By: Edward Perry, Sean McLoughlin, Ashim Paun and Lucy Acton
Equities
Global
June 2020 www.research.hsbc.com
Building Technology New era, new opportunities COVID-19 may change how we interact with buildings, bringing attractive mid-term opportunities in new technologies
In the near term, historical perception is that the construction aftermarket offers support in a downturn. Q2 will likely bring a different reality
We adjust forecasts and TPs. Maintain Buy on Schneider and Hold on Assa Abloy, Legrand, KONE; downgrade Schindler to Hold from Buy and dormakaba to Reduce from Hold
Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it.
HSBC Building Technology coverage
40% Of global energy is consumed by buildings
30% Of energy used in buildings is wasted due to inefficient management systems
125bps HSBC estimates that smart buildings contributed 125bps to building tech top-line growth in 2019
Source: HSBC research
Elevator manufacturers: • KONE • Schindler • Otis • Canny Elevator • SMEIC System integrators (building automation software): • Siemens • Schneider • Honeywell • Johnson Controls • United Technologies • ABB Specialty chemicals (products for bonding, sealing, reinforcing and protecting): • Sika Low-voltage equipment (circuit breakers, sockets, switches): • Legrand • Eaton Construction and engineering software: • Dassault Systèmes Access Solutions (doors, locks, turnstiles): • Assa Abloy • dormakaba
Contents
Executive Summary 3 New era, new opportunities 3 New era, new opportunities 5 How might the pandemic shape the future Smart Building? 5 Underlying construction markets 7 Investment theses 8 Smart Buildings 10 Smart Buildings and COVID-19 10 The role of elevators in a COVID-19 world 14 Global construction markets 15 Europe 15 North America 16 China 18 Rest of the World 19 Company exposures 19 Company sections 21 Estimate changes 21 Scenario Analysis 24 Q2 2020 estimates 26 Valuation and risks 27 Disclosure appendix 35 Disclaimer 40
Executive Summary
New era, new opportunities
We spend 90% of our lives in buildings and the pandemic may well change the way that we interact with these spaces. As the dust settles, we anticipate a continued focus on technology for Smart Buildings, ranging from elevator route controls to more efficient energy management systems. In the near term, smarter building technology may actually help enable a safe return to work. In the mid-term, the focus on emissions remains a key driver, with buildings accounting for c40% of global energy demand. Here, the EU’s sustainable recovery package could provide a further catalyst. Perception vs. reality. Historical perception is that the construction aftermarket provides support in times of softer demand. In our view, Q2 will bring a different reality, as restrictions on activity constrain new construction, as well as replacement. Through 2020 we see the greatest impact in the residential end-market, while infrastructure should prove more robust. Important geographical distinctions are also evident, with a construction recovery well under way across China, while divergence has emerged between a weaker Southern Europe and a more resilient North. Schneider Electric’s Buildings business will come under near-term pressure, and we are cautious ahead of challenging Q2 numbers, yet highly attractive mid-term opportunities remain in Smart Building technologies, Industrial Automation and Data Centre. We see further room for a multiple re-rating against a backdrop of consistent improvement in FCF conversion and operational outperformance in comparison to peers. Schindler has so far significantly outperformed the sector since the start of the sell-off, which we consider a justifiable function of a strong balance sheet, high exposure to strength in China, and a regulation-driven maintenance business. That said, we downgrade the stock to Hold from Buy, as anticipated future underperformance in China vs. KONE and CHF headwinds no longer leave us meaningfully above consensus. We also downgrade dormakaba to Reduce from Hold, as c13% cuts to earnings against a backdrop of exceptionally challenging construction markets, a project- heavy mix, execution risk and CHF headwinds now leave us 5/7% below 2020/21e consensus. We make limited earnings changes in this report. On average, we expect organic revenue declines of -20% in Q2 and -7% in 2020. We do not see a return to 2019 earnings levels until 2022. We include Bull & Bear scenario analysis for each company, which imply a range of +/- c10-15% around base case valuations.
Summary of changes to target prices and ratings Company Tickers Price CMP
Rating
_ Target price
Upside/Downside
2020e
Old New Old New P/E EV/EBITDA
Assa Abloy ASSAB SS SEK
193.0 Hold
Hold
195
190
-2% 27.6
14.2
dormakaba DOKA SW CHF
551.5 Hold
Reduce
555
480
-13% 23.4
12.9
KONE KNEBV FH EUR
61.6 Hold
Hold
48
57
-7% 35.1
22.6
Legrand LR FP EUR
64.3 Hold
Hold
65
63
-2.0% 23.4
14.3
Schindler SCHN SW CHF
225.0 Buy
Hold
235
235
4.4% 31.9
19.5
Schneider SU FP EUR
94.9 Buy
Buy
95
110
15.9% 24.4
15.5
Source: Refinitiv Datastream, HSBC, Priced as of 18 June 2020
Building Technology peer group Company Sector Tickers Mcap
Curr
Rating
Price TP Up/
S
ROIC ROE Sales
CAGR
EPS CAGR
Source: Refinitiv Datastream, HSBC, Priced as of 18 June 2020
Equities ● Global June 2020 4
USDm
Downside
FY2020e
FY2020e
FY2020e
FY2020e
FY2020e
FY2020e
FY2020e
FY2020e
FY2020e
FY2020e
2018-
2020e
2018-
2020e
Assa Abloy
Access Control
ASSAB SS
21,628
SEK
Hold
193.0
190.0
-1.5%
2.5
14.2
16.3
27.6
1.8%
4.2%
15.6%
1.9
10.2%
12.8%
3.8%
-9.8%
Dormakaba
Access Control
DOKA SW
2,404
CHF
Reduce
551.5
480.0
-13.0%
1.8
12.9
16.0
23.4
2.1%
4.4%
11.5%
1.7
21.0%
45.2%
-5.1%
-10.7%
Allegion plc
Access Control
ALLE US
9,282
USD
N/A
103.0
N/A
N/A
3.3
17.3
14.7
25.0
1.0%
4.2%
19.0%
1.5
N/A
45.5%
-1.6%
-4.3%
Geberit
Building Products
GEBN SW
17,965
CHF
Hold
473.2
445
-6.0%
7.1
25.2
31.0
34.4
1.7%
3.0%
22.9%
0.6
18.9%
26.4%
-10.5%
-10.4%
Kingspan
Building Products
KSP ID
11,556
EUR
Buy
56.8
55.0
-3.2%
2.5
19.5
25.5
31.8
0.8%
2.4%
9.6%
0.9
11.0%
14.8%
0.1%
-1.0%
Sika
Building Products
SIKA SW
27,465
CHF
Buy
184.3
181.0
-1.8%
3.9
22.7
30.5
41.8
1.2%
3.8%
12.7%
2.2
10.3%
19.9%
2.9%
-0.1%
KONE
Elevators
KNEBV FH
33,209
EUR
Hold
61.7
57.0
-7.6%
2.9
22.6
25.4
35.1
2.0%
2.9%
11.3%
NA
46.0%
28.7%
3.3%
1.8%
Otis
Elevators
OTIS US
23,421
USD
N/A
57.5
N/A
N/A
2.4
17.2
15.9
27.7
1.4%
NA
14.0%
2.5
N/A
NM
N/A
N/A
Schindler
Elevators
SCHN SW
15,796
CHF
Hold
225.0
235.0
4.4%
2.1
19.4
23.2
31.9
1.1%
3.7%
9.0%
NA
37.3%
19.6%
-2.5%
-18.4%
Belimo
HVAC
BEAN SW
4,629
CHF
N/A
7030.0
N/A
N/A
3.2
18.5
14.8
44.0
1.9%
NA
17.5%
-1.0
N/A
20.9%
4.4%
6.8%
Legrand
LV Equipment
LR FP
19,279
EUR
Hold
64.3
63.0
-2.0%
3.1
14.3
18.4
23.4
1.7%
4.2%
17.0%
1.6
8.7%
14.1%
1.1%
-6.3%
Eaton
LV Equipment
ETN US
35,012
USD
Hold
87.5
77.0
-12.0%
2.1
12.0
16.8
19.2
3.3%
7.6%
12.8%
1.5
8.6%
11.7%
-7.0%
-4.3%
Schneider
LV Equipment/Diversified
SU FP
61,973
EUR
Buy
94.9
110.0
15.9%
2.5
15.5
20.8
24.4
2.3%
4.5%
11.8%
1.2
7.4%
9.9%
-2.3%
-7.2%
Average
3.0
17.2
20.0
30.0
1.7%
4.1%
14.2%
1.3
17.9%
22.5%
-1.1%
-5.3%
EV/
EV/
EV/
P/E
Div yield FCF yield
EBIT
Net debt/
ales
EBITDA EBIT margin EBITDA
New era, new opportunities
COVID-19 may alter how we interact with buildings. In the mid-term, we see attractive opportunities in more sustainable technologies Diverging trends are emerging across construction markets; distinctions must be made by end-market and geography Schneider Electric remains our preferred play on the Smart Building theme. We downgrade Schindler to Hold from Buy and dormakaba to Reduce from Hold
How might the pandemic shape the future Smart Building?
We spend 90% of our lives in buildings
Smart Buildings use a network of connected devices to improve the functions of a building We spend 90% of our lives in buildings and the pandemic may well change the way in which we interact with these spaces. As the dust settles, we anticipate a continued focus on technology for Smart Buildings, ranging from elevator route controls to more efficient energy management systems. In the near term, smarter building technology may actually help enable a safe return to work. In the mid-term, the focus on emissions remains a key driver, with buildings accounting for c40% of global energy demand. Here, the EU’s sustainable recovery package could provide a further catalyst, adding further impetus to the Green Deal and focus on energy efficient renovation.
Smart Buildings use a network of connected devices to improve the way a building works, often lowering energy consumption and enhancing the internal environment. In 2019 we estimated that incremental investment in Smart Building technology contributed an additional 125bps to organic top-line growth for the relevant companies in our coverage. In many cases, such as for Schneider Electric, we believe that this contribution was a key factor in driving growth above market expectations. We also noted how rapid growth in investment in Smart Buildings is now starting to drive M&A across the value chain, as evidenced by Schneider Electric’s recent acquisition of RIB Software. In terms of the transition to Smart Buildings, we see a delay to investment in light of COVID-19, yet no break in the broader trend. The greater adoption of Smart Buildings has so far seen strong growth in verticals such as hospitals, pharma and banking, with interest also growing in Buildings represent 40% of global energy demand, and 30% of energy used in buildings is wasted due to inefficient management systems Schneider Electric
Level of digitalisation by industry; significant room for growth in building automation
Source: ABB
residential. Offices may see more fundamental change going forward, as working from home, at least on a part-time basis, is likely to become even more of a reality in a post-COVID-19 world. However, this was already the direction of travel. In the decade to 2018, the share of home workers rose from roughly 10% to more than 20% in many developed markets. In the past couple of months, this has likely risen to more than 45% (see Leaving the city, 28 May 2020).
Time spent at workplaces is down substantially
Latest
% change from baseline (7dma)
22 Mar 29 Mar 5 Apr 12 Apr 19 Apr 26 Apr 3 May 10 May 17 May 24 May 31 May (7 Jun)
Germany
-30
-41 -40
-46
-44
-31
-36
-22
-20
-32
-16
-26
France
-59
-69
-68
-66
-66
-61
-61
-56
-37
-41
-28
-27
Italy
-62
-68
-68
-66
-66
-61
-59
-42
-38
-31
-27
-33
Spain
-62
-66 -72
-75
-67
-64
-63
-55
-49
-42
-35
-32
Portugal
-52
-60 -61
-65
-60
-56
-56
-46 -41
-35
-30
-26
Greece
-45
-60
-56
-52
-58
-54
-48
-33
-26
-19
-12
-9
Ireland
-50
-54
-65
-66
-65
-60
-58
-59
-54
-48
-43
-46
United Kingdom
-23
-59
-65
-68
-66
-61
-60
-61
-55
-53
-52
-47
Switzerland
-39
-47 -47
-51
-49
-40
-39
-31
-23
-34
-18
-25
Poland
-36
-40
-41
-47
-45
-33
-40
-26
-23
-20
-16
-12
Norway
-46
-47
-45
-60
-44
-35
-38
-28
-22
-32
-18
-25
Sweden
-21
-25
-26
-40
-33
-22
-30
-20 -19
-31
-14
-17
Key: Amount of time spent vs baseline levels
Low
High
Source: Google LLC "Google COVID-19 Community Mobility Reports".
We therefore anticipate pressure on the construction of new buildings in developed market cities over the coming years, yet we do not expect urbanisation to reverse. Cities, after all, are not just about jobs and provide many things that are crucial to our quality of life. In fact, we believe building owners in developed markets may need to spend more on technology to improve the user experience within existing buildings, in order to attract and retain tenants. In emerging markets, particularly China and SE Asia, we expect the adoption of new technologies and Smart Buildings to continue at a strong pace, in conjunction with steady rates of urbanisation.
Underlying construction markets
The Chinese construction market and regulation-driven elevator maintenance should prove more robust
Northern Europe has proven more resilient than the South Historical perception is that the construction aftermarket provides support in times of softer demand. In our view, Q2 will likely bring a different reality, as restrictions on global activity constrain both new construction and replacement. Any short-term positives are most likely to be found in the recovering Chinese construction market, predominantly regulation-driven elevator maintenance, and the DIY channel market. The latter, for example, was a key reason for Stanley Black & Decker’s recent upward revision of Q2 revenue guidance. Looking further forward through 2020 as a whole, we see the greatest disruption to the residential end-market, while infrastructure may prove more robust. Within the commercial market, we anticipate a wide divergence across verticals; healthcare should hold strong, while hotels, leisure and retail will likely see more sustained pressure, which could continue for 2-3 years. A geographical distinction should also be made. A construction recovery is well under way across China, yet a greater divergence has emerged between a weaker Southern Europe and a more resilient North. We make limited earnings changes in this report. On average we expect organic revenue declines of -20% in Q2 and -7% in 2020. We do not see a return to 2019 earnings levels until 2022. We include Bull & Bear scenario analysis for each company.
Forecast group organic sales to decline in 2020e
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%
-10%
Assa Abloy Legrand Schneider dormakaba Schindler KONE 2020 Organic sales decline
Source: Company Data, HSBC
Note: For dormakaba, we show calendar year estimates to ensure comparability
Forecast group EBIT margin decline in 2020e
0
-50
-100
-150
-200
-250
-300
Assa Abloy Schneider
Legrand Schindler dormakaba KONE 2020 change in EBIT margin (in bps)
Source: Company Data, HSBC
Note: For dormakaba, we show calendar year estimates to ensure comparability
Investment theses
We are concerned that Assa’s revenue mix is more cyclical today than it was in 2009
We are 5/7% below dormakaba 2020/21e consensus EBITDA
KONE is set to benefit most from a rebound in Chinese construction (c30% of sales) Assa Abloy (ASSAB SS, Hold, TP SEK190 from SEK195): We trim our estimates and now expect an FY20 organic revenue decline of 8.8% and margin contraction of 250bps y-o-y. Construction markets are not immune to this crisis, and the historically stable renovation business (67% of group revenues) will likely come under similar pressure to new equipment in a world of limited activity. We also note that Assa is more cyclical today than it was in 2009 due to more industrial exposure within Entrance Systems, a larger metal doors business, and the residential digital door locks business. Following a challenging Q1 2020, we therefore anticipate an even more painful Q2 (-22.5% organic sales decline, 590bps of margin decline). In the mid- term we are more positive, and believe Assa can benefit from an estimated c1% incremental growth from greater investment in Smart Buildings, namely through digital door locks and the HID (Hughes Identification Devices) business (see Spotlight: Smart Buildings, 11 March 2020). We are broadly in line with 2020-21e consensus earnings and with the valuation stretched in the face of the cyclical risks that lie ahead, we maintain our Hold rating on the stock. On our latest estimates, Assa is trading on 2020/21e PE multiples of 28x/21x. dormakaba (DOKA SW, downgrade to Reduce from Hold, TP CHF480 from CHF555): We see an increasing disconnect between the company’s prospects and valuation, with consensus not yet fully reflecting the challenges of 2020, in our view. In a similar way to close peer Assa Abloy, we expect dormakaba to come under significant near-term pressure, with both new construction and renovation projects heavily disrupted. The last two years have already seen dormakaba suffer from a string of execution issues, leading to cost headwinds and margin compression. Against a backdrop of exceptionally challenging end-markets, execution problems are at risk of being magnified. Fundamentally, dormakaba has a strong product and will also benefit in the mid-term from the greater adoption of Smart Building technologies. However, the shares have, in our view, wrongfully outperformed the sector since the start of the sell-off on 18 February while our latest estimates, which reflect material disruption in 2020 and significant FX headwinds, are 5/7% below 2020/21e consensus earnings. On our latest estimates, which include an FY20 organic revenue decline of 6.7% and EBITDA margin contraction of 170bps, dormakaba is trading on 2020/21e PE multiples of 23x/21x. KONE (KNEBV FH, Hold, TP EUR57 from TP EUR48) Our base case now assumes a FY20e 3.5% organic revenue decline and an 11.7% adj. EBIT margin (-70bps y-o-y). This sits slightly above the mid-point of KONE management’s own scenarios, which range from stable organic FY sales (best case) to a 10% organic revenue decline (worst case). Our base case assumptions are: a solid recovery in China from Q2 and in H2, with a more gradual ‘U-shaped’ recovery in the rest of the world. KONE is most exposed to potential upside in China (30% of group revenues) where construction activity has promptly resumed, particularly in infrastructure, which has picked up rapidly since March. On the important residential side of the Chinese market, we believe that KONE’s strong relationship with the large, consolidating property developers will allow the company to continue to outperform underlying growth trends. On our latest estimates, KONE is trading on 2020e/21e EV/EBIT multiples of 24x/20x. While we like the underlying quality of KONE’s business, we are cautious on valuation, which in our view remains stretched at this point and we therefore rate the stock Hold. Legrand (LR FP, Hold, TP EUR63 from EUR65) We cut our estimates and now expect a FY20 organic revenue decline of 8.3% and a margin contraction of 150bps. The short-term outlook for Legrand is set to be particularly weak, as Italy is an important market (c9% of group sales) with high margins, while India is also important. Just as it is the case for Assa, renovation markets (48% of group revenues) – which have traditionally provided support in a downturn – may well also come under as much pressure as
Schindler’s large maintenance business should provide earnings support through the crisis
Secular trends remain in place for Schneider across Smart Buildings, Industrial Automation and Data Centre
new equipment throughout this crisis. In general, the long-term growth outlook for the group is unspectacular, yet solid, driven by meaningful exposure (28% of sales) to two of the most exciting themes in the industrial space: Smart Buildings and the data revolution. The company has a strong historical precedent of maintaining pricing power and margins in a downturn, yet we maintain our Hold rating on the stock due to near-term pressures and our view that through- cycle growth will be lower than peers Assa Abloy and Schneider Electric. On our new estimates, the stock is trading on a 2020/21e PE multiples of 23x/21x. Schindler (SCHN SW, downgrade to Hold from Buy, unch. TP CHF235) Schindler, like KONE, has so far significantly outperformed the sector since the start of the sell- off, which we consider a justifiable function of a strong balance sheet, high exposure to strength in China, and a regulation-driven maintenance business (see Global Elevator OEMs, Schindler & KONE: How to justify the premium, 02 April 2020). That said, in this note we downgrade the stock to Hold from Buy as anticipated future underperformance in China vs. KONE and CHF headwinds no longer leave us meaningfully above consensus estimates. In China, Schindler has performed well, and the company’s relative overweight in the infrastructure segment should indeed stand the business in good stead. That said, KONE continues to outperform Schindler in the important residential market (c70% of total market value) and we believe this will continue going forward, due to the Finnish market-leader’s strong relationships with the large Chinese property developers. On the more positive side, we continue to see strong near-term earnings support from Schindler’s large and highly-defensive maintenance business, an attractive mid-term opportunity in digital through Schindler Ahead, as well asbalance sheet strength. On our estimates, the stock is trading on 2020/21e EV/EBIT multiples of 22.8x/17.0x. Schneider (SU FP, Buy, TP EUR110 from EUR95) Our base case now assumes a FY20 organic revenue decline of 8.1% and margin contraction of 170bps. In spite of this, we retain our positive investment case, based on Schneider Electric’s strong mid-term growth and margin prospects, driven by three key areas: Smart Buildings, Industrial Automation and Data Centre (see Seeking cloud cover, 15 May 2020). Both Data Centre (driven by the ‘stay at home’ economy) and exposure to strong Chinese construction markets should provide relative support in the near term, while the outlook for Oil & Gas (7-8% group revenue) and India (c5% of sales) is particularly weak. We are encouraged that Schneider’s revenue mix is less cyclical today than in 2008, most notably including an exposure to Software & Services that is now twice as large (16% of sales). The company has an impressive pedigree of maintaining pricing power and FCF in downturns, and boasts a strong balance sheet and liquidity position. On our estimates, which are 5% ahead of consensus on 2020e earnings, Schneider is trading on 2020/21e PE multiples of 24x/20x. We see room for the company to ultimately re-rate toward the more premium names in the sector at +20x, a reflection of the company’s transition to a higher quality status (most aptly demonstrated through improved FCF conversion) as well as its mid-term growth and margin prospects relative to peers.
Smart Buildings
A focus on Smart Buildings is likely to continue as the world starts to emerge from severe lockdowns The EU’s sustainable recovery package and Green Deal could provide a further catalyst to energy efficient renovation Schneider Electric remains our preferred play on the theme
Smart Buildings and COVID-19
Smart Buildings may help enable a safe return to work We spend 90% of our lives in buildings and the pandemic may well change the way in which we interact with these spaces. As the dust settles, we anticipate a continued focus on technology for Smart Buildings, ranging from elevator route controls to more efficient energy management systems. In the near term, smarter building technology may actually help enable a safe return to work. In the mid-term, the focus on emissions remains a key driver, with buildings accounting for c40% of global energy demand. Here, the EU’s sustainable recovery package could provide a further catalyst, adding further impetus to the Green Deal and focus on energy efficient renovation. In terms of a broader transition to Smart Buildings, we see a delay to investment in light of COVID- 19, yet no break in the broader trend. As outlined in greater detail within our recent thematic (see Further investment to drive organic growth and M&A, 11 March 2020), we consider the transition to Smart Buildings to be a function of (1) improved returns on investment in automation platforms; (2) an increased focus on sustainability; and (3) a greater focus on user experience.
Level of digitalisation by industry; significant room for growth in building automation
Source: ABB
Smart Buildings use a network of connected devices to improve the way a building works, often lowering energy consumption and enhancing the internal environment. In 2019 we estimated that incremental investment in Smart Building technology contributed an additional 125bps to
organic top-line growth for the relevant companies in our coverage. In many cases, such as for Schneider Electric, we believe that this contribution was a key factor in driving growth above market expectations. We also noted how rapid growth in investment in Smart Buildings is now starting to drive M&A across the value chain, as evidenced by Schneider Electric’s recent acquisition of RIB Software.
Smart Building solutions Companies Smart Building solutions
Assa Abloy Provides electromechanical locking solutions, digital door locks and products for access control. The company also provides solutions for identification management and entrance automation
dormakaba Access control and data collection solutions for residential and commercial use. The company also provides entrance system solutions to manage people flow within buildings
KONE 24/7 Connected Services is KONE’s IoT offering, which uses IBM Watson"s platform to connect elevators and escalators. The company provides People Flow solutions, which helps security and access control in buildings
Legrand Legrand"s flagship Eliot program provides connected IoT products
Schindler The Schindler Ahead platform helps analyze cloud-based data to deliver improved equipment uptime, maintenance insights and convenience. Elevators are equipped with PORT Technology that manages passenger traffic and provides personalized access.
Schneider Provides connected products and Ecostruxure, which is the central intelligence system for a smart building.
EcoStruxure Building offers innovative solutions to reduce energy costs, improve efficiency, meet sustainability goals and boost building value
Source: Company data, HSBC
Smart Building adoption is typically through renovation, rather than new construction
Buildings account for c40% of global emissions 1) Improved returns on investment in automation platforms Regarding this first driver, improved functionality from digitalisation and the IoT, combined with lower cloud computing system costs, have improved the return on investment in Smart Building platforms. The adoption of Smart Building systems is typically through renovation, rather than new construction demand, made easier today through wireless systems.
IoT-based systems to significantly improve ROIs Basic building management system IoT-based energy management system
Average installation cost (per sq ft)
USD
2.50
USD
0.75
Installation cost for a 50,000 sf building
USD
125,000.00
USD
37,500.00
Average annual energy bill (per sq ft)
USD
2.32
USD
2.32
Average annual energy bill
USD
116,000.00
USD
116,000.00
Energy savings
20%
25%
Average annual energy savings
USD
23,200.00
USD
29,000.00
Payback period (years) 5.4 1.3
Source: IBM, National Institute of Building Sciences, Siemens, HSBC estimates
2) An increased focus on sustainability In terms of the environmental focus, buildings account for c40% of global emissions and a greater focus on sustainability has led to a trend for smarter, greener buildings, which we believe will ultimately be supported by regulation. The EU’s ambitious European Green Deal provides a strong signal, which includes mobilising EUR25-30bn of investment, in part focused on the renovation of buildings.
Buildings represent 40% of global energy demand, and 30% of energy used in buildings is wasted due to inefficient management systems Schneider Electric
Green Deal important to COVID-19 recovery
75% of current building stock in the EU is energy inefficient
Plans to at least double the current building renovation rate in a Renovation Wave
We expect COVID-19 to accelerate the trend of working from home
Buildings: a key role to play in Europe’s climate ambition and recovery At the end of May, the European Commission (EC) set out its proposal for a coronavirus recovery plan. The plan will “ensure the recovery is sustainable, even, inclusive and fair for all Member States”. The recovery instrument, to be called “Next Generation EU”, is funding worth EUR750bn, and will run alongside the EU’s reinforced long-term budget for the years 2021- 2027. We believe the proposed coronavirus recovery proposal adds yet further impetus to Europe’s previously announced Green Deal, the first detailed plans of which were introduced in March 2020. The Green Deal forms part of the bloc’s overarching plan to become the first climate neutral continent by 2050, European Green Deal, 12 December 2019.
In Smart Buildings, 11 March 2020, we explained that the buildings sector is likely to feature heavily in the detailed framework for the Green Deal, particularly given that buildings account for an estimated 40% of energy consumed in the EU. The Commission estimates that roughly 75% of building stock in the bloc is inefficient, but 80% of today’s buildings will be in use in 2050, therefore putting policy emphasis on renovation and retrofitting of current building stock. The EC’s initial outline of the Deal suggested that the annual renovation rate of the continent’s building stock (public and private) would need to nearly double (current rates are estimated at approximately 1%) in order to achieve overarching energy efficiency and climate targets. In our view, major opportunities for efficiency gains in buildings exist in the following areas: 1. The building envelope (façade, roof, insulation and glass) 2. Heating equipment (condensing boilers, air-to air heat pumps, ground-sourced heat pumps) 3. Cooling equipment (including air conditioning) 4. Appliances (refrigerators/freezers, washing machines, dishwashers, tumble driers). The coronavirus recovery proposal document talks of a “Renovation Wave” across the bloc. Via financial and legislative support, the EU is hoping to at least double the current annual building renovation rate of existing building stock, thereby improving energy efficiencies, addressing a significant emitting sector in the bloc and also creating jobs in construction and renovation. Social housing and public buildings (schools and hospitals) are likely to be prioritised for renovation, helping to bring down energy bills for the poorest in society. There will be a public consultation held on the Renovation Wave towards the end of June 2020, where we expect to see more detail on the initiative, before adoption, which is planned for Q3 2020. We also note that investment in clean hydrogen is a key pillar of the Green Deal. We expect that hydrogen will become a useful source of clean power in buildings going forwards, as written about in Global Hydrogen, 4 February 2020.
3) User experience The last of our three core drives of Smart Buildings is user comfort. The greater adoption of Smart Buildings has so far seen strong growth in verticals such as hospitals, pharma and banking, with interest also growing in residential. Offices may see more fundamental change going forward, as working from home, at least on a part-time basis, is likely to become even more of a reality in a post- COVID-19 world. However, this was already the direction of travel. In the decade to 2018, the share Building renovation is therefore central to the post-COVID 19 economy recovery The European Commission on the “Renovation Wave”
Smart Buildings can facilitate more flexible working schedules
of home workers rose from roughly 10% to more than 20% in many developed markets. In the past couple of months, this has likely risen to more than 45% (see Leaving the city, 28 May 2020). We therefore anticipate pressure on the construction of new buildings in developed market cities over the coming years, yet we do not expect urbanisation to reverse. In fact, we also expect building owne...