurchaser:Lone Star/Hudson AdvisorsVendor:Charles Street Buildings GroupNIY:ConfidentialPrice:c.600mfootfall,particularly in tourist hotspots,as well as a wider recognition of the advantages in holding a prominent physical presence.For investors interested in retail parks,sites anchored by convenience goods,value-orientated operators,or food have generally performed well given the prevailing lack of supply,and importantly,lack of competition.Prime yields remain highly competitive relative to other sectors,particularly for cash-on-cash motivated buyers.Early-cycle acquisitions will benefit from some mild yield compression,with prime yields either peaking,or close to peaking,in most markets(particularly high street and retail parks).Prime shopping centres,prime high streets,good footfall locations and anything food-anchored will be most attractive from a core strategy perspective.Investors looking at value-add and opportunistic strategies in the sector may consider converting shopping centres to mixed-use assets,particularly in Western or Northern European markets,which tend to be more saturated.The living sector displayed some signs of recovery in 2024,with activity weighted towards the second half of the year,mirroring improvements in liquidity across debt capital markets.There were a handful of major portfolios that traded in the year,supporting overall turnover,including Aermont Capitals 730m acquisition in Sweden and a 695m deal in the Netherlands led by TPG Angelo Gordon.However,total investment of 44.7bn(US$48.4bn)across the EMEA region was still more than 40%down on 2019,with the majority of activity and appetite still in smaller lot sizes(sub-100m).Multifamily continues to be the dominant sub-sector,accounting for over 70%of capital deployed in the year.Germany is the major regional market,but in line with wider trends it is losing market share to other markets including the UK and Spain.Across student accommodation,the UK market remains the largest by some margin,accounting for around 60%of investment last year.Fundamentally,demand remains strong for rental accommodation across all areas of the living sector,including student and senior.Most major markets are structurally undersupplied in the types of housing needed to support demographic change,particularly in urban areas.This is unlikely to change in the near term,given higher construction costs and planning constraints.Meanwhile,deteriorating housing affordability is pushing more people into rental accommodation,which should provide further space for rents to grow,even if there are affordability challenges here too.Investors continue to back these structural dynamics,with increased focus on Southern Europe.Spain,in particular,is seeing more activity supported by a rising number of rental households in the country,especially in major cities,following several years of strong inward migration.The market is still relatively nascent though,as it remains tough to find operational partners with experience across much of the living space.Yields were unchanged across both student and multifamily for much of last year,and this stability is supporting confidence that the market has bottomed out.Many investors are taking this as a signal to re-engage with the market and seek new opportunities,and we are expecting a number of larger portfolios to launch through the first half of 2025,both in the UK and across Europe,cementing the recovery in activity.This should support some mild inward movement of yields as capital competes for the best assets.Savills Takes Stock:Annual review of global real estate capital markets 2025Asset:NOBIA Sale&Leaseback,Jonkoping,SwedenSector:Industrial and LogisticsSavills Role:Advised VendorPurchaser:Hines Vendor:NOBIANIY:6.50%Price:SEK1.35bnAsset:Al Durrah Tower,Abu Dhabi,UAESector:ResidentialSavills Role:Advised VendorPurchaser:Private Indian FamilyVendor:ConfidentialNIY:ConfidentialPrice:AED305mSavills Takes Stock:Annual review of global real estate capital markets 2025North America26US exceptionalism has been a continuing theme of the global macro environment in recent years;despite a generational shift in interest rates,US growth has consistently outperformed both peer economies and underlying expectations.Some of this is due to cyclical dynamics.Strong immigration in recent years helped to boost the labour force and ease inflationary pressures without a material rise in unemployment,while households have been very willing to draw down on pandemic-era excess savings.Meanwhile,the government has continued to operate large fiscal deficits in support of their industrial policy objectives.3.0%2.5%2.0%1.5%1.0%0.5%0.0%-0.5%-1.0%Percentage point differnceGlobal:GDP growth,difference between actual and consensus forecasts United States Euro Area JapanSource:Savills Research using Macrobond and Focus Economics20232024But US exceptionalism is not just a cyclical phenomenon and the structural outperformance of the US economy is likely to continue underpinned by an entrepreneurial and innovative environment that is supportive of robust productivity growth.This dynamic will support continued outperformance in 2025,with the economy expected to again see robust growth well in excess of 2%.Real wage growth will be the key driver of activity via strong consumer spending,supported by some easing in financial conditions and continued tightness in labour market conditions despite slower jobs growth.Risks to the outlook largely centre on the policies of the incoming Trump administration.On the one hand,expectations of blanket trade tariffs and tighter immigration controls are likely to weigh on activity.On the other,tax cuts and deregulation would be expected to boost growth.The commonality of these policies is that they are inflationary and this has been a key driver of US Treasury yields since the odds of a Trump presidency started rising,back in September.Higher-for-longer and political uncertainty were key themes driving real estate market activity in 2024 and it is clear from the first few weeks of 2025 that both will be important for the year ahead.After an encouraging start to 2024,transactional activity was subdued in the lead up to the November vote.However,total investment of US$410bn was still nearly 8%up on the year after some payback in the final quarter.27Savills Takes Stock:Annual review of global real estate capital markets 2025Now election uncertainty is being replaced by legislative uncertainty and both economic and real estate outcomes in 2025 will be contingent on both the scale and sequencing of the new administrations policy agenda.Meanwhile,sticky inflation has both policymakers and market participants reigning in expectations for rate cuts this year.Nevertheless,sentiment is significantly improved compared with this time last year.Base effects are important;sentiment indicators are generally benchmarked against a recent period and it is hard to argue for anything other than a significant improvement in market conditions as we enter 2025.But equally,a more optimistic outlook is grounded in the fundamentals.Increasingly,the data shows that asset values have bottomed out,which is indicative of more rational pricing expectations across buyers and sellers.7006005004003002001000US$bnUS:Real estate investment Living Office Industrial Retail Hotel ForecastSource:Savills Research using MSCI RCA.Excludes development sites 201920242025 forecastUS:Real estate sentiment and commercial property prices Commercial Property Price Index Sentiment,asset values in 12 months(RHS)30% %5%0%-5%-10%-15%-20uE0%0%-15%-30%-45%-60%Year-on-yearNet balance of opinionSource:Savills Research using Macrobond and Green Street Advisors2018 2019 2020 2021 2022 2023 202428Savills Takes Stock:Annual review of global real estate capital markets 2025The living sector was easily the most invested in 2024,accounting for nearly 40%of total deal activity and it will again be popular this year.This is perhaps where the fundamentals are most compelling.While estimates of the national housing shortage range widely from around 1.5m to 5.5m,they nevertheless agree that there is a shortage,and this is delaying the formation of new households in the US.This is creating a large base of pent up demand.The key differentiator for investors in this cycle will be in identifying where these pressures are most acute.Recent supply-side dynamics do warrant some caution in deploying capital in the short term.The market has delivered a record number of multifamily units in 2024,pushing the vacancy rate above 6cording to Moodys Analytics,the highest since 2011.Excess supply is most apparent across the Sun Belt region,in markets such as Austin,Atlanta,Dallas and Phoenix.Rising inventory levels will continue to come through in many of these cities in the first half of this year.US:Multifamily development180160140120100806040200Thousand unitsSource:Savills Research using Macrobond Units under construction Units completed2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024Elsewhere,development activity is slowing,with new construction activity back to pre-pandemic levels since the beginning of last year.As such,we are either close to,or past,the peak in deliveries and vacancy should stabilise and trend down from here.This assumption is supported by expectations of continued robust demand for rental units across both the single and multifamily sectors.Employment growth is slowing,but the labour market remains in good health and households are seeing solid real wage growth.Anticipated controls on immigration may impact demand,but will also feed into skills shortages and construction cost inflation,so represent a double-edged sword.Newly formed households will continue to be pushed into the rental sector by affordability constraints in the sales market,with average mortgage rates hovering around 7%,as outlined by David Heller,Executive Vice President of Capital Markets Group at Savills US,“investors are largely looking through the near term rate environment,instead focusing on accumulating units,resulting in a number of high profile trades.”This dynamic is unlikely to change in 2025.Fundamentals in the industrial sector deteriorated in 2024,with new supply outpacing demand for a second consecutive year.The national vacancy rate has risen to a 10-year high of 7.6%,with rents broadly stable on the year.This is not just about the onboarding of new supply;leasing activity has been weak and sub-lease space hit a record high at the end of 2024.In some markets,such as Los Angeles,Inland Empire,and Northern New-Jersey,asking rents are falling quickly.Developers continue to be active and much of new construction is speculative.This will introduce continued leasing risk for landlords over the next few years particularly for traditional big box prime logistics buildings,as this is where much of the development activity is concentrated.Southern markets such as Dallas-Fort Worth,Austin and Charlotte appear most at risk from these dynamics.Demand is likely to accelerate in 2025,however,now that some of the post-election uncertainty is behind us.Amazon is ramping up activity across the US,for example,which often provides a good leading indicator for the wider market.We are likely to lead to some rebalancing in the market as a consequence,with the vacancy rate expected to stabilise around mid-year.29Savills Takes Stock:Annual review of global real estate capital markets 2025Nevertheless,the current environment favours a more discerning approach to investing.Core funds will be looking to acquire prime assets in land-constrained markets,while higher risk strategies will favour assets with some reversionary potential or more niche properties that still retain some degree of scarcity in supply,including outdoor storage.Data centres will also be attractive to core investors although it is quickly becoming a crowded marketplace,with a significant amount of capital chasing limited opportunities.For those able to break ground,the outlook is positive,as supply is simply unable to keep up with projected demand.Retail,too,is a supply constrained sector that will present opportunities for investors.The much-maligned office sector enters 2025 in a much better state than it did 2024 and we are beginning to see some stabilisation in both investment and occupational market dynamics.For many of the largest,most invested office markets including New York,Los Angeles,Chicago and San Francisco 2024 was the strongest year for leasing in the post-pandemic era.Vacancy rates are largely stable or falling as a consequence,led by a decline in available sublease space.Tenant-favourable conditions prevail albeit that landlords have been increasing concessions in order to avoid rebasing rents lower.The average availability rate of national CBD office space is 25.9%,nearly double the pre-pandemic level,so it will take a period of sustained leasing demand to bring fundamentals back to something resembling equilibrium.However,bifurcation between the best and the rest is as prevalent in the US as it is globally.We expect a modest increase in prime rents next year,with core investors looking for stabilised assets in the major gateway and viable suburban office markets.As highlighted by Heller,“what we are seeing in terms of investor demand is consistent with what we are seeing in terms of tenant demand.However,if you are the owner of one of the assets that tenants want,youre generally reluctant to transact.”This dynamic may shift with a recovery in values,so do not discount the return of the trophy asset as scale investors look for opportunities.Elsewhere,we are likely to see more distress in 2025,which will attract opportunistic buyers looking for heavily discounted assets.The delinquency rate of office-based CMBS has hit a record high,spanning a period of over two decades,and MSCI estimate that nearly one-third of office debt due to mature this year is collateralised by properties valued below the underlying loan principle.US:Industrial&logistics demand and supply7006005004003002001000-100-200Square foot(millions)ForecastSource:Savills Research2006 2007 2008 2009 2010 20011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Deliveries Net absorptionSavills Takes Stock:Annual review of global real estate capital markets 2025Again,this may support the ongoing adjustment in the sector by improving transactional activity,with the market“finally clearing out and working through some of the commoditised or troubled assets,which should support the transition to the next cycle,”according to Heller.The repurposing of secondary stock office space remains a challenging endeavour,but we expect to see more of this activity as prices continue to fall.In some markets inventory levels are already falling,including in New York,with only a small handful of markets seeing any notable new development activity.US:office CMBS delinquency rate12%8%6%4%2%0%PercentSource:Savills Research using Trepp2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024Asset:250 Park Avenue,New York,USSector:OfficeSavills Role:Advised PurchaserPurchaser:J.P.Morgan ChaseVendor:AEW/GMNIY:N/APrice:US$320mSavills plc is a global real estate services provider listed on the London Stock Exchange.We have an international network of more than 600 offices and associates throughout the Americas,UK,Europe,Asia Pacific,Africa,India and the Middle East,offering a broad range of specialist advisory,management and transactional services to clients all over the world.This report is for general informative purposes only.It may not be published,reproduced or quoted in part or in whole,nor may it be used as a basis for any contract,prospectus,agreement or other document without prior consent.Whilst every effort has been made to ensure its accuracy,Savills accepts no liability whatsoever for any direct or consequential loss arising from its use.The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.Oliver Salmon Global Capital Markets World Research 44(0)20 7535 2984 Savills ResearchWere a dedicated team with an unrivalled reputation for producing well-informed and accurate analysis,research and commentary across all sectors.Rasheed Hassan Global Capital Markets Head of Global Cross Border Investment 44(0)20 7409 8836 Charlotte RushtonAnalystWorld Research 44(0)20 7016 3856
2025-02-28
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REPORTSavills ResearchC A R I B B E A N I S L A N D S2 0 2 4/2 5With its breathtaking landscapes,vibrant cultures,and strategic location,the Caribbean has long been a coveted destination for property investors and homeowners.Spanning from The Bahamas in the north to Trinidad and Tobago in the south,the regions islands offer diverse real estate opportunities,including luxury beachfront properties,stunning sea view villas,and charming pied-de-terres in gated and managed estates.Each island has its own unique feel and culture,making the Caribbean an exciting and dynamic market for real estate.In recent years,Savills have seen property markets in the Caribbean experience a significant resurgence following the challenges of the pandemic.As global travel restrictions eased and demand for second homes,vacation rentals,and remote working hubs increased,the islands saw a notable rebound in real estate activity.With more international buyers seeking a balance of work,leisure,and investment potential,the Caribbean has reemerged as a top choice for those looking to capitalise on its growth and eternal allure.Increased flight connections from both Europe and North America in 2024 have resulted in higher footfall through the islands and,in many cases,have turned a latent interest into a tangible purchasing option as more investors visit the region.Certain islands have gone further in offering visa options,making it easier than ever for our clients to stay longer than has historically been the norm.Interest from developers has continued apace in the last 12 months,and we are excited that the number of branded residential developments being conceived and built within the Caribbean as a whole.Development is at an all-time high as the likes of Six Senses,One&Only,and Four Seasons look to grow their footprint in the region.This report offers an in-depth analysis of the current property market trends,examining those key factors that combine to create these fascinating residential markets.We highlight emerging hotspots across several of our key Caribbean markets,providing valuable insights for investors,developers,and potential homeowners.As the market expands,we hope this report will equip you with the knowledge to make informed decisions in the Caribbeans thriving real estate.F O R E W O R DCONTE NTS2-5The Caribbeans Regional Resonance6-7The Bahamas8-9Turks and Caicos Islands1 0-1 1Barbados1 2-1 3Antigua and Barbuda1 4Cayman Islands1 5Grenada1 6St Vincent&the Grenadines1 7St Lucia1 8Outlook1 9ContactsJAMES BURDESSDirector,Head of Savills CaribbeanTOM VICKERYHead of Savills Caribbean Desk1Only Europe has seen a stronger level of growth in its inbound tourist arrivals from 2010 to 2023,with an increase of over 40%in tourist arrivals over the period.This surge of travellers has helped to support many local economies in the Caribbean,with the IMF reporting accelerated GDP growth for the region,rising from an average of 3.6%annual growth between 2017-19 to 12.9tween 2021-23.Strong economic growth supports increased investment in infrastructure and real estate development,further increasing the attractiveness of the region to global buyers.The Caribbean Community,known as CARICOM,acts as a regional integration organisation akin to the European Union.It seeks to align member states and associate members on economic and foreign policy and coordinate responses to natural disasters and climate change.Through the organisation,there are now several free trade agreements across the region,which have been critical in improving economic development and allowing local real estate and tourism sectors to flourish.The United States is the nearest economic power neighbouring the Caribbean and is a significant source for both tourists and buyers in local residential markets.While high inflation has dampened consumer sentiment across North America,the forecast falls in inflation rates should support a rebound in sentiment.As Americans begin to feel more confident about the economy and inflation begins to settle,many regional islands will likely see an increase in inbound tourism and property interest.Tourist arrivals by region,growth 2010-20230 0P%Asia and the PacificNorth AmericaSouth AmericaMiddle EastCarribeanEuropeInbound arrivals growth percentageSource:UN TourismThe Caribbean,with its nearly endless beaches and unique islands remains among the worlds premier tourist and second home destinations.The region has bounced back from the pandemic,with international tourist arrivals and receipts climbing past their pre-pandemic peaks to 28 million arrivals in 2023.23R E G I O N A L O V E R V I E WAs the Caribbean economy has been surging in recent years,the prime residential markets have done the same.Across the sample markets in this report,prime residential prices have increased by an average 27%in the past five years.Prime reflects the top 5-10%of prices across the studied markets.However,the locations across the Caribbean do not appear to have reached a price ceiling and,in fact,they represent relative value compared to other prime second home markets.On a price per square foot basis,Caribbean destinations are on average four times less expensive than Palm Beach,75%less expensive than Miami,and 50%less expensive than Sardinia,the Hamptons,and Tuscany.Within the region,there is a significant degree of pricing variation as well.Established destinations closer to the United States,such as Turks and Caicos Islands and The Bahamas,tend to see higher prime residential pricing than locations such as Antigua and Barbados,which are less popular with Americans.However,Antigua and Barbados see much more global buyer bases,with the large majority of their prime property buyers originating from across the United Kingdom and Europe.The land-constrained nature of the islands across the region,coupled with increased global demand levels,means that over the coming years,prime residential prices are likely to continue their upward trajectory.From the grounded and authentic island experience of Antigua to the fully fledged luxury developments in Barbados and The Bahamas,there are diverse opportunities for those seeking a part of Caribbean prime real estate.Caribbean prime residential pricing compared to global second home destinations$-$1,000$2,000$3,000$4,000$5,000$6,000MonacoPalm BeachMalibuQuinta do LagoMiamiFrench Riviera(average)Vale do LoboSardiniaThe HamptonsTurks and Caicos IslandsTuscanyThe BahamasLake ComoDubaiComportaLiguriaBarcelonaBodrumAntiguaPhuketSeychellesBarbadosSicilyMarbellaAlgarvePalmaMlagaSotograndeHi AnCape TownBaliMaldivesAverage prime price per square foot(USD)Global Second Home DestinationsCaribbean DestinationsSource:Savills ResearchTHE ROLE OF THE EXECUTIVE NOMAD Globally,some 58 jurisdictions offer visa programmes for temporary remote workers,10 of which are in the Caribbean.Something that began as a niche visa type to offset weak tourist markets in the wake of the pandemic has now become widespread and is becoming a key tool for countries to attract skilled workers to their countries.In comparison to the more common digital nomad usually characterised as a young backpacker with a laptop executive nomads tend to be older,more likely to travel with family in tow and put more emphasis on physical and digital connectivity.Executive and digital nomads require high speed internet,something that the average vacationer or resident can appreciate as well.Investments and improvements in this area are happening,with several islands developing fibre networks to meet this growing demand.Long term second home buyers demand power and airport access,an area of increased development as well.Branded Residences and other purpose-built developments are popular for buyers looking to spend part of the year in the region.Amenities,services,and security are integral to these developments and are key selling-points for many global buyers.Brands are also taking notice;as of July 2024,there are 28 operating developments across the region with 1,800 residences.There are also 36 developments in the pipeline,which will bring an additional 4,400 residences to the region.As a region of islands,climate change,with its associated risks of sea level rise,is a concern for many Caribbean markets.All of our featured markets are tackling this problem,with many governments actively working with the United Nations and various international organisations to raise awareness of the issue.Many nations are taking steps towards climate mitigation,such as the restoration of natural flood barriers,including coral reefs.With respect to real estates impact on the local environment and habitats,nearly all new developments on these islands must conduct environmental impact assessments in order to get planning approval to be built.Caribbean Branded Residences completed and pipeline schemesAverage prime property price per square foot0246810BarbadosDominicaJamaicaGrenadaSaint Kitts and NevisBritish Virgin IslandsAnguillaSaint LuciaBermudaAntigua and BarbudaPuerto RicoCayman IslandsDominican RepublicThe BahamasTurks and Caicos IslandsCosta RicaNumber of schemesCompletedPipeline$-$200$400$600$800$1,000$1,200$1,4002021202220232024Average price per square foot(USD)Turks and Caicos IslandsThe BahamasAntigua and BarbudaBarbadosSource:Savills Research using Savills Global Residential Development Consultancy45R E G I O N A L O V E R V I E WLocated just 300 kilometres from the coast of Miami,the capital Nassau is a mere hour flight from the south Florida business hub.This proximity lends the country to see most of its buyer interest come from the United States,with places further afield such as the United Kingdom and South America comprising smaller segments of buyers.Much like Miami,The Bahamas is increasingly seen as a key residential destination for those from the global south who wish to do business inside the United States,as proximity and ease of access allow for frequent business travel.Akin to its Caribbean neighbours,The Bahamas is a tourism hotspot,with many internationally known resorts and high-quality cruise ports.In terms of visitors by air,the island has seen a recent boom period with 1.72 million visitors in 2023,up from 1.47 million in 2022.Compared to the pre-pandemic travel which also sat at 1.66 million total visitors in 2019,the rebound in tourism has been significant.This significant increase in tourism helps the local economy,but it is not the only source area of activity in The Bahamas.The country is also home to a growing finance sector,including investment into cryptocurrency.Financial services constitute the second-most important sector of the economy,accounting for approximately 15%of GDP.The government recently passed additional legislation to protect investors and consumers through increased disclosures and risk management processes.Nassau seeks to continue to be a hub for responsible innovation in the financial sector.This increased interest and international appeal has also been felt in the real estate market,where mainstream and prime prices have risen significantly in recent years.From 2019 to September 2024,prices per square foot for mainstream and prime second-hand villas have risen by 41%and 26%,respectively.THE BAHAMASA sprawling archipelago of nearly 700 coral islands,The Bahamas is the northernmost market analysed in this report.The allure of the pink sand beaches leads many travellers and homebuyers to its shores as many seek to carve out a piece of the small island culture it offers.Prime second-hand villas currently sit at$1,290 per square foot,while mainstream prices sit at$360 per square foot.In the ultra-prime sector,prices have stayed relatively flat,with a modest-4cline from 2019 to September 2024.Price increases are generally the result of a lack of supply and capacity constraints in new construction.The rise of remote work and an influx of professionals leaving urban centres have also fuelled the Bahamian real estate market,resulting in second-hand prime apartment prices per square foot increasing 82%from 2019 to 2022.While this trend is still very prevalent and drives large sales volumes,it has subsided from its peak in the immediate post-pandemic period,and prices in this asset class have fallen by-27%from 2022 to September 2024,sitting at$920 per square foot.Prime residential prices-second-hand properties$-$200$400$600$800$1,000$1,200$1,400$1,600201920202021202220232024Average price per square foot(USD)Prime second-hand apartmentsPrime second-hand villasSource:Savills ResearchBeing a nation of many islands,new developments take advantage of the access to the sea.One such example is the recently announced Rosewood Exuma development,situated on its own 124-acre private island;the development looks to feature a fully serviced beach club along with two marinas built to accommodate local yachts.The development seeks to offset its impact on the environment through sustainable building practices,including utilising solar energy to help power the development.In the next five years,The Bahamas seeks to continue on its path of growth,both with its economy and real estate markets.Scarcity of beachfront property across the islands is intensifying demand,with interest growing in secluded,underdeveloped areas that promise privacy and exclusivity away from busier tourist hubs.The countrys strategic location near the United States remains a significant asset,attracting buyers driven by favourable economic forecasts in The Bahamas and the United States.As demand for residential and investment properties strengthens,The Bahamas appeal as a destination with close ties to the United States will continue to make it one of the Caribbeans most dynamic real estate markets.67The economy of the Turks and Caicos Islands is primarily driven by tourism,which accounts for 65%of GDP.The islands attract travellers with their pristine beaches,luxury resorts,and world-class diving spots.Tourism supports a thriving services sector,including hospitality,real estate and construction,with many foreign investors purchasing second homes and rental properties.Offshore financial services also play an important role in the economy,benefiting from the islands tax-neutral status,which attracts international business and investment.The government has been working to diversify the economy by promoting sustainable tourism and developing infrastructure across the country.The residential market in the Turks and Caicos Islands is heavily influenced by the islands reputation as a luxury destination,attracting high net worth individuals,retirees,and international investors.The market is dominated by upscale properties,including beachfront villas,resort-style apartments,and luxury estates,particularly in popular areas such as Grace Bay,Providenciales,and Parrot Cay.The prime market-properties priced at$5 million and up-accounts for 10%of the market,with ultra-prime properties such as those in Emerald Point commanding over$25 million.Price sensitive prime buyers tend to look for more inland properties where residences tend to transact for between$1-2 million.The beachfront remains highly coveted,particularly in Grace Bay,where prices reach$1,200-$1,500 per square foot,driven by new developments such as St.Regis and The Ritz-Carlton.Increased demand for prime residential property across the islands is reflected in the pricing dynamics.Since 2019,prime prices have increased by an average of 33%.Both new build and second-hand properties have seen elevated demand in the post-pandemic years,as global buyers seek the quality of life found across the Caribbean.The majority of prime residential buyers in Turks and Caicos originate from three markets:the United States(60%),Canada(30%),and the United Kingdom(10%).The governments policies encourage foreign ownership,allowing non-residents to buy property without restrictions,which has boosted the real estate market.Additionally,the islands tax-neutral statusno income,capital gains,or property taxesmakes it an attractive option for international investors.While there is no Citizenship by Investment Programme(CIP),there is a programme known as the Investor PRC which helps high net worth buyers establish permanent residency on the island.This programme requires an investment of$1 million or more and does not allow participants to work on the island,but they are able to maintain businesses outside of the jurisdiction.In recent years,there has been a growing interest in environmentally friendly developments and sustainable living options,catering to buyers who are conscious of their carbon footprints,with some new build villas adopting solar energy.The Turks and Caicos Islands housing market remains robust,supported by strong demand for prime residential and investment properties.The governments focus on infrastructure development and sustainable tourism will likely continue to drive interest in real estate,keeping the market attractive to foreign buyers.TURKS AND CAICOS ISLANDSAn archipelago of 40 islands to the southeast of The Bahamas,Turks and Caicos attracts a global base of visitors and residents with its beaches,pristine marine environment,and established prime residential market.Prime prices per square foot Turks and Caicos Islands$-$200$400$600$800$1,000$1,200$1,400$1,600201920202021202220232024Average price per square foot(USD)Prime villasPrime apartmentsSource:Savills Research89Located in the southeastern Caribbeans Lesser Antilles,the island has long been celebrated for its pristine beaches,vibrant Bajan culture,and an array of recreational activities.A prime attraction is its world-renowned golf courses,such as the prestigious Country Club and Green Monkey at Sandy Lane,Royal Westmoreland and Apes Hill,which draw both residents and tourists.Travellers from the United Kingdom make up the majority of holiday home owners in to Barbados.A growing number of Canadians and Americans round out the top three tourist source markets.In a bid to attract even more international residents in recent years,the country introduced the Welcome Stamp,allowing global visitors to live and work remotely in Barbados for up to a year.As of April 2024,over 3,000 individuals have taken advantage of this programme,highlighting its appeal for for digital and executive nomads alike.Looking forward,Barbados is positioning itself as a top-tier destination for high net worth individuals,not merely as a vacation spot but as a full-time residence.With an emphasis on quality of life and access to amenities that rival those of major cities,the island is aiming to attract individuals who are interested in immersing themselves in the local community while enjoying the comfort and tranquillity of island living.Expanding its digital and executive nomad programmes remains central to Barbados strategy,as these initiatives aim to retain skilled,entrepreneurial individuals who can invest and contribute to the economy long-term.The Welcome Stamp,combined with a streamlined property purchase process,reflects Barbados commitment to bolstering its economy by attracting long-term visitors who contribute to the local community.Barbados real estate market has seen robust development across all income segments,with both mainstream and prime properties experiencing notable growth.New developments have been delivered to the market at speed,with all classes of product seeing consistent price growth.For new build villas,there has been significant growth in both mainstream and prime assets,with prices per square foot growing by 22%and 18%,respectively from 2019 to September 2024.The combination of seamless residency programmes,growing property market,and strategic development initiatives makes Barbados one of the Caribbeans most dynamic and appealing real estate markets.With strong prospects for continued growth and an emphasis on attracting global talent,Barbados is well on its way to establishing itself as an ideal destination for those seeking a blend of Caribbean charm and investment potential.In the mainstream market these prices now sit at$275 per square foot,while prime properties costs upwards of$500 per square foot.For the ultra-prime segment,there has been price growth of 24%from 2019 to 2024.As is the case in other Caribbean markets,supply is becoming tight and new developments sell quickly.Notable developments on the island include the planned Limegrove Hotel and Residences,part of a high end,mixed-use complex in historic Holetown,blending luxury residential spaces with premium retail outlets.New developments tend to be concentrated on the western coast of the island,with another large-scale development at The Pierhead in the nations capital.The Pierhead,the first phase completing in 2026,will include commercial spaces and residences.This inspiring development is expected to be the catalyst for Bridgetowns redevelopment.In the prime and ultra-prime segments there is a continued desire for themed offerings-such as golf,tennis and marina;as well as sea views and beach frontage.As development continues,this is becoming an increasingly scarce commodity and prices for these properties have risen significantly.In some cases,properties with a beach frontage can be almost double the price of comparable properties,while properties with a view can be up to 25%more expensive than those without.This has led to a trend towards development of gated communities with beach frontage.Regardless of views,all members in these communities have private access to the developments beach and other community amenities.Barbados has a very stable rental market which has not seen the same degree of price fluctuation as many of its peers.From 2019 to September 2024,apartment rents have increased as the introduction of the Welcome Stamp boosted demand across the island and supply has been unable to keep up.Digital nomads and potential home buyers use this as a means of sampling the local lifestyle before deciding to make a more permanent move to the island.BARBADOSAmong the Caribbeans most established residential markets,Barbados embodies the idyllic island lifestyle with a distinct blend of history,culture,and natural beauty.New-build villa prices$-$100$200$300$400$500$600$700$800$900201920202021202220232024Average price per square foot(USD)MainstreamPrimeUltra-primeSource:Savills Research1011Antiguas economy is primarily driven by tourism,making up 80-85%of GDP,supported by hotels,short-term rentals,and digital and executive nomads.The services sector,especially banking and financial services,plays a significant role as well.The government has been working on diversifying the economy,including investments in renewable energy and information technology.Antiguas residential market is defined by a mix of high-end luxury properties,vacation homes,and local residential property,reflecting its dual appeal as a tropical getaway and a strong local community.The prime segment,which dominates the market,is particularly attractive to international buyers seeking vacation homes,second residences,or investment properties.Popular areas such as English Harbour,Jolly Harbour,and the areas around scenic beaches are host to upscale villas,beachfront estates,and resort-style properties.These luxury homes offer features like waterfront access and modern amenities,appealing to affluent buyers from North America and Europe.The majority of buyers come from the United Kingdom,accounting for 60-65%of the market,followed by the Netherlands(10%),Italy(10%),and the United States and Canada(10%and 5%,respectively).Foreign ownership is common,as the government encourages international investment in real estate.Antiguas CIP,which grants citizenship to individuals who invest in local property with a minimum price of$350,000,has also spurred interest in the housing sector.While Americans and Canadians were initially less present,the CIP has attracted increased interest from these regions over the past two years.Antigua also offers a digital nomad visa,which gained huge popularity during the pandemic,but demand has since tapered off.Remote workers,however,still comprise a portion of the market.Recent developments include the Sugar Ridge condos and Pearns Point,both attracting international buyers through the CIP.Antiguas charm lies in its lack of gated communities and standardised developments,with many buyers seeking bespoke,authentic Caribbean homes.The$3-7 million range is gaining popularity,with buyers favouring custom-built homes over more standardised and uniform properties.The prime residential market in Antigua is robust,with average prices per square foot of approximately$490.Prime prices across the island have risen by over 17%since 2021,with second-hand prime apartments seeing the steepest increases in pricing at 43%over the period.The supply-constrained nature of the islands,coupled with the desire of international buyers to have properties which are easy to lock-up and leave,is likely contributing to this strong price increase.ANTIGUA AND BARBUDAPositioned where the Atlantic and Caribbean meet,Antigua and Barbuda is known for reef-lined beaches,rainforests,and resorts.Prime prices per square foot-Antigua$-$100$200$300$400$500$600$7002021202220232024Average price per square foot(USD)Prime new-build apartmentsPrime new-build villasPrime second-hand apartmentsPrime second-hand villasSource:Savills ResearchNotably,the ultra-prime market,with homes priced above$10 million,constitutes approximately 10-15%of the market,while prime properties range from$3-5 million.Branded residences and turnkey properties in the$600,000-800,000 range are expected to dominate the market over the coming years,especially as more schemes are brought online.Challenges persist,with the limited availability of land in prime locations supporting additional price increases in the near term.Despite this,the prime residential property market in Antigua remains stable,supported by international investment and local demand.Efforts toward sustainable and eco-friendly developments have also been increasing,reflecting a global shift toward more environmentally conscious living.The market is expected to remain vibrant,fuelled by tourism and continued investment in infrastructure.1213A collection of three islands,Grand Cayman,Cayman Brac,and Little Cayman,the islands offer a peaceful lifestyle combined with a healthy business environment.Well known for its established financial and tourism markets,it boasts the highest GDP per capita in the region,at$96,073.As is the case for many of its Caribbean neighbours,the Caymans tourism industry was negatively impacted by the pandemic and subsequent lockdowns.In terms of airline arrivals into the islands,the Cayman Islands saw a pre-pandemic peak of 59,563 visitors in March 2019.As travellers have returned to the islands and tourism has returned to pre-Covid levels,airline arrivals reached 57,040 in March 2024,reflecting an almost full recovery.The majority of these travellers come from the United States,with second and third positions being filled by Canada and the United Kingdom,respectively.The local real estate market benefits from a simplified buying process and few taxes.Foreign buyers are subject to only a 7.5%stamp duty tax of the purchase price,with no property tax or controls on foreign ownership of land.Known for its luxury condos and exclusive beachfront estates,Seven Mile Beach has become a hub for affluent buyers who desire direct access to the Caribbeans clear waters and high-end amenities.The residential market has seen some marginal cooling following the post pandemic boom,but prime and ultra-prime property continue to be in high demand and sell with minimal time on the market.Supply,however,remains limited due to strict land-use regulations and environmental protections,which support long-term value retention and make these properties highly desirable.Recently,the Cayman Islands have closed their Global Citizen visa programme for digital nomads.This has helped alleviate some pressure in the rental market.However,the closure so far has had no effect in slowing interest in the islands,as low supply continues to drive this sellers market.Grenada features a thriving tourism industry,with long coastlines and picturesque waterfalls dotted across the interior.Tourism visits have almost fully recovered from the lows of 2020-21,with over 500,000 international visitors in 2023.Grenada has a digital nomad visa,similar to many of its neighbours.Implemented in 2021,the visa allows for 12 months of residency and remote work on the island.This has helped introduce the market to a wider group of potential buyers,as well as giving the already strong rental market a boost.There is also a growing CIP which has drawn increased international attention.The process for foreign land ownership has also been streamlined.Purchasing property in Grenada for foreigners is a simple process,requiring the acquisition of an Alien Land Holding License,granted by the government with a 10%of the property purchase price fee.Grenadas prime residential market has gained traction in recent years,drawing attention from buyers looking for properties in secluded,scenic areas.High-end developments are typically found along the pristine beaches and lush hillsides,where the combination of Looking towards the future,the Cayman Islands stand to benefit from recent interest rate drops in the United States and other global economies.As the local currency is traded at a pegged exchange to the US dollar,these lower interest rates abroad should translate to an increase in residential market transactions and development as access to capital is made less expensive.This combined with a positive economic outlook in the face of global uncertainty bodes well for the near future.ocean views and privacy appeals to discerning clients.Those looking for property in Grenada are likely interested in a more authentic,relaxing Caribbean lifestyle.The prime property market in the island is popular with retirees who enjoy the pace of life and weather.Most frequent buyers are from the United Kingdom,with American and Canadian buyers taking up second and third place,respectively.The governments forward-looking stance on sustainable tourism and development,along with its tax policies,make Grenada an attractive base for investors.Its stable rental market,bolstered by the tourism sector,also presents opportunities for rental income,especially with the rising trend of long-term stays among digital nomads and expatriates.Looking towards the future,the supply of residential property will likely continue to be a barrier for the market.This is not only due to limited development,but general land constraints which play a large role in this small market.However,Grenadas favourable tax environment,peaceful stability will likely prove to advance the islands enduring appeal to the international community.CAYMAN ISLANDSGRENADAThe Cayman Islands combines economic stability with a sophisticated lifestyle,making it one of the regions premier locations for high net worth individuals.A small nation in the southeast of the Caribbean,Grenada is known as the island of spice due to its large-scale cultivation of nutmeg,mace,and cinnamon.1415Well known for its natural beauty,sailing culture,and private islands the nation remains a popular international tourism spot.Much like its neighbours,tourism has rebounded to just below 2019 levels after the slowdown in 2020,with 394,000 visitors in 2023.St Vincent is serviced by an airport in its capital of Kingstown which has direct flights to several North American markets,allowing for easy access to the remote islands.St Lucia offers a blend of natural beauty and exclusivity,making it an alluring choice for second-home buyers.Tourism,the cornerstone of the islands economy,is booming,with over 380,000 arrivals recorded in 2023,signalling a robust post-pandemic recovery.Many visitors are captivated by St Lucias stunning landscapes,culture,and relaxed lifestyle,inspiring an increase in foreign investment in local property.The recent uptick in tourism has sparked a surge in demand for vacation rentals and second homes,propelling property prices upward.St Lucia attracts both high net worth individuals and families seeking citizenship or investment opportunities.Demand is primarily driven by North American and European buyers attracted to its CIP,which allows qualifying real estate investments as a pathway to citizenship.The islands housing market is as varied as its landscapes,from beachfront villas to mountainside retreats.Property prices vary considerably based on location and size.However,despite rising property prices,St Lucia remains a comparatively affordable Caribbean option,with a cost of living below that of many neighbouring islands.This tourist resurgence has prompted further development in the hospitality sector,such as the recent opening of a second Sandals hotel located on Buccament Bay.While many tourists come for the relaxing lifestyle there are many more activities on offer.These include a climb up to the top of La Soufrire,St Vincents active volcano,which is home to many rare birds and wildlife.The nation does not offer a digital nomad scheme,but it does allow 30 days entry without any visa requirements.A favourable tax environment further enhances the appeal of St Vincent and the Grenadines,particularly for international buyers seeking a luxurious Caribbean retreat.The prime residential market in St Vincent and the Grenadines is characterised by exclusivity and natural beauty,with high-end developments in secluded coastal areas and private islands.Mustique Island remains a hallmark of the ultra-prime market,known for its custom-built estates that attract clientele from around the globe.New developments in the Grenadines cater to the luxury traveller with an emphasis on eco-friendly,low-impact construction.Projects such as the Glossy Bay Marina on Canouan Island provide residents with amenities such as private marinas,golf courses,and world-class spa facilities.These developments are designed to preserve the natural environment,with sustainable building practices that respect the islands delicate ecosystems.The local government is dedicated to supporting the economic and infrastructure of the island through implementing a resilient city plan Kingstown and neighbouring area Arnos Vale.This plan seeks to create a sustainable and stable foundation for the expansion of the city and to better facilitate investments in the real estate and tourism sectors on the islands.Development across St Lucia has ramped up to match the demands of its growing tourism sector.New hotels,resorts,and infrastructure projects are reshaping the islands landscape and enhancing visitor experience.A notable development is the expansion of St Lucias cruise ship terminal,which is now equipped to handle larger vessels and increased cruise passenger arrivals,thus feeding the islands tourism pipeline.Additionally,there are new residential developments in the pipeline,with a variety of property types,which are designed to cater to the heightened interest in purchasing prime residential property on the island.These projects are pushing property prices higher and generating increased interest,creating a vibrant real estate market.Looking forward,St Lucias appeal to tourists and property buyers alike shows no signs of slowing.With government efforts likely to continue attracting businesses and bolstering infrastructure,the island is positioned for sustained economic growth.It is expected that there will be further property developments and enhancements to tourism infrastructure,ensuring St Lucia remains an attractive and increasingly luxurious Caribbean destination.ST VINCENT&THE GRENADINESST LUCIASt Vincent&the Grenadines is a nation made up of 32 islands located on the eastern flank of the Caribbean,south of St Lucia,north of Grenada and west of Barbados.Known for its sandy beaches,rainforests,and the iconic Pitons two volcanic peaks designated as a UNESCO World Heritage Site.1617Savills plc is a global real estate services provider listed on the London Stock Exchange.We have an international network of more than 600 offices and associates throughout the Americas,UK,Europe,Asia-Pacific,Africa,India and the Middle East,offering a broad range of specialist advisory,management and transactional services to clients all over the world.This report is for general informative purposes only.It may not be published,reproduced or quoted,in part or in whole,nor may it be used as a basis for any contract,prospectus,agreement or other document without prior consent.While every effort has been made toensure its accuracy,Savills accepts no liability whatsoever for any direct or consequential loss arising from its use.Thecontent is strictly copyright and reproduction of the whole or part of it inanyform is prohibited without written permission from Savills Research.Savills World ResearchWe are a dedicated team with an unrivalled reputation for producing well-informed and accurate analysis,research and commentary across all sectors of global property.SAVILLS GLOBAL RESIDENTIAL James BurdessDirector,Head of Savills Caribbean 44(0)20 7016 3783m. 44(0)780 799 Tom VickeryHead of Savills Caribbean Desk 44(0)20 7016 Victoria GarrettDirector,Global R 44(0)7929 097888SAVILLS WOR L D RESEAR C H Kelcie Sellers Associate Director,World Research 44(0)20 3618 3524 Connor ChiltonAnalyst,World Research 44(0)20 7016 OUTLOOKAccess to labour and costs of importing material remain a challenge for new development in the short term.However,increased investment in infrastructure promises new development opportunities for prime real estate in the future.Climate change remains and acute concern for these island markets,but action is being taken both at a national level and in real estate development.With future proofing environmental impact assessments,local markets will continue to reduce their footprint for the future.Regional stability and enduring appeal play crucial parts in the growing interest in tourism,remote working,and second home buyers for the Caribbean.Markets across the region are poised for a prosperous future.The Caribbean has maintained its steady tourism and economic growth,with some markets exceeding their pre-pandemic tourist highs.This trend is set to continue,with the tourism market in the region forecast to grow 5.3%per annum between 2024-2029.Real estate supply across many markets remains tight,with undersupply causing relative price growth across the region.New development is expected to continue apace which should alleviate this supply pressure in the near future.Digital and executive nomad visa programmes remain a core part of many markets as a way of boosting rental markets and attracting high income individuals to the island lifestyle.In the short-term,this will likely remain to have a positive impact on the regions real estate markets.1819
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Achieving Zero-Carbon Buildings:Electric,Efficient and FlexibleFebruary 2025|Version 1.0The Energy Transitions Commission(ETC)is a global coalition of leaders from across the energy landscape committed to achieving net-zero emissions by mid-century,in line with the Paris climate objective of limiting global warming to well below 2C and ideally to 1.5C.Learn more at:www.energy-transitions.org Energy Transitions Commission is hosted by SYSTEMIQ Ltd.Copyright 2025 SYSTEMIQ Ltd.All rights reserved.Front cover and Report design:Geist*Studio.Our Commissioners come from a range of organisations energy producers,energy-intensive industries,technology providers,finance players and environmental NGOs which operate across developed and developing countries and play different roles in the energy transition.This diversity of viewpoints informs our work:our analyses are developed with a systems perspective through extensive exchanges with experts and practitioners.The ETC is chaired by Lord Adair Turner who works with the ETC team,led by Faustine Delasalle(Vice-Chair),Ita Kettleborough(Director),and Mike Hemsley(Deputy Director).The ETCs,Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible,was developed by the Commissioners with the support of the ETC Secretariat,provided by Systemiq.This report constitutes a collective view of the Energy Transitions Commission.Members of the ETC endorse the general thrust of the arguments made in this publication but should not be taken as agreeing with every finding or recommendation.The institutions with which the Commissioners are affiliated have not been asked to formally endorse this briefing paper.In addition to this report and accompanying executive summary,we will also be publishing Infographics and Toolkits,outlining how to decarbonise the energy used to operate commercial and residential buildings,reduce embodied carbon from new buildings,and accelerate the buildings energy transition.The ETC team would like to thank the ETC members,member experts and the ETCs broader network of external experts for their active participation in the development of this report.The ETC partners with Bloomberg New Energy Finance(BNEF)for leading market information.All BNEF data has been sourced from .The ETC Commissioners not only agree on the importance of reaching net-zero carbon emissions from the energy and industrial systems by mid-century but also share a broad vision of how the transition can be achieved.The fact that this agreement is possible between leaders from companies and organisations with different perspectives on and interests in the energy system should give decision-makers across the world confidence that it is possible simultaneously to grow the global economy and to limit global warming to well below 2C.Many of the key actions to achieve these goals are clear and can be pursued without delay.This report should be cited as:ETC(2025),Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible2ETC CommissionersMr.Marco Alvera,Co-founder and Chief Executive Officer TESMr.Bradley Andrews,Chief Executive Officer SLR ConsultingMr.Benoit Bazin,Chairman and Chief Executive Officer Saint GobainMr.Ahmad Butt,Executive Chairman Deep Science VenturesDr.Zhao Changwen,President,Center for International Knowledge on Development(CIKD),China Center for International Knowledge on Development(CIKD)Ms.Jamie Choi,Chief Executive Officer Tara Climate FoundationMr.John Creyts,Chief Executive Officer Rocky Mountain InstituteMr.Spencer Dale,Chief Economist bpMr.Bradley Davey,Executive Vice-President,Head of Corporate Business Optimization ArcelorMittalMs.Faustine Delasalle,Chief Executive Officer MPPMr.Agustin Delgado,Chief Innovation and Sustainability Officer IberdrolaDr.Vibha Dhawan,Director General The Energy&Resources InstituteDr.Julio Friedman,Chief Scientist Carbon DirectMr.Matthew Gorman,Director of Carbon Strategy and Sustainability Heathrow AirportMr.Craig Hanson,Managing Director and Executive Vice President for Programs World Resources InstituteMr.Seb Henbest,Group Head of Climate Transition HSBCMr.Alex Hewitt,Co-founder and Chairman CWP GlobalDr.Thomas Hohne-Sparborth,Head of Sustainability Research(at Lombard Odier Investment Managers)Lombard OdierDr.Jennifer Holmgren,Chief Executive Officer LanzaTechMs.Naoko Ishii,Director,Center for Global Commons and Professor,Institute for Future Initiatives Center for Global CommonsDr.Mallika Ishwaran,Chief Economist Shell plcMr.Greg Jackson,Founder and Chief Executive Officer Octopus EnergyMr.Timothy Jarratt,Group Executive,Market Development and Strategy AusgridMr.Zou Ji,Chief Executive Officer and President of Energy Foundation China EF ChinaMr.Shaun Kingsbury,Chief Investment Officer Just ClimateMr.Zheng Li,Executive Vice President Institute of Climate Change and Sustainable Development,Tsinghua University Mr.Zhenguo Li,President LONGiMr.Martin Lindqvist,President and Chief Executive Officer SSABMr.Bruce Lourie,President of the Ivey Foundation The Transition AcceleratorMr.Johan Lundn,Senior Vice President,Project and Product Strategy Office Volvo Mr.Rajiv Mangal,Vice President Safety,Health&Sustainability Tata SteelMs.Laura Mason,Chief Executive Officer L&GMr.Nicholas Mazzei,Vice President Sustainability-Europe DP WorldMs.Maria Mendiluce,Chief Executive Officer We Mean Business CoalitionMs.Dervilla Mitchell,Director ArupMr.Jon Moore,Chief Executive Officer BloombergNEFMr.Simon Morrish,Founder and Chief Executive Officer X-linksMs.Paige Marie Morse,Enterprise Director,Sustainability AspenTechMr.Carl Moxley,Group Climate Director L&GMr.Jelle Nederstigt President WorleyMrs.Damilola Ogunbiyi,Chief Executive Officer SEforAllMr.KD Park,President Korea Zinc LtdMs.Nandita ParshadManaging Director,Sustainable Infrastructure Group EBRDMr.Alistair Phillips-Davies,Chief Executive Officer SSEMr.Andreas Regnell,Senior Vice President,Head of Strategic Development VattenfallMr.Menno Sanderse,Head of Strategy and Investor Relations Rio TintoMr.Ian Simm,Founder and Chief Executive Officer Impax Asset ManagementMr.Sumant Sinha,Chairman,Founder and Chief Executive Officer ReNewMs.Anna Skarbek,Director,Climate Works Australia Climate Works CentreMr.Steve Smith,Interim Chief Strategy and Regulation Officer and President,National Grid Partners National Grid Ms.Marijn Steegstra,Head of Client Coverage NL&Energy Transition,Europe and Africa RabobankLord Nicholas Stern,IG Patel Professor of Economics and Government Grantham Institute LSEMs.Marina Taib,Senior Vice President,Corporate Strategy PetronasMr.Greg De Temmerman,Deputy CEO and Chief Science Officer Quadrature Climate FoundationMr.Chacko Thomas,Group Chief Sustainability Officer Tata Sons(Sustainability Group)Mr.Simon Thompson,Senior Advisor,Rothschild&Co RothschildMr.Nigel Topping,Former UN Climate Change High-Level Champion UK Climate Change Committee Dr.Robert Trezona,Founding Partner Kiko Ventures Mr.Jean-Pascal Tricoire,Chairman Schneider ElectricMs.Laurence Tubiana,Chief Executive Officer European Climate FoundationMr.Fabby Tumiwa,Executive Director IESRMr.Adair Turner,Chair Energy Transitions CommissionSenator Timothy E.Wirth,Vice Chair United Nations Foundation Mr.Lei Zhang,Chief Executive Officer Envision GroupAchieving Zero-Carbon Buildings:Electric,Efficient and Flexible3Major ETC reports and working papersGlobal Reports MissionPossibleSeriesBarriersto Clean ElectrificationSeriesCOP-focusedMission Possible(2018)outlines pathways to reach net-zero emissions from the harder-to-abate sectors in heavy industry(cement,steel,plastics)and heavy-duty transport(trucking,shipping,aviation).Making Mission Possible(2020)shows that a net-zero global economy is technically and economically possible by mid-century and will require a profound transformation of the global energy system.To download all ETC reports,papers,explainers and factsheets visit www.energy-transitions.orgBarriers to Clean Electrification Series(20222024)recommends actions to overcome key obstacles to clean electrification scale-up,including planning and permitting,supply chains and power grids.Financing the Transition(20232024)quantifies the finance needed to achieve a net-zero global economy and identifies policies needed to unleash investment on the scale required.Nationally Determined Contributions(2024)calls for industry and government collaboration to raise ambition in the next round of Nationally Determined Contributions by COP30 to limit the impact of climate change.Material and Resource Requirements for the Energy Transition(2023)dives into the natural resources and materials required to meet the needs of the transition by mid-century,and recommends actions to expand supply rapidly and sustainably.Fossil Fuels in Transition(2023)describes the technically and economically feasible phase-down of coal,oil and gas that is required to limit global warming to well below 2C as outlined in the Paris Agreement.Keeping 1.5 Alive Series(20212022)COP special reports outlining actions and agreements required in the 2020s to keep 1.5C within reach.Making Mission Possible Series(2021-2022)outlines how to scale up clean energy provision to achieve a net-zero emissions economy by mid-century.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible4 4Sectoral focuses provided detailed decarbonisation analyses on six of the harder-to-abate sectors after the publication of the Mission Possible report(2019).As a core partner of the MPP,the ETC also completes analysis to support a range of sectorial decarbonisation initiatives:MPP Sector Transition Strategies(2022-2023)a series of reports thatguide the decarbonisation of seven of the hardest-to-abate sectors.Of these,four are from the materials industries:aluminium,chemicals,concrete,and steel,and three are from the mobility and transport sectors aviation,shipping,and trucking.Sectoral and cross-sectoral focusesGeographical focuses Unlocking the First Wave of Breakthrough Steel Investments(2023)This ETC series of reports looks at how to scale up near-zero emissions primary(ore-based)steelmaking this decade within specific regional contexts:the UK,Southern Europe,France and USA.Canadas Building Heating Decarbonization-Jurisdictional Scan(2024)provides an in-depth look at how governments across Canada and the globe are using policy to transition building heating away from fossil fuels.China 2050:A Fully Developed Rich Zero-carbon Economy(2019)analyses Chinas energy sources,technologies and policy interven-tions required to reach net-zero carbon emissions by 2050.A series of reports on the Indian power system,outlining decarbonisation roadmaps for Indias electricity supply and heavy industry.Setting up industrial regions for net zero(2021-2023)explore the state of play in Australia,and identifies opportunities for transitioning to net-zero emissions in five hard-to-abate supply chains.Pathways to Net-Zero for the US Energy Transition(2022-2023)examines the trendlines,challenges,and opportunities for meeting the US net-zero objective.A Path Across the Rift(2023)reviews an analysis of African energy transitions and pinpoints critical questions we need to answer to foster science-based policymaking to enable decisions informed by clear and objective country-specific analysis.EU Factsheets(2024)cover the phase down of fossil fuels,carbon capture,utilisation and storage(CCUS),financing the transition,and energy security,to bring a facts-based perspective to the EU debates around energy.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible5 5GlossaryActive heating and cooling:The use of mechanical heating and cooling technologies,such as boilers,heat pumps,and AC.Carbon budgets:The maximum amount of cumulative net global anthropogenic CO2 emissions that would result in limiting global warming to a given level with a given probability,taking into account the effect of other GHG reductions.The remaining carbon budget indicates how much CO2 could still be emitted while keeping warming below a specific temperature level.Carbon Budgets provide directional insight only and remain highly uncertain.They relate only to anthropogenic emissions or emissions from natural sources arising because of human activity(e.g.,land use change),and already allow for the significant carbon sequestration which naturally occurs in forests and oceans.Carbon capture and use or storage(CCUS):We use the term“carbon capture”to refer to the process of capturing CO2 on the back of energy and industrial processes.Unless specified otherwise,we do not include direct air capture(DAC)when using this term.The term“carbon capture and storage”refers to the combination of carbon capture with underground carbon storage;while“carbon capture and use”refers to the use of carbon in carbon-based products in which CO2 is sequestered over the long term(e.g.,in concrete,aggregates,carbon fibre).Carbon-based products that only delay emissions in the short-term(e.g.,synfuels)are excluded when using this terminology.Carbon capture projects should aim to achieve capture rates of above 90%.Carbon emissions/CO2 emissions:We use these terms interchangeably to describe anthropogenic emissions of carbon dioxide in the atmosphere.Carbon price:A government-imposed pricing mechanism,the two main types being either a tax on products and services based on their carbon intensity,or a quota system setting a cap on permissible emissions in the country or region and allowing companies to trade the right to emit carbon(i.e.as allowances).This should be distinguished from some companies use of what are sometimes called“internal”or“shadow”carbon prices,which are not prices or levies,but individual project screening values.Coefficient of performance(CoP):A measure of a heat pump or ACs efficiency.It is calculated as the temperature difference between the heat source and the heat sink and therefore demonstrates the efficiency of a heat pump at a moment in time,for example given the temperature outside and the desired inside temperature.A heat pumps CoP expresses efficiency as a multiple,rather than a percentage;a CoP of 3 can be interpreted as efficiency of 300%.Heat pump efficiencies are typically averaged over a season,to show the seasonal coefficient of performance(sCoP)for average winter conditions.Cost of capital:A measure of the risk associated with investments;it expresses the expected financial return,or the minimum required rate,for investing in a company or a project.Direct use of fossil fuels:The use of technologies that use/burn fossil fuels or biomass in a building(e.g.,a gas or oil boiler,a gas stove,or the traditional use of biomass for cooking).Embodied carbon emissions:Lifecycle carbon emissions from the production of building materials,such as cement,concrete and steel,and the use of fossil fuels in machinery and transport in construction,maintenance and demolition of a building.Energy productivity:Energy use per unit of GDP.Final energy demand:All energy supplied to the final consumer for all energy uses.Global Warming Potential(GWP):Global warming potential is a measure of the contribution to warming from one ton of refrigerant,relative to the warming induced by one tonne of carbon dioxide.Greenhouse gases(GHGs):Gases that trap heat in the atmosphere.Global GHG emission contributions by gas CO2(76%),methane(16%),nitrous oxide(6%)and fluorinated gases(2%).“Green”hydrogen:Refers to fuels produced using electricity from low-carbon sources(i.e.variable renewables such as wind and solar).Heat network:Heat sourced or generated at centralised locations and distributed to individual buildings(e.g.,via hot water).They range community heating(e.g.,one block of flats or a street),to larger-scale district heating(e.g.,cities and towns).There are many different types of heat networks,including those generating heat using fossil fuels,large-scale heat pumps,or utilising low-temperature heat from existing sources such as waste industrial or transport heat.The term also includes networked heat pumps,which use a centralised heat source(such as the ground)and transfer this low-grade heat to individual heat pumps,to be upgraded.Heat networks are generally much more efficient than individual technologies.Heat pump:A clean heating technology which extracts heat from the air,water or the ground,and transfers that heat inside to where it is needed,either via hot water or hot air.They are the same technology as an air conditioner,but work in reverse.They utilise the refrigeration cycle,which involves compressing and then expanding a refrigerant,causing it to change state via condensation and evaporation.Indirect use of fossil fuels:The use of fossil fuels to generate electricity.Levelised cost of electricity(LCOE):A measure of the average net present cost of electricity generation for a generating plant over its lifetime.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible6The LCOE is calculated as the ratio between all the discounted costs over the lifetime of an electricity-generating plant divided by a discounted sum of the actual energy amounts delivered.Liquified Petroleum Gas(LPG):Is a hydrocarbon gas that exists in a liquefied form supplied in two main forms,propane(C3H8)and butane(C4H10).LPG has a low boiling temperature and is typically stored in pressurised steel vessels.Minimum energy performance standard(MEPS):Regulations which set a minimum standard for a technologys energy efficiency.Negative emissions(or“net negative”emissions):Is used for the case where the combination of all sector CO2 emissions plus carbon removals results in an absolute negative(and thus a reduction in the stock of atmospheric CO2).Net-zero carbon emissions/Net-zero carbon/Net-zero:We use these terms interchangeably to describe the situation in which the energy and industrial system as a whole or a specific economic sector releases no CO2 emissions either because it doesnt produce any or because it captures the CO2 it produces to use or store.In this situation,the use of offsets from other sectors(“real net-zero”)should be extremely limited and used only to compensate for residual emissions from imperfect levels of carbon capture,unavoidable end-of-life emissions,or remaining emissions from the agriculture sector.Operational emissions:The emissions relating from the direct and indirect use of energy use to operate buildings(i.e.for heating,cooling,cooking,lighting and appliances).Passive heating and cooling:Techniques and material choices which rely on natural elements such as the sun,and a buildings envelope and fabric to maintain a comfortable indoor temperature and therefore reduce the use of mechanical,or“active”,heating systems.These techniques can have a significant impact on improving comfort and lowering energy bills.Peak energy demand:Increases in energy consumption by buildings over a day(e.g.,heating demand in the morning and evening,cooling demand in the middle of the day and night),and over a year(e.g.,heating demand in colder months,cooling demand in hotter or humid months).Process emissions:CO2 and other GHG emissions generated as consequence of a chemical reaction other than combustion occurring during an industrial process.Refrigerants:Fluids which are capable to changing state between a liquid and gas at low temperatures due to very low boiling points.In other words,they are able to absorb and let go of heat energy quickly.There are many different types of refrigerants,which work at different pressures and temperatures.Scope 1 emissions:Emissions from sources that an organisation owns or controls directly for example from burning fuel in its own fleet of vehicles.Scope 2 emissions:Emissions that a company causes indirectly and come from where the energy it purchases and uses is produced.For example,emissions caused when generating the electricity used in the companys office buildings.Scope 3 emissions:Emissions that are not produced by the company itself and are not the result of activities from assets owned or controlled by them,but by those that its indirectly responsible for up and down its value chain.An example of this is buying,using and disposing of products from suppliers.Scope 3 emissions include all sources not within the scope 1 and 2 boundaries.Seasonal energy efficiency rating(SEER):Assesses the energy efficiency of an AC and is measured by the cooling output during a typical cooling-season divided by the total electric energy input during the same period.Sequestration:Carbon sequestration is the process of capturing and storing atmospheric carbon dioxide.Sustainable biomass:In this report,the term sustainable biomass is used to describe biomass that is produced without triggering any destructive land use change(in particular deforestation),is grown and harvested in a way that is mindful of ecological considerations(such as biodiversity and soil health),and has a lifecycle carbon footprint that considers the opportunity cost of the land as well as the timing of carbon sequestration and carbon release specific to each form of bio-feedstock and use.Traditional Use of Biomass(TUOB):The use of solid biomass-including wood,wood waste,charcoal,agricultural residues and other bio-sourced fuels,such as animal dung-with basic technologies.It is primarily used for cooking in buildings,with three-stone fire or basic improved cookstoves,often with no or poorly operating chimneys.Whole life carbon/emissions:The combined total of embodied and operational emissions over the whole life cycle of a building(i.e.material production,construction,use and maintenance,and end-of-life).Life cycle assessments(LCAs)should take into account the greenhouse gas impacts across land use change(if applicable),growth,harvesting,transportation,conversion,and use of bioresources.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible7ContentsReport Map 10Introduction:coverage,report structure and summary conclusions 11Structure of this report 13 Summary conclusions 14 Infographic 161.The building decarbonisation challenge 18 1.1 Emissions from the energy used to operate buildings 20 1.2 Emissions from the construction of new buildings 23 1.3 The nature and size of the global building stock 24 1.4 The energy transition for buildings:key characteristics and implementation challenges 27Section A:Decarbonising the energy used to operate buildings 302.Heating 31 2.1 The starting point:large scale use of fossil fuels for heating primarily in northern latitude countries 32 2.2 Clean heating technologies:efficiencies and costs 34 2.2.1 Alternative clean heating technologies 34 2.2.2 Relative costs of different technologies 41 2.2.3 Heat pump myths,realities and technological progress 49 2.2.4 Heat networks 52 2.3“Passive”heating techniques 53 2.3.1 The opportunity for passive heating in new buildings 55 2.3.2 The potential to retrofit buildings for passive heating 56 2.4 Optimal combinations of heating technologies and improved insulation 58 2.4.1 New buildings 58 2.4.2 Existing buildings 59 2.4.3 Implications for the balance of different technologies 61 2.5 Implications for the energy needed to heat buildings 65 2.6 Actions for policy and industry to support the rapid adoption of clean heating technologies at scale 68 2.6.1 Making heat pumps more competitive to install and operate 69 2.6.2 Making heat pumps straightforward to purchase,install and operate 73 2.6.3 Coordinating and planning for rapid and large-scale fossil fuel replacement 733.Cooling 75 3.1 Active cooling technologies:AC 77 3.2 Managing growing demand for cooling 78 3.2.1 Opportunities to improve energy efficiency 79 3.2.2 Promoting optimal consumer behaviour 81 3.2.3 The vital importance of“passive cooling”techniques 82 3.3 Implications for the energy needed to cool buildings 864.Cooking 87 4.1 The transition to clean cooking technologies 88 4.2 Implications for energy used for cooking 895.Appliances 91 5.1 The potential to improve energy efficiency 92 5.2 Implications for the energy needed to power appliances 936.Lighting 957.The net-zero transition in commercial buildings 99 7.1 Understanding commercial building energy use 100Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible8 7.2 Active clean heating and cooling technologies in commercial buildings 103 7.3 Passive heating and cooling in commercial buildings 104 7.3.1 Retrofit of commercial buildings for better energy management and insulation 105 7.4 Actions for policy and industry to accelerate adoption of clean technologies 106 7.4.1 Regulation to drive energy efficiency improvement and emissions reduction 106 7.4.2 Voluntary commitments and market incentives 1078.Buildings in a clean energy system:Managing growing electricity demand via efficiency and flexibility 109 8.1 Buildings electricity demand and renewable supply 110 8.1.1 Final energy demand:Total energy needed to operate buildings by mid-century 110 8.1.2 Peak energy demand:The daily and seasonal time profile of building energy use 111 8.2 Managing electricity demand:Opportunities to reduce electricity use and increase flexibility 114 8.2.1 Improving the efficiency of electric technologies 115 8.2.2 Building more efficient new buildings:Better building design and envelopes 115 8.2.3 Retrofitting existing buildings for energy efficiency 120 8.3 Demand-side efficiency and flexibility:Time-shifting when buildings use energy 121 8.3.1 Better building envelopes to enable pre-heating and cooling 121 8.3.2 Smart systems 123 8.3.3 Rooftop Solar PV 124 8.3.4 Storage technologies 127 8.4 Bringing it all together:Implications for building demands on the clean electricity system 129 8.4.1 Reducing the total electricity needed to operate buildings 129 8.4.2 Reducing peak electricity demand:Buildings as energy assets 130 8.4.3 The phase out of fossil fuels used in buildings 1319.Reducing the impact of refrigerant leakage and venting 132 9.1 Estimates of emissions from leakage and venting 134 9.2 Actions to manage the refrigerant challenge 136Section B:Reducing embodied carbon from the next generation of new buildings 13710.Understanding emissions across the building lifecycle 13711.The opportunity to reduce embodied carbon in buildings construction 141 11.1 Decarbonising material production 144 11.1.1 Low-carbon cement and concrete technologies 145 11.1.2 Low-carbon steel technologies 147 11.1.3 Decarbonising aluminium,bricks and glass 148 11.2 Demand efficiency:using less materials,using low-carbon materials,and building less 148 11.2.1 Build smarter:material intensity and substitution 150 11.2.2 Build efficient:modular construction 157 11.2.3 Build nothing or less 158 11.3 Implications for embodied carbon from new construction 15912.Embodied carbon from retrofitting and at end-of-life 160 12.1 The embodied carbon of retrofitting 160 12.2 End-of-life emissions:rebuilding vs deep retrofit 16213.Policies and industry actions to reduce embodied carbon 164 Carbon pricing 165 Better measurement 165 Whole-life carbon regulation 165 Voluntary action 166Section C:Actions by government,industry and financial institutions 167Annex 1:Heat pumps 174Acknowledgements 177Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible9How to navigate this reportMapping by chapter numberConstructionOperationKey actorsPriority sectionsIn northern latitude countriesIn the rest of the world Developers and construction companies 2.3:Passive heating 2.4:Clean heating tech in new builds 3.2.2:Passive cooling 8:Buildings in clean energy system 1113:Reducing embodied carbon 3.2.2:Passive cooling 8:Buildings in clean energy system 1113:Reducing embodied carbonEnergy and technology companies 26:Heating,cooling,cooking,appliances,lighting 8:Buildings in clean energy system 9:Reducing refrigerant leakage 36:Cooling,cooking,appliances,lighting 8:Buildings in clean energy system 9:Reducing refrigerant leakageFinancial institutions 24:Heating,cooling,cooking 7:Commercial buildings 1113:Reducing embodied carbon 34:Cooling,cooking 7:Commercial buildings 1113:Reducing embodied carbonCommercial businesses and professional building owners 7:Commercial buildings 26:Heating,cooling,cooking,appliances,lighting 8:Buildings in clean energy system 1113:Reducing embodied carbon 7:Commercial buildings 36:Cooling,cooking,appliances,lighting 8:Buildings in clean energy system 1113:Reducing embodied carbonResidential households 26:Heating,cooling,cooking,appliances,lighting 8.3:Demand-side flexibility 36:Cooling,cooking,appliances,lighting 8.3:Demand-side flexibilitySection A:Decarbonising the energy used to operate buildings10.Building lifecycle emissions11.Reducing embodied carbon in new buildings8.Buildings in a clean energy system:managing growing electricity demand 1097.Commercial buildings 999.Reducing refrigerant leakage and venting12.Embodied carbon from retrofitting and end-of-life 16013.Policies and industry action to reduce embodied carbon 164Section C:Actions by government,industry and financial institutions 167Section B:Reducing embodied carbonStakeholder navigationThis report serves as a comprehensive analysis of every aspect of the building energy transition,which involves a wide variety of different actors.This table suggests the most relevant sections for different groups of stakeholders in different regions(i.e.those with and without heating needs).There are implications for policymakers throughout the report.BUILDING LIFECYCLE2.Heating4.Cooking3.Cooling5.Appliances6.Lighting11.Reducing embodied carbon in new buildings 1413187759195 30 137132 137Energy uses in residential buildings:Introduction:Coverage,report structure and summary conclusionsAt COP21 in Paris,and again at COP26 in Glasgow,the vast majority of the worlds nations agreed that it is essential to limit global warming to well below 2C,and ideally to 1.5C,with limited overshoot.Recent extreme weather events across the world have illustrated the vital importance of meeting those objectives.But we are running out of time to achieve them.To limit global warming even to well below 2C(e.g.,to 1.7C)will require CO2 emissions resulting from the use of energy to fall to around net-zero by mid-century.This will require switching to the use of non-fossil fuel energy sources,together with a limited but vital role for carbon capture and storage(CCUS)in offsetting the small residual use of fossil fuels.Much of the work of the Energy Transitions Commission(ETC)has therefore been devoted to identifying how to achieve this decarbonisation of energy supply.1 Through the work of the Mission Possible Partnership,the ETC has also described how to decarbonise the hard-to-abate,heavy emitting sectors,such as steel,cement and concrete,shipping and aviation.This is the first ETC report looking in-depth at the global buildings sector,which makes up a third of global emissions,and 10%of direct fossil fuel energy use.2,3 Its coverage includes:Both“operational“and“embodied”emissions.Operational energy is used in buildings for space and water heating,space cooling,cooking,lighting and multiple forms of appliances.Operational emissions result if fossil fuels are used directly in end applications,or indirectly to produce electricity.Embodied carbon results from the emissions generated from producing and transporting building materials(predominately steel,cement and concrete)and the use of fossil fuels in constructing,maintaining and demolishing buildings.Both supply-side and demand-side levers.Energy supply-side levers include switching from gas boilers to electric heat pumps for residential heating,which will reduce emissions if accompanied by power sector decarbonisation.Demand-side measures increase“energy productivity”by reducing the amount of energy needed to deliver end energy services,and thus human welfare(e.g.,via improved building insulation).It is important to note,however,that the key supply-side lever of electrification also improves energy productivity:the theme that“electrification is efficiency”is a key message of this report.The impact of building electrification on the overall electricity system.Electrifying building heating and cooking will increase not only overall electricity demand,but peak electricity demand.Meanwhile,using variable renewables to decarbonise electricity supply means that a large share of electricity supply will not be dispatchable.It is therefore essential to identify and implement actions which can achieve time-specific power supply/demand balance in future electricity systems.These include many actions such as improved insulation,decentralised storage and demand-side flexibility which can be deployed at the building level,rather than within the electricity supply system.The latter aspects of this report will feed into two other ETC workstreams:Our work on power sector transformation,which is looking at all the generation,storage,demand-side flexibility and grid investments which will be needed to balance supply and demand in zero-carbon power systems across different regions of the world.Our report from this work stream will be published in Q2 2025.Overall analysis of opportunities to improve“energy productivity”in all sectors of the economy,which will be published in Q1 2025.Box A describes the focus of this analysis and the different categories of energy productivity improvement which it will consider.1 ETC(2024),Fossil Fuels in Transition:Committing to the phase-down of all fossil fuels;ETC(2021),Making Clean Electrification Possible;ETC(2022),Mind the Gap:How carbon dioxide removals must complement deep decarbonisation to keep 1.5C alive;ETC(2022),Carbon capture,utilisation and storage in the energy transition:vital but limited.2 Systemiq analysis for the ETC;BNEF(2023),New Energy Outlook 2022;IEA(2022),World Energy Outlook 2022.3 We have previously evidenced the potential to electrify building heating in our 2021 Making Clean Electrification Possible report,the global investment required to decarbonise buildings in our 2023 Financing the Transition report,and developed scenarios for the decline of direct fossil fuel use in buildings in our 2023 Fossil Fuels in Transition report.The MPP has also developed detailed sector transition strategies to decarbonise cement and concrete,steel and aluminium.While buildings is a key source of demand for these materials,these strategies are broader than just the buildings sector.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible11Box A The ETCs wider work on energy productivity Much of the work of the ETC has been devoted to identifying how to achieve decarbonisation of energy supply.4 But emissions could also be reduced by using energy more efficiently;and even if all energy supply were decarbonised,greater energy efficiency would still play a critical role in reducing the total cost of energy inputs required.Improving overall“energy productivity,i.e.the amount of energy required to deliver any given level of GDP and human welfare,is therefore an important objective.Over the last 10 years,global primary energy productivity has increased by 1.7%per annum,but with global GDP growing at 2.7%,overall energy demand has continued to grow.5 But at COP28,nations agreed to double the rate of energy productivity improvements,achieving a global average of 4.1%per annum by 2030.6To identify how this could be achieved,and to assess the long-term potential for energy efficiency improvement beyond 2030,it is essential to take a detailed sector-by-sector approach.The ETC is therefore conducting that sector-by-sector analysis and will produce an overall report supported by sector-specific appendices in Q1 2025.The report will cover opportunities to improve energy productivity in:The building sector,drawing on the analysis and conclusions set out in this report.The road transport sector,where electrification will be a key driver of improvement,but where there are also opportunities to improve the technical efficiency(kWh of energy input per km travelled)of both internal combustion engines and electric vehicles.The heavy industry sectors,such as steel,cement and chemicals,where supply-side decarbonisation(e.g.,switching from cooking coal to hydrogen as the reduction agent in iron production)could be accompanied by efficiency improvements in many process steps.The aviation and shipping sectors,where switching to new fuels such as sustainable aviation fuel(SAF)and ammonia might,in fact,reduce measured primary energy efficiency(because of significant conversion losses),but where there are significant opportunities to improve energy efficiency in-use(e.g.,reducing the amount of jet fuel used per passenger km).The analysis will consider the drivers of measured energy productivity at both the“primary”and“final”energy level,and will assess opportunities for three different types of energy productivity improvement:Technical energy efficiency,which measures the input of energy required to deliver a desired energy service.In buildings,this opportunity covers both:The efficiency with which heating equipment converts a kWh of energy input into a kWh of heat delivered into a building.The number of kWh which need to be delivered to maintain a specific temperature level,which depends on the efficiency of insulation.Service efficiency,which measures the potential for people to enjoy the same standard of living while using less energy-intensive services(e.g.,using public transport rather than private cars),or products(e.g.,increasing utilisation of existing buildings rather than building new ones).Material efficiency,where efficiency can be improved by delivering a given quantity of products with reduced material inputs(e.g.,fewer kg of steel or cement used to construct a building).4 ETC(2024),Fossil Fuels in Transition:Committing to the phase-down of all fossil fuels.5 IEA,Energy Efficiency,available at www.iea.org/energy-system/energy-efficiency-and-demand/energy-efficiency.Accessed 26/11/2024.6 COP28,Global Renewables and Energy Efficiency Pledge.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible12The global building stock varies hugely by category(e.g.,residential and multiple variants of commercial building),age,design,quality of construction,and typical unit size.Optimal approaches to decarbonisation must therefore be tailored to specific circumstance.Optimal approaches also sometimes involve complex trade-offs between the technical efficiency of heating/cooling equipment and the optimal level of insulation,and between operational and embodied carbon emissions.And some important policy levers in particular the various forms of building regulation are simultaneously relevant to both operational and embodied emissions.As a result,there is no perfect way to structure a report on building decarbonisation.Our report structure therefore combines a mix of focus by building type,application type and key topic,and involves some unavoidable duplication of messages between chapters.It covers in turn:Chapter 1:Current energy use and resulting emissions by building type and application.Section A:Decarbonising the energy used to operate buildings Chapters 23 assess opportunities to reduce the emissions resulting from space heating and cooling in new and existing buildings(focusing mainly on residential).They consider the potential to electrify heating,to reduce energy input requirement via“passive”heating and cooling(e.g.,via improved insulation),and to improve the technical efficiency of the key heat pump/AC technology.7 Chapters 46 investigate opportunities to reduce emissions from cooking,lighting and appliances.Chapter 7 explores operational energy use in commercial buildings.Most of the relevant technologies apply also to the residential sector and are therefore already described in Chapters 26,but this chapter highlights specific features of their application to commercial buildings.Chapter 8 explains how to manage refrigerant leakage and venting from heat pumps and ACs.Chapter 9 explores the system-wide implications of electrified buildings.It assesses opportunities to create efficient and flexible buildings which can play a key role in managing electricity demand in a renewable energy system.Section B:Reducing embodied emissions from the next generation of new buildings Chapter 10 describes the nature and scale of embodied carbon emissions,with the production of cement/concrete and steel playing a dominant role.Chapter 11 assesses both(i)the potential to decarbonise material production,drawing on the work of the MPP,and(ii)the potential to reduce the amount of material required in construction of new buildings via improved building techniques and alternative materials.Chapter 12 assesses optimal approaches to the retrofit of existing buildings,which can entail a trade-off between reducing operational vs.embodied emissions.Chapter 13 sets out the policy and industry actions required to drive reduction in embodied emissions.It highlights the important role that carbon pricing should play.Section C:Summary of the actions required from policymakers,industry,financial institutions.7 Active heating/cooling systems refer to the use of mechanical equipment to regulate indoor temperatures(e.g.,heat pumps,AC).Passive solutions rely on natural elements such as the sun and a buildings envelope to maintain a comfortable indoor temperature.Structure of this reportAchieving Zero-Carbon Buildings:Electric,Efficient and Flexible13Each chapter of this report sets out our conclusions on the specific challenges considered,the public policy and industry actions required to drive decarbonisation,and potential implications for electricity demand and fossil fuel use.The Executive Summary presents a condensed version of the chapter-by-chapter conclusions,and assesses the overall potential for reducing both operational and embodied energy via either supply-side or demand-side levers.Our key conclusions related to operational energy use include:1.The solution to decarbonising residential and commercial heating will be predominately electric,and predominately heat pumps but there is no one-size-fits-all technology,with the optimal solution depending on building characteristics and household preferences.Heat networks(e.g.,networked ground source heat pumps and district heating solutions)should be deployed where possible,since these can deliver significant efficiency gains and enable entire streets to be decarbonised and segments of the gas grid switched off.2.A whole-building approach is required to create zero-carbon ready buildings.This involves consideration and optimisation across three types of technology:1)installation of clean heating technologies which can be powered by clean electricity,2)improvements to the building envelope and 3)consideration of a suite of smart and flexible technologies(e.g.,smart system,solar and batteries).Insulating the least efficient homes must be a government priority,and combined with heat electrification can lower energy bills and improve comfort levels.However,for the average home,deep retrofit is not a pre-requisite for installing a heat pump,as long as radiators and systems are appropriately sized.3.Hydrogen should not be used for home heating in new or existing buildings.It is much less efficient(e.g.,green hydrogen for heating would require 56 more electricity than heat pumps)and would still require substantial retrofit to boilers and the gas network.It may,however,play a niche role in some specific locations(e.g.,close to clean hydrogen production).4.Demand for cooling is set to more than double by 2050,as a result of rising incomes and climate change.Demand could,however,be even greater if rising incomes drive significant behaviour change in parts of the world which are currently more conservative in their use.This will have significant benefits for health,wellbeing and productivity,but will create huge demands for electricity requirements that need to be managed.5.Deploying passive cooling techniques(e.g.,white roofs and external shading)in buildings could reduce global demand for cooling by around 25%,with even greater benefits for the 40%of the global population living in hot countries that may still not have access to AC in 2050.Many of these are low-cost,such as external shading and painting roofs white,and can reduce cooling energy demand in individual buildings by up to 50%.6.The risk of emissions relating to refrigerant leakage and venting from ACs and heat pumps is very large but can be managed.Emissions from refrigerant leakage and venting in 2050 could be equivalent to 15%of todays total building emissions,but could be cut in half with regulations and incentives for proper disposal of refrigerant at end-of-life,skills certifications to improve the quality of installations and maintenance,and with a faster transition to lower-GWP refrigerants.7.For cooking,it is essential to phase out the traditional use of biomass(TUOB)as rapidly as possible,eliminating its extremely harmful health effects and emissions.Intermediate fuels such as liquid petroleum gas(LPG)will play a role during the transition but the eventual solution should see cooking electrified across the world.8.Final demand for buildings could increase from 36,600 TWh to 57,500 TWh under business as usual.But it would be theoretically possible to limit this to 23,200 TWh via a combination of:Electrification,which directly reduces final energy consumption because heat pumps are 34 times more efficient than fossil fuel boilers and electric cooking can be over 5 times more efficient than the traditional use of biomass.Technical efficiency improvements in heating(e.g.,from a COP of 3 to 45),cooking(e.g.,moving to induction hobs),cooling equipment(where the average AC sold today is far less efficient than best available technology),household appliances,and moving all lighting to LED bulbs.These improvements could reduce required energy supply by around 25%.Building new buildings to higher standards and incorporating passive heating and cooling techniques where reducing operational energy per m2 beyond current regulated standards by 25%may only add 15%to construction costs and retrofitting existing buildings.Summary conclusionsAchieving Zero-Carbon Buildings:Electric,Efficient and Flexible14 Improving demand efficiency through the installation of smart systems which can reduce unnecessary energy use(e.g.,sensors in commercial buildings,controlling thermostats remotely),and different behavioural choices(e.g.,setting cooling thermostats slightly higher).This illustrates the scale of the opportunity which should be pursued,even if in practice,only a proportion of the total opportunity if likely to be achieved.9.Electrification is efficiency,but as we move to a building energy which is almost wholly electric,the total demand for electricity will increase significantly.Annual electricity requirements for buildings in 2050 could be 2.53 times higher than today,increasing from 12,800 TWh to around 35,000 TWh;but in principle this could be lowered to around 18,500 TWh with strong action on energy productivity.Pursuing this energy productivity potential must therefore be a priority,but public policy must also ensure rapid growth in clean electricity supply.10.Electricity demand for buildings will create peaky demand for grids,but there is huge untapped potential for demand-side flexibility.Insulation can have a significant impact on a buildings thermal inertia and peak heating needs;all buildings should aim to have 24 hours flexibility.Water storage tanks are a low-cost,no regrets solution for households with sufficient space to shift water heating outside of peak times.Smart systems are also a no-regrets solution,which can also support gradual behaviour change.Solar panels and batteries installed at building-level would be a huge benefit to the grid in countries with a big cooling need,and will become increasingly economic as costs decline.11.It is technically and economically feasible to almost entirely eliminate the direct use of gas and oil in buildings by 2050,with falls of around 1520%possible by 2030.Coal use can be entirely eliminated by 2040.Our key conclusions related to embodied carbon are:12.Global floor area is set to expand by 50%by 2050,and if buildings continued to be built at todays embodied carbon intensity,this could result in 75 GtCO2 cumulative emissions between now and 2050.This could be reduced to 40 GtCO2 by feasible actions to decarbonise the production of cement/concrete,steel and other building materials,as described in the MPPs sector transition strategies.13.A further reduction to 30 GtCO2 could be achieved via improvements in building design and construction technique and the elimination of wasteful overbuilding relative to demand,particularly in China.Feasible measures include light-weighting construction techniques and building design considerations to use less material input,and using lower-carbon materials such as timber;some bio-based materials such as hempcrete can even have negative emissions if dealt with correctly at end-of-life.These demand-side levers will become even more important if the decarbonisation of material production occurs slower than indicated in the MPP scenarios.14.Key policy,industry and finance actions:Set out a clear national vision for the building energy transition,with targets for heat pump deployment and clear bans on fossil fuel heating and cooking,supported by local street-by-street delivery plans.Underpin incentives for,and trust in,clean,electric technologies by creating early demand for low-carbon technologies,rebalancing gas and electricity prices,and providing time-limited subsidies for deployment.Create strong frameworks and standards for measuring and reducing whole-life carbon of new buildings,particularly around embodied carbon.Manage new and peaky electricity demand with flexible and efficient buildings with time-of-use tariffs,minimum energy performance standards and labelling regulations,financial incentives for insulation,and encouraging the uptake of smart systems,rooftop solar PV and batteries.Introduce carbon prices or equivalent regulation to drive the decarbonisation of material production,and create incentives for the more efficient use of carbon-intensive construction materials.Deliver a fair transition for households,with targeted support for low-income households,investment in social housing,clear regulations on the energy efficiency of rented properties,and education and awareness of low-cost passive heating and insulation improvements.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible15DECARBONISING THE ENERGY USEDIN RESIDENTIAL AND COMMERCIAL BUILDINGS 9.7 GtCO2 emissions from 36,800 TWhof buildings energy useGLOBAL CO EMISSIONS TODAY26%2.6 GtCO2 embodied carbon from new buildings 7hieving zero-carbon buildings:Electric,efficient and flexibleANNUAL FINAL ENERGY CONSUMPTION USED IN BUILDINGS TWhTODAY:36,800 TWh2050:40,000 TWh13,500CH47,00013,0003,30016,60010,2002,2006,0001,80014,7005,0005,0003,60011,100CH48004,90033,70017,500Electric,efficient and flexible buildings:What will it look like?LED lightingEfficientappliancesElectriccookerHigh performancewindowsSolar panels batteryWall and roofinsulationAir-sourcedheatpumpWaterstoragetankMaximisednatural lightAir conditioning and ventilationRenewableelectricitygenerationElectricity gridconnectionGround-sourceheat pumpSmart energysystemEnergy Transitions Commission-January 2025ENERGYEND-USEENERGYSOURCEFossil fuelsTraditional useof biomassElectricityDistrict heatingand renewableheat generationHeatingCookingCoolingLightingAppliancesHeatingCookingCoolingLightingAppliancesFossil fuelsDistrict heatingand renewableheat generationElectricityElectricityENERGYSOURCEENERGYEND-USEEnergy productivity can lower electricity demand:Technical efficiency improvementsBetter building fabricBehavioural choicesKey technologies and features include:CommercialbuildingWhitecoolroofExternal shadingLED light sensorsResidentialbuildingHeat pumps and electric cookingElectrification increases efficiency by 200-300ficient AC,LED lighting,appliancesImproved insulationNet-zero building transitionEnergy Transitions Commission-February 2025REDUCING EMBODIED CARBONFROM NEW BUILDING CONSTRUCTIONGLOBAL CO EMISSIONS TODAY9.7 GtCO2 emissionsfrom buildings energy use26%2.6 GtCO2 embodied carbon from new buildings 7%Embodied carbon:what is it?STAGES OF A BUILDING LIFECYCLE UPFRONT PHASEMAINTENANCE AND USE PHASEEND-OF-LIFE PHASEPRODUCTCONSTRUCTIONTimeExtract raw materialsTransport tofactoryProduce materialsTransport to siteConstruct buildingMaintain and repairReplaceRefurbishEnergy useDemolishHaul away waste materialsRecycle and disposalPriority:Reduce use of high-carbon steel,cement and concrete Reducing emissions from the construction of new buildings is criticalGLOBAL FLOOR AREA IS SET TO EXPAND BY 50%Billion m220222502050390WITH NO ACTION,NEW FLOOR AREA COULD PRODUCE 75 GtCO2GtCO2Remainingcarbon budget for a 1.5C pathwayEmbodiedcarbon fromnew buildingsWith no action40%of carbon budgetWith action15%of carbon budget7520030200DECARBONISE STEEL AND CEMENT/CONCRETEBUILD LESS&BE MORE EFFICIENT IN CONSTRUCTIONExtend building lifetime withmaintenance and repurposing2Avoid highvacancy rate1Better urbanplanning3Electrification and alternative fuelsCarbon capture,utilisationand storageAlternative cement chemistriesIron reduction with green hydrogen;useof scrap steelModularconstruction4Type of building emissions:EmbodiedOperational(heating,cooling,cooking,lighting,appliances)What action is needed?USE LESS CEMENT,CONCRETE AND STEEL BuildingheightWall-to-floor ratioMaterialsratioUSE ALTERNATIVE,LOW-CARBON MATERIALS TimberBambooHempcreteRammed earth3 conditions for bio-based materials to have lower whole-life carbon:1Sustainably sourced:Harvested at the right time and replanted2Store carbon while in building3Dealt with properly at end-of-life:Recycled or burnt with carbon capture Higher material intensity SteelCementHigh-riseHighratioLower material intensity SteelCementBiobased Mid-riseSmallratioCO2 140 bn m2Energy Transitions Commission-February 2025The building decarbonisation challenge Buildings account for 33%of global annual emissions,12.3 GtCO2 Exhibit 1.1,and 10%of direct fossil fuel use,14,000 TWh.8,9 This arises from:Emissions from the operation of buildings,which account for 26%of global emissions,or 9.8 GtCO2.The direct use of fossil fuels accounts for 3 GtCO2(8%),predominately the use of gas and oil for heating.The indirect use of fossil fuels for electricity used in buildings accounts for 6.8 GtCO2(18%).Operational emissions are produced by the worlds total stock of buildings,around 250 billion m2.10 Emissions from the construction of new buildings,which account for 7%of global emissions,or 2.5 GtCO2.These emissions are referred to as embodied carbon,and arise from the production of materials predominately steel,cement and concrete-and the use of fossil fuels in transportation and construction.Embodied emissions relate to the additions to the global building stock in a given year,around 5 billion m2.A further 6%of annual emissions are the embodied carbon from new infrastructure,such as roads and bridges,railways,industrial facilities,ports,and pipelines.11 Together with buildings,this makes up the worlds“built environment”.This report will predominantly focus on buildings both residential and commercial but will discuss some issues relating to the embodied carbon resulting from infrastructure construction in Section B.8 IEA(2023),The energy efficiency policy package:key catalyst for building decarbonisation and climate action.9 IEA(2022),World Energy Outlook 2022.10 IEA(2023),World Energy Outlook 2023.11 IEA(2023),The energy efficiency policy package:key catalyst for building decarbonisation and climate action.1Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible18Buildings account for 33%of global emissions;around three-quarters of this is from the energy used to operate buildings,a quarter is from the annual construction of new buildings Exhibit 1.126%-9.7 GtCO2Direct use of fossil fuels in buildings(e.g.,gas and oil boilers and stoves)Indirect use of fossil fuels used to generate electricity to power,heat and cool buildingsEmbodied emissions arise from the production of materials(e.g.,cement,steel,and aluminium)and the energy used to construct buildings Global emissions by sector,2022GtCO2Embodied carbon from construction of new infrastructure6%-2.3 GtCO2Emissions from buildingsoperational energy useGenerated from:250 bn m2-the current stock of global buildings7%-2.6 GtCO2Embodied carbon from new building construction Generated from:5 bn m2 a year-the annual additions to global building stock(2%per year growth)Other60%DirectIndirect12.3 GtCO2NOTE:This shows annual carbon flows as opposed to stock.Infrastructure includes roads,pipes,airports,railways.SOURCE:IEA(2023),The energy efficiency policy package:key catalyst for building decarbonisation and climate action.Total buildingemissionsAchieving Zero-Carbon Buildings:Electric,Efficient and Flexible19Heating and appliances are the biggest sources of operational emissions,while residential buildings account for 16%of global emissions,compared to 10%from commercialGlobal operational emissions by end-use,2022GtCO2Global operational emissions by building type,2022GtCO29.7 GtCO29.7 GtCO2NOTE:This shows annual carbon flows in a given year.Emissions for cooking do not include those from the traditional use of biomass,in line with common carbon accounting for bioenergy which assumes lifecycle CO2 emissions are zero.This means total emissions for cooking could be larger.SOURCE:IEA(2023),The energy efficiency policy package:key catalyst for building decarbonisation and climate action.11%7%6%8%7%6%3%2%2%Total operationalemissionsTotal operationalemissionsExhibit 1.2Heating 4.1Residential 6.0Commercial 3.7Appliances 3.0Cooling 1.1Cooking 0.7Lighting 0.7Embodied carbon from construction of new buildingsEmbodied carbonfrom construction of new infrastructureOther60%Other60%1.1 Emissions from the energy used to operate buildings Energy is used in buildings for five end uses:heating,cooling,cooking,lighting and powering appliances(e.g.,refrigerators,TVs,and dishwashers)Exhibit 1.3.Heating is the biggest source of operational emissions(11%of global emissions),accounting for 45%of final energy use in buildings and 80%of direct fossil fuel use Exhibit 1.2.Cooking accounts for a further 15%of direct fossil fuel use,but is largely fuelled by the traditional use of biomass(TUOB)in lower-income countries.12 TUOB is incredibly inefficient(as little as 10%of energy used is converted to useful heat),meaning cooking is the second largest component of final energy demand(30%).Cooling,lighting and appliances are over 95%electrified,with emissions resulting from the indirect use of fossil fuels to generate electricity.Appliances account for 15%of final energy demand,and are the second largest source of operational emissions from buildings and are responsible for 8%of all sector global emissions.Cooling and lighting each account for 5%of final energy demand and 23%of global emissions;however,as we will explore in this report,cooling is set to the be the fastest growing source of buildings energy demand over the coming decades,with implications for emissions if clean electrification does not keep pace and if refrigerant leakage is not managed.These global averages mask significant variation across countries;some parts of the world such as Africa have no or very little heating needs,while others,such as parts of Canada and the Nordic countries have very low cooling needs.Many countries,including China,the US and parts of Europe,have both seasonal heating and cooling needs.12 TUOB refers to the use of solid biomass(e.g.,wood,wood waste,and charcoal)with basic technologies(e.g.,open fires and basic stoves).Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible20Residential buildings account for 60%of operational emissions,despite comprising 80%of global floor space Exhibit 1.2 and Exhibit 1.6.13 In comparison,commercial buildings make up 20%of global floor space but produce 40%of operational emissions and account for 30%of buildings final energy demand.Commercial buildings are a very diverse group of buildings,including offices,hotels,restaurants,hospitals and schools.Overall,as Exhibit 1.3 shows,35%of total buildings energy use is already electrified.This means that as the power sector is decarbonised,operational emissions will fall in turn Exhibit 1.4.13 IEA(2023),The energy efficiency policy package:key catalyst for building decarbonisation and climate action;IEA(2023),World Energy Outlook 2023.The direct use of fossil fuels in buildings accounts for 40%of energy use,followed by electricity at 35%,and the traditional use of biomass for cooking at 20%Exhibit 1.3Global buildings operational energy use by end-use and fuel,2022TWhTUOBCoalOilGasElectricityFossil FuelsDistrict HeatRenewables16,700HeatingCookingAppliancesLightingCooling10,2002,200 1,8006,000Total buildings energy use 37,000 TWhShare of:Buildings energy useDirect use of fossil fuels in buildingsNOTE:Shares of building energy by end-use from 2021 applied to 2022 actuals.Heating includes both space and water heating.TUOB=traditional use of biomass.SOURCE:Systemiq analysis for the ETC;IEA(2022),World Economic Outlook 2021;IEA(2023),World Economic Outlook 2022.45(%6%2%5%2%5hieving Zero-Carbon Buildings:Electric,Efficient and Flexible21Globally,the carbon intensity of electricity generation has fallen 15%since 2000 and,even with no new policy action,is likely to halve in the next ten yearsExhibit 1.4Carbon intensity of electricity generation,projections to 2050gCO2e per kWh1,000900800700600500400300200100020002005201020152020202520302035204020452050ChinaIndiaJapan&South KoreaAustraliaSoutheast AsiaUnited StatesEuropeLatin AmericaRest of WorldGlobal averageProjections-50%NOTE:Projections are from the Economic Transition Scenario which assumes no new policy action to accelerate the transition.SOURCE:BNEF(2024),New Energy Outlook 2024.-15hieving Zero-Carbon Buildings:Electric,Efficient and Flexible221.2 Emissions from the construction of new buildings Embodied emissions arise from a wide variety of processes,materials and machinery used to construct buildings.In comparison to operational emissions,where robust data on household energy use and the emissions intensity of different fuels exists,national or global databases are lacking.This reflects the lack of a consistent measurement framework,the fact that regulation to date has largely focused on measuring operational energy,and the huge variation in the way buildings are built and the materials used.This is,however,beginning to change,with many countries in recent years taking significant steps forward in terms of measuring and understanding embodied carbon.As this report argues,it is now possible for regulation to implement minimum requirements for embodied,or whole-life carbon,to drive accelerated action to address embodied carbon this decade.Most embodied emissions derive not from activities conducted at the building site,but from the production of the materials used and 95%of these emissions result from the production of iron/steel and cement/concrete Exhibit 1.5.Global floor area is set to increase 5060%by 2050,from 250 billion m2 to 390 billion m2,which will drive significant demand for steel,cement and concrete Exhibit 1.6.14 It is important to note that these projections represent net floor area,accounting for construction and demolition.This means that gross construction is actually higher.As we explore in Chapter 10,constructing an additional 140 billion m2 would generate 75 GtCO2,holding todays global average embodied carbon per m2 constant(0.5 GtCO2 per bn m2).15 This report outlines the opportunities to utilise new materials and design and construction methods to reduce this to 3040 GtCO2.14 IEA(2023),World Energy Outlook 2023.15 Systemiq analysis for the ETC.Cement,concrete and steel account for 95%of embodied emissions relating to material productionExhibit 1.5Cement and steel contribution to global construction material carbon impact%of totalCement and concreteSteelOthers,including bricks,aluminium and glass650%5%SOURCE:Adapted from WBCSD&Arup(2023),Net-zero buildings Halving construction emissions today.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible23Exhibit 1.6Global floor area is set to increase 5060%by 2050,driven by a doubling of the building stock in middle-and low-income countriesGrowth in global floor area,projections to 2022 to 2050Billion m240035030025020015010050020502022 55% 35% 20% 100%039040035030025020015010050020502022 55%0390Other middle-and low-income countriesChinaCommercialResidentialHigh-income countriesNOTE:Projections from the IEAs Net Zero scenario.SOURCE:IEA(2023);World Energy Outlook,https:/www.iea.org/reports/world-energy-outlook-2023,re-used under license:CC BY 4.0. 55% 55%1.3 The nature and size of the global building stock The term“buildings”covers a very range of different building types.And the type and size of a building,its ownership,and its location have huge implications for the applicability of clean heating technologies,for the potential to improve energy efficiency,for the optimal actions that can be taken to lower embodied carbon in that new buildings,and for the ability to finance any changes.While it is broadly accepted that each building must be assessed on an individual basis as there is no one-size-fits-all solution to decarbonising buildings,this report acknowledges the need for stronger national strategic visions.These visions are essential to enable the transition at pace and scale and thus this report seeks to identify the technologies and solutions that are likely to dominate.Residential buildings Drawing on data from OECD countries,key differences in residential buildings across countries include:Building archetype:Drawing on data from the OECD,60%of buildings are houses and 40%are flats and apartments Exhibit 1.7.16 This varies massively across countries,with flats accounting for 6575%of building stock in Spain and Korea,compared to 1520%in Australia and the UK.In cities like Shanghai,flats account for 90%of floor space.17 16 OECD database,available at www.oecd.org/en/data.html.Accessed 01/08/2024.17 Wenyi Zhang(2024),Composition of residential buildings in Shanghai 2022,by type.SOURCE:IEA(2023);World Energy Outlook,https:/www.iea.org/reports/world-energy-outlook-2023,re-used under license:CC BY 4.0.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible24 Size:Average floor space per person varies from over 65 m2 in the US,to around 45 m2 in France and Germany,to below 30 m2 in many Eastern European countries.18 Ownership:Around 75%of buildings are privately owned in Europe,but again this varies massively at 45%in Germany,6570%in the UK and US,and over 90%in Hungary and Romania Exhibit 1.7.On average in Europe and North America,15%of buildings are privately rented and 10%are social housing.19 Degree of urbanisation:40%of people across Europe and the US live in cities,35%live in towns and suburbs,and 25%in rural areas.20 These proportions will vary hugely across other continents.In general,there is a global trend towards greater urbanisation as lower-income countries develop.18 European Commission,EU Building Stock Observatory,available at www.building-stock-observatory.energy.ec.europa.eu/database.Accessed 01/08/2024;National Renewable Energy Laboratory(2022),US Building Stock Characterization Study.19 Eurostat,2021 for Europe,available at www.ec.europa.eu/eurostat/data/database.Accessed 01/08/2024;US Census,2022 for US,available at www.census.gov.Accessed 01/08/2024.20 Eurostat,2021 for Europe,available at www.ec.europa.eu/eurostat/data/database.Accessed 01/08/2024;US Census,2022 for US,available at www.census.gov.Accessed 01/08/2024.Exhibit 1.7Flat/apartmentSemi-detachedDetached HouseOtherOwner,no outstanding mortgage or housing loanOwner,with mortage or loanTenant,rent at market priceTenant,social housing or subsidisedResidential building stock varies considerably;key factors determining technology choices are the type of dwelling and ownershipOccupied residential building stock by dwelling type in OECD countries,2020%of totalDistribution of population by building ownership,selected countries,2021%of totalKoreaSpainLatviaSwitzerlandEstoniaGreeceLithuaniaMaltaGermanyItalyCzech RepublicIcelandSwedenPortugalSlovakiaAustriaBulgariaJapanPolandLuxembourgFinlandDenmarkRomaniaFranceCanadaSloveniaHungaryUnited StatesCyprusNorwayBelgiumCroatiaNetherlandsUnited KingdomAustraliaIrelandMexicoCosta RicaNew ZealandRomaniaSlovakiaCroatiaHungaryLithuaniaPolandBulgariaLatviaMaltaEstoniaPortugalCzech RepublicSpainSloveniaItalyGreeceBelgiumLuxembourgNetherlandsIrelandCyprusFinlandUnited StatesUnited KingdomSwedenFranceDenmarkAustriaGermanySOURCE:OECD Database,available at www.oecd.org/en/data.html.Accessed 01/08/2024;Eurostat Database,available at www.ec.europa.eu/eurostat/data/database.Accessed 01/08/2024;US Census 2022,available at www.census.gov.Accessed 01/08/2024.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible25Exhibit 1.80 0%US%of total floor space(2021)Europe%of numberof buildings(2015)China%of total floor space(2015)“Commercial buildings”refers to a very large and heterogenous group of sectors including offices,schools,hotel and retailRomaniaItalySpainChinaCyprusSlovakiaCroatiaUnited StatesCzech RepublicBulgariaLatviaMaltaPortugalLuxembourgHungaryFranceLithuaniaAustriaNetherlandsBelgiumIrelandSwedenPolandGreeceDenmarkSloveniaGermanyFinlandBuilt floor area by residential/commercial,2015%of total floor areaCommercialCommercial buildings by sector%of total floor area or number of buildings29 #8%7%8(%5%3%7%5%7ucationSchools,universities,research labs OfficesWholesale and retailIncl.Shops,hairdressers,service stations,food shopsWarehouses and otherIncl.transportation&garages,agricultural buildingsHotels and restaurantsIncl.cafes,pubs,canteens in businessesHealthcareHospitals,care homesSports/entertainmentGyms,leisure centres,swimming poolsNOTE:For the US,sports facilities are included in“warehouses and other”.ResidentialCommercial buildings Globally,commercial buildings make up 20%of floor space,but this varies across countries Exhibit 1.8.In Germany,for example,commercial buildings account for a third.The term“commercial building”refers to a very large and heterogeneous stock of buildings across different sectors.In Europe and the US,offices account for 2530%,compared to almost 40%in China.Education and wholesale/retail buildings are typically the second and third largest,at around 1525%respectively.Other sub-sectors include warehouses,hotels and restaurants,hospitals and sports facilities(see Chapter 7).The significant heterogeneity in commercial buildings more so than for residential makes determining optimal transition pathways even more challenging.In Chapters 2 to 6,we assess the technologies and solutions which can deliver operational emissions reductions by application(heating,cooling,cooking,lighting and appliances),drawing primarily on residential examples.Chapter 7 then discusses the specific characteristics and challenges of commercial buildings.SOURCE:National Renewable Energy Laboratory(2022),US Building Stock Characterization Study;Building Performance Institute Europe(2015),Europes Buildings Under the Microscope;Baijiahao(2018),Real estate and constructions:What are the sub-sectors?What are the sizes?;Eurostat,available at www.building-stock-observatory.energy.ec.europa.eu/database/.Accessed 01/08/2024;US Energy Information Administration(2018),Commercial Buildings Energy Consumption Survey;Pan L,Zhu M,Lang N,Huo T.(2020),What Is the Amount of Chinas Building Floor Space from 1996 to 2014?Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible261.4 The energy transition for buildings:key characteristics and implementation challenges The energy transition is imperative not just to reduce emissions,but also to deliver upon critical social and economic development goals.The quality of building stock varies significantly across and within countries,with lower incomes,energy poverty,and poor living standards and health being closely linked.As we outline in this report,with the right policies,decarbonising buildings and improving social outcomes can go hand in hand.Electric heating and cooking technologies will significantly improve air quality and are inherently more efficient with lower running costs.Building more efficient and flexible homes will increase comfort levels,improve living standards and further lower energy bills.There are two core pillars to decarbonising buildings:1.The first is transitioning to clean technologies and lower-carbon materials.For energy used in the operations of buildings,this primarily means switching from fossil fuel based heating and cooking within buildings to clean and overwhelmingly electric technologies.This must be underpinned by a rapid decarbonisation of the power system to ensure that the electricity used in buildings is low and eventually zero-carbon.For energy used in the construction of buildings,embodied emissions,this means decarbonising the production of critical materials(i.e.steel and cement),switching to lower emission materials where possible(e.g.,via sustainably sourced timber),and electrifying transport and construction.2.The second is improved energy productivity.This means using less energy for the same standard of living and can be achieved through energy efficiency(i.e.using less energy to deliver the same output by technical efficiency improvements to AC and through improved insulation),material efficiency(i.e.using less material for the same quality of new building by lightweighting building design and modular construction which reduces waste),and service efficiency(i.e.better utilisation of existing buildings such as shared working spaces).Since it will take time both to fully decarbonise electricity generation and to decarbonise the production of steel,cement and other construction materials,improved energy productivity will play a critical role in reducing cumulative emissions during the transition to net-zero and limiting warming to 1.5C.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible27Increasing the energy productivity of buildings will also have a wide range of other economic,social and environmental benefits:Because more energy efficiency buildings need to consume less energy,a smaller clean power system is needed.This reduces the scale of the clean electricity generation build challenge,and total investments needed in renewables,grid upgrades,and storage.21 Because buildings built with passive heating and cooling designs require less energy,it will help to ease balancing challenges for the electricity grid,especially at peak times,helping to create a resilient and flexible energy system.Buildings which use less energy,especially at more expensive peak times,will have significant social benefits,lowering energy bills for households,improving living standards,and health and equality.The combination of needing to build a smaller clean power system and using less materials in construction will have lower negative impacts on planetary boundaries,including less demand for materials,minerals and land.Achieving the two pillars of building decarbonisation installing clean technologies and improving the energy productivity of buildings-poses some distinct implementation challenges not found in other sectors:In the decarbonisation of the power system,light and heavy industry,aviation,shipping and heavy trucking,almost all the investment decisions required to drive decarbonisation will be made by professional managers in businesses rather than by individual consumers.And while in some cases be a green cost premium to be faced(with for instance,a higher steel price per tonne and higher shipping freight rates)at the level of the products purchased by individual consumers,the cost impact is very small.In passenger road transport,individual consumers will need to make decisions about car purchases,but within a number of years EVs will be cheaper to buy upfront than internal combustion engine vehicles(ICEVs).22 Indeed in China that point has already been reached.In addition,comparing the cost and performance characteristics of EV and ICEs is relatively straightforward.21 ETC(2021),Making Clean Electrification Possible.22 BNEF(2024),Electric Vehicle Outlook 2024.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible28 However,in the residential building sector,individual households will need to decide between multiple possible clean technologies both“active”(e.g.,heating and cooling systems)and“passive”(e.g.,improved insulation)the installation of which will entail some disruption within their homes.And while clean heating technologies(in particular heat pumps)can deliver lower operating costs,installing them currently comes with higher upfront investment in most countries.But the availability and cost of finance varies greatly between low and high income households.More generally indeed,feasible and optimal solutions vary greatly by specific household circumstances,such as the availability of space and current quality of insulation.In the construction sector,building a low-embodied carbon building entails a complex array of decisions and trade-offs across different materials and decision-makers(e.g.,developers,suppliers,material produces,construction companies).Compared to the industry and transport sectors,where products are relatively standardised and mass-produced,there are limits to how far new developments,material and design choices can be standardised.The sector is typically highly fragmented(e.g.,high levels of sub-contracting),compared to other sectors with a relatively small number of large corporates operating in the space.The buildings energy transition therefore relies on action from a wide variety of actors,each of whom have very different incentives to change:Owner-occupiers and tenants will be motivated to improve comfort,while avoiding disruption and lowering costs to operate buildings.Homeowners and building owners will be motivated by reducing capital investment costs,lowering costs to maintain buildings and by improving the value of their assets.Net-zero commitments of financial institutions,developers and the private sector will create demand for new net-zero buildings and retrofit of existing buildings.Policymakers and lower-income households will be motivated by the need to improve wellbeing,health and productivity.This report sets out the actions required by government and the private sector to minimise the financial and distributional impacts on households,to ensure a fair and just transition,and to rapidly reduce emissions.Public policies must be designed to address these distinctive implementation challenges and distributional effects present in the buildings sector.Despite these challenges,the actions required to decarbonise the energy used in buildings will ultimately lead to improved outcomes for society,through lower and more stable energy bills,improved housing quality and living standards,and reduction in GHG emissions.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible29Section A:Decarbonising the energy used to operate buildings Total global energy use in buildings amounts to 37,000 TWh or 130 EJ today;this is around a third of total final energy consumption across the global economy.This comes from four key energy sources Exhibit 1.3:Direct use of fossil fuels account for almost 40%,providing 13,800 TWh in 2022.Within this,gas accounts for 60%,oil for 30%,and coal for almost 10%.Electricity use accounts for a further 35%(12,800 TWh),with three-quarters of this powering cooling,lighting and appliances.Today,only 15%of heating is electrified.The decarbonisation of the power sector will therefore drive the decarbonisation of a large share of building operational emissions.TUOB in cooking accounts for 20%of total energy use(7,000 TWh),primarily in lower income countries.The final 510%of energy provided is from renewables(e.g.,solar thermal water heating and geothermal)and district heating although it is important to note that 90%of district heating,which involves generating heat in a centralised location and then distributing it to individual buildings,is generated by fossil fuels.Decarbonising the energy used in buildings involves a mix of three key actions:1.The replacement of all technologies which currently combust fossil fuels in buildings.2.The rapid decarbonisation of power systems so that electricity used in homes is generated without carbon emissions.3.The greater adoption of efficient technologies,ranging from best in class appliances,to distributed generation such as rooftop solar and building fabric insulation.The specific mix of technologies needed will depend on how energy is currently used in buildings,with each use case having its own decarbonisation options that can be combined in various ways.Therefore,this section will examine each use of energy within buildings heating,cooling,cooking,appliances,and lighting outlining the decarbonisation options and considerations for each use case.In Chapters 26 we focus on these uses of energy in residential buildings,before turning to the specificity of commercial buildings in Chapter 7.Chapter 8 will bring the whole story on operational energy use together,discussing the system-wide implications of electrified buildings.Chapter 9 will then discuss the refrigerant leakage and venting challenge in both residential and commercial buildings.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible30HeatingKey messages Building heating can and should be almost entirely electrified,primarily with heat pumps,either in individual homes or within heat networks.In most circumstances,heat pumps can provide low-carbon heat at a total cost of ownership comparable,and in many cases lower,than fossil fuels.There is,however,no one-size-fits-all solution;a range of technologies will be used to solve the challenges of specific building types and climates.Hydrogen is not a viable alternative to replace gas heating at scale;it is much less efficient(e.g.,green hydrogen would require 56 times more electricity than heat pumps),would still require substantial retrofit to boilers and the gas network,and would not be scalable until the mid-2030s.A whole-building approach is required to create zero-carbon ready buildings.This involves consideration and optimisation across three types of technology:1)installation of clean heating technologies which can be powered by clean electricity,2)improvements to the building envelope and 3)consideration of a suite of smart and flexible technologies(e.g.,smart system,solar and batteries).Insulating the least efficient homes must be a government priority,and combined with heat electrification can lower energy bills and improve comfort levels.However,for the average home,deep retrofit is not a pre-requisite for installing a heat pump,as long as radiators and systems are appropriately sized.While not a pre-requisite for heat pumps,there is a suite of passive heating retrofits,many of which are relatively low-cost(e.g.,loft insulation and draught proofing)which can greatly improve living standards,reduce energy bills and ease peak energy demand.Deployment of heat pumps and improved insulation could halve 2050 final energy demand for residential heating compared to a BAU scenario that maintains existing fossil fuel use.This will enable the almost complete elimination of all fossil fuel use for residential building heating by 2050.However even in this case,electricity used to heat buildings could still grow from 2,600 TWh today to 4,0005,000 TWh in 2050.Without strong action on technical efficiency and insulation,it could be 10,000 TWh.Heating building space and water accounts for 45%of total energy use in buildings across the world,but for 80%of direct fossil fuel use,and thus for the vast majority of todays emissions which would not be eliminated by the decarbonisation of electricity supply alone.Decarbonising heating is therefore the most important challenge in the buildings sector.This chapter describes and assesses the technologies available to achieve decarbonisation and the implications within the residential sector.Chapter 7 considers the specific challenges related to commercial buildings.The sections below set out the analysis which supports these conclusions,covering in turn:1.The starting point:a large role for fossil fuels in residential heating,primarily in developed countries.2.Technologies available to solve the problem and relative costs:multiple variants of heat pumps as the primary solution.3.Passive heating:improved insulation in new and existing buildings.4.Combining different approaches in new and existing buildings:indicative overall mix.5.Implications for energy productivity,electricity and fossil fuel use.6.Actions required from government,business,and consumersThe implications of heating decarbonisation for peak electricity demand will then be explored in Chapter 8.2Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible312.1 The starting point:large-scale use of fossil fuels for heating primarily in northern latitude countriesHeating is the biggest buildings decarbonisation challenge,accounting for 45%of final energy use in buildings and 80%of direct fossil fuel use.Of the 11,000 TWh of fossil energy used directly to provide on-site heat,67%or 7,400 TWh is gas,27%or 2,900 TWh is oil,and the remaining amount is coal.Coal is also dominant in some district heating systems,particularly those in northern China.Fossil-based heating is concentrated in northern latitude countries with relatively cold winters Exhibit 2.1.Around 75%of total fossil fuel use for heating buildings,and over 60%of total gas use in buildings,is in the US and Canada,Europe and China.Russia and Iran are also major users of gas in buildings,accounting for 10%and 7%,respectively,of total gas use.There are an estimated 720 million gas and oil boilers supplying 10,400 TWh of energy for heating today,including 240 million gas boilers in the US and Canada,150 million in Russia and Iran,and 140 million across Europe.23 In addition,there is 600 TWh of coal heating existing buildings,predominately in China.23 Systemiq analysis for the ETC,based on average fuel use per household per year.Exhibit 2.1The pace of heating decarbonisation is predominately a question of how fast gas and oil use in Europe,North America and China can be electrifiedFossil fuel use in buildings by end-use and region,2022TWhNOTE:Heating includes both space and water heating.Other includes building cooling,lighting and appliances.Russia and Iran are included in Rest of World for oil and coal.SOURCE:Systemiq analysis for the ETC;IEA(2022),World Economic Outlook 2021;IEA(2023),World Economic Outlook 2022;IEA(2023),World Energy Balances dataset;IEA(2023),Energy Efficiency dataset;Tsinghua Building Energy Research Center(2018),Annual Report of Building Energy in China.Gas inbuildings8,7007,4004,4003,000700600Gas forheatingOil in buildingsOil forheatingCoal inbuildingsCoal forheatingOtherCookingHeatingEnd-useRest of WorldRussia and IranChinaNorth AmericaEuropeRegion85%is for heating65%is for heating85%is for heating5 %Total fossil fuel energy use for heating=11,000 TWhAchieving Zero-Carbon Buildings:Electric,Efficient and Flexible32Three-quarters of global heating energy is for space heating,and a quarter is used to heat water.24 This is despite space heating only being required in around 40%of households across the world.By contrast,water heating is required by all households for bathing and washing;however,energy needs are comparatively smaller and a large share of hot water needs in lower-income countries are unmet.The fuels used for water heating largely mirror those used for space heating,although with larger shares for electricity and for non-electric renewables(e.g.,solar thermal where the heat of the sun is used to direct heat water).Overtime,however,water heating may account for a rising share of residential building energy demand,as space heating is electrified using highly efficient heat pumps and as building insulation is improved.The direct and indirect use of fossil fuels to heat buildings produces about 4.1 GtCO2.To reduce and eventually eliminate these emissions,it is essential to replace the direct use of fossil fuels in buildings with clean heating technologies,primarily electric.Electrification must be combined with rapid decarbonisation of electricity generation,which is critical economy-wide and not just for residential heating.Alongside a focus on electrification,however,it is important to consider the full range of possible means to improve energy efficiency,and to focus on the role which electrified building demand will play within future zero carbon electricity systems.It is therefore important to simultaneously consider opportunities to Exhibit 2.2:Reduce household and commercial demand for heat consumption via building design and improved insulation sometimes called“passive heating”technologies.This will reduce the emissions from electricity during the transition to zero carbon electricity production,and reduce required electricity inputs in the long term.Section 2.3 assesses these options.Reduce electricity input from the grid,instead generating electricity at a building or community level,via the installation of rooftop solar PV.These opportunities are considered in Chapter 8.Reducing in particular energy requirements at peak times,which impose high costs if electricity is the energy source.This can be achieved either via the improved insulation actions discussed in Section 2.3,or via energy storage solutions at building level(whether in heat or electricity form),combined with smart systems.These opportunities are discussed in Chapter 8.24 IEA(2023),World Economic Outlook 2022.Exhibit 2.2The net-zero transition will require buildings to become lower-carbon,more efficient and more flexible in their energy consumption habitsLow-carbon buildingsFlexible buildingsEfficient buildingsClean heatingtechnologies 1.Technologies to reduce total energy consumption 2.Technologies to shift energyconsumption outside of peak times 3.Three sets of technologies are requiredResistive heating Solar thermal Low-carbon fuelsHeat pumps Passive heatingInsulation Rooftop solar PV*Smart systemsStationary batteriesWater tanksThermal batteriesNOTE:*Rooftop solar PV does not reduce overall energy consumption from buildings,but reduces imports from the grid.SOURCE:Systemiq analysis for the ETC.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible332.2 Clean heating technologies:efficiencies and costs Multiple technologies could be deployed to decarbonise building heating and different solutions will be most appropriate in different circumstances.But heat pump technology should play the dominant role given its inherent efficiency advantage,which enables it to provide low-carbon heat at a lower running cost than fossil fuels;concerns about the effectiveness of heat pumps are largely misplaced and technology improvement will make them even less valid.Heat networks,some of which will use heat pump technology,will often be cost effective in new builds.2.2.1 Alternative clean heating technologies There are four main types of potentially zero-carbon heating technology which could be used to provide space and/or water heating in residential and commercial buildings Exhibit 2.3:1.Electricity-based solutions via either:Electric heat pumps which use the same compression technology as air-conditioners but work in the reverse direction.As Exhibit 2.4 shows,there are several types of heat pump,and different variants will be most appropriate in different solutions.But their common and distinctive feature is that that they can deliver multiple kWh of heat for each kWh of electricity input.The actual size of this multiplier or“coefficient of performance“(COP)-varies by type of heat pump,but is already usually over 3(i.e.an efficiency rate of over 300%),and can reach 5 for ground source heat pumps.25 Annex 1 provides more details on heat pump technology.Electric resistive heating,which generates heat by passing an electric current through a resistor.The main technology for electric resistive space heating is the convection heater,while electric water heating can be delivered via immersion heaters(where a resistive heating element is placed in water in an insulated storage tank),or immediate heaters(where water is passed over a resistive heating element,which reaches higher temperatures but is less efficient).All applications are close to 100ficient in turning electrical energy into heat.2.Zero-carbon heat sources:Solar thermal systems use the radiated heat of the sun to directly heat water in panels,which is then stored in a hot water cylinder.They are used almost entirely for water rather than space heating but are an efficient and cost effective solution in locations with strong solar radiation.Geothermal heat can also be used a heat source for district heating.25 A heat pumps“coefficient of performance”is predominately determined by the temperature on a given day and so its efficiency is often quoted in terms of its“seasonal coefficient of performance,which measures the average efficiency of a heat pump over the winter months.Please refer to Annex 1 for more information.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible343.Low-carbon fuels used in boilers.Biomass boilers burning wood chips,which must be produced in a sustainable fashion in order to be genuinely low-carbon.These are bulkier than gas boilers,with space also required to store biomass.Burning biomass has adverse local air quality effects via particulate matter and nitrogen dioxide,and is therefore subject to increasingly tight regulation which will limit their application to particular locations.Bio-methane burnt in existing gas boilers and distributed via the existing gas grid.However,the widespread supply of sustainable biomethane is expected to be limited and limited to specific countries,such as Brazil.Hydrogen burnt in variants of gas boiler and also distributed via the existing gas grid.This has been proposed as a solution in a number of countries,but for reasons set out in Box B is unlikely to be an optimal solution in individual homes.It may,however,play a role in niche locations or district heating systems.As the ETC set out in our 2021 report,Bioresources within a Net-Zero Emissions Economy:Making a Sustainable Approach Possible,as a general principle,the worlds limited supply of sustainable bioresources should ideally be allocated to uses(e.g.,long distance aviation)where alternative decarbonisation options(e.g.,electrification)are not feasible.Building heating is not one of those priority applications.264.Secondary heat sources:District heating systems can also utilise existing heat sources,such as urban waste heat(e.g.,sewage water,data centres,metro systems),and industrial waste heat.26 ETC(2021),Bioresources within a net-zero emissions economy.Technologiesin individualbuildingsKey:Technologies&heat sourcesin heat networksExhibit 2.3There are four main groups of clean heating technologies;heat networks do these at scaleFull set of possible clean heating technologies:ElectricTechnologiesZero-carbonheat sourcesLow-carbonfuelsSecondary heatsources1234Relies on clean electricity generationEntirely renewableRelies on access to sustainable bio resourcesHydrogen must be“green”,produced with renewable electricityEntirely renewable;although in the long-term,also important that urban and industrial heat is produced using clean fuels SpaceheatingWaterheatingSpacecoolingSOURCE:Systemiq analysis for the ETC.Heat pumpsResistive heatingSolar thermalHydrogen boilerGeothermalSolar thermalHydrogenBiomethaneSustainablebiomass boilerNetworked ground sourceheat pumpsCentralised large-scaleheat pumpsRenewable energysources(e.g.,river and sea water)Urban and tertiarysector waste heat(e.g.,sewage water,data centre,transport)Industrial waste heatAchieving Zero-Carbon Buildings:Electric,Efficient and Flexible35Among these technologies,reversible heat pumps can be used to also provide cooling,but all the other technologies can only provide heating.The technologies also differ in relation to whether and how they can provide water heating Exhibit 2.3:Water-based heat pump systems(air-to-water,ground-to-water,and water-to-water)can provide water heating using water cylinders which impose space requirements Exhibit 2.11.The cost effective solution may often be to combine heat pump warming of water to a moderate temperature,with electric resistive heating to reach a high temperature for hot water needs.In comparison,air-to-air heat pumps cannot provide water heating and require an additional electric resistive water heater.Electric resistive heating can work either via an immersion heater inside a cylinder or via an immediate heater which requires much less space,with water heated by passing through a heat exchanger.The immersion heater/cylinder combination has the advantage that it can enable the use of off-peak electricity,reducing consumer costs and peak electricity requirements in the grid.These different technologies can either be deployed in individual homes or at centralised locations,with hot water then distributed to individual homes.This is known as a“heat network”,and ranges from community heating(e.g.,one block of flats or a street),to larger-scale district heating(e.g.,cities and towns)Exhibit 2.4.Heat networks are generally much more efficient than individual technologies,with the ability to reach much higher temperatures,utilise low-temperature heat from existing sources,and minimal losses through highly-insulated pipes.27Networked ground source heat pumps sit somewhere in the middle of this spectrum using shared ground arrays that gather low-temperature heat(e.g.,around 10C)from boreholes 150300m below the ground and feed it to individual heat pumps in homes,which then upgrade the heat to around 5060C Box C.27 Vattenfall,Benefits of Heat Networks,available at www.heat.vattenfall.co.uk/why-heat-networks/benefits-of-heat-networks/.Accessed 15/10/2024.Achieving Zero-Carbon Buildings:Electric,Efficient and Flexible36What is the scale of heating solution?Exhibit 2.4Heat pumps are not just one technology they can be deployed at different scales and there are different types depending on the heat source/sink combination Individual home Heat networks Community heating:block of flats or a few streets(e.g.,50500 households)District heating:larger districts,towns and even small cities(e.g.,500100,000 households)1Which heat pump technology(source/sink combination)best suits building and household needs?Key heat pump technologies3How distributed is the heat exchange?Fully Distributed:Individual home solution Heat network 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