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Trends and prospects
What are the current trends in and future prospects for the real estate market (both commercial and residential) in your jurisdiction?
The German real estate market differs from other major European markets as it does not have one predominant local market and is characterised by the federal and economically decentralised organisation of the country. Germany’s key economic centres and real estate markets are Berlin, Cologne, Dusseldorf, Frankfurt am Main, Hamburg, Munich and Stuttgart, together with their metropolitan areas. These seven so-called ‘A cities’ are of equal significance and continue to be the focus of the national and international real estate industry. In addition, there are a number of larger cities with between 250,000 and 650,000 inhabitants, which are of supra-regional importance and which used to receive less focus from international investors but have become more attractive lately as real estate prices have risen greatly in the A cities. These B cities include Bremen, Dortmund, Dresden, Essen, Hanover, Leipzig, Mainz, Nuremberg, and Wiesbaden.
Classic university towns such as Bonn, Freiburg im Breisgau, Heidelberg and Muenster are equally attractive. Moreover, due to high prices and low interest rates on loans, smaller provincial towns, especially in western Germany, have become increasingly appealing in recent years.
Due to an ongoing acute housing shortage in large cities and university towns, residential property has been the focus of attention in recent years. Since the investment market in the residential sector is now extremely selected, the focus is on residential project developments as well as properties such as hotels, student apartments and nursing homes.
In addition, after several years of stagnation, the construction of new offices in A and B cities has resumed in recent years. A certain sideways movement is also likely in logistics real estate. Due to the low interest rates, such investment is increasingly targeting properties such as data centres and healthcare facilities.
Provided that bank interest rates remain low, the fundamental situation is unlikely to change much. However, there are strong political efforts to counteract a further sharp increase in rent prices. Housing rental law is heavily regulated in Germany, and this trend is likely to intensify in the coming years, further increasing the risks for investors.
Rights and registration
What types of holding right over real estate are acknowledged by law in your jurisdiction?
German law recognises:
- land ownership;
- heritable building rights;
- condominium ownership;
- partial ownership (legally identical to condominium ownership but reserved to non-residential use);
- heritable condominium building rights;
- heritable partial ownership; and
- ideal co-ownership by fractions.
Are rights to land and buildings on the land legally separable?
No. Rights to land and buildings on the land are not legally separable, except in relation to heritable building rights and structures connected to the ground for a temporary purpose only (eg, wind turbines).
Which parties may hold and exercise rights over real estate? Are there restrictions on foreign ownership of property?
Any natural and legal person may hold real estate. There are no special restrictions on foreign ownership; however, for reasons of legal practicality, foreign entities should not acquire land with an unusual legal form (ie, a legal form which has no equivalent under German law).
How are rights, encumbrances and other interests over real estate prioritised?
Rights to land (eg, easements, limited personal servitudes and liens such as land charges, mortgages and real charges) must be entered in the land register. The date of entry and the order of entry in the corresponding section of the land register generally determine their rank.
Must real estate rights, interests and transactions be registered in your jurisdiction? What are the legal effects of registration?
In general, any change to a right in a property will become effective only after its registration in the land register.
What are the procedural and documentary requirements for entry into the national real estate register(s)? Can registration be completed electronically?
There is no central land registry for the whole of Germany. Rather, the land registers in most federal states are kept by the local courts for their respective district. All entries and legal changes regarding property rights must be applied for with notarised deeds or documents certified by a notary public. Registration cannot be executed electronically.
The importance of notaries’ offices in Germany differs considerably from the position of notaries in the legal systems of many other countries. German notaries must be strictly neutral towards the respective contracting parties (eg, the notarisation of a contract must not be executed by the same law firm that represents one of the parties to the contract). German law assigns key tasks in the administration of justice to notaries. Therefore, notaries are lawyers with additional notary training. In some federal states, only the top 3% to 10% of graduates are admitted to the notary's office.
What information is recorded in the national real estate register(s) and to what extent is such information publicly available?
The land register provides information about, and the respective entry is constitutive for, the rights to:
- ownership (entered in Section 1 of the land register);
- easements or servitudes, preliminary reservations and priority rights (Section 2); and
- real estate liens, such as mortgages and land charges (Section 3).
Information on the land register is available only to persons with a legitimate interest (eg, a neighbour) or to those with an enforceable title against the owner. A potential buyer will need the written consent of the seller to inspect the land register.
Is there a state guarantee of title?
There is no state guarantee for the accuracy of entries in the land register. However, the register enjoys so-called ‘public faith’. This means, for example, that the buyer of a plot can rely on the fact that the person registered as the owner in the land register is entitled to sell and transfer ownership of the plot.
The acquisition of land is also effective if the person registered as the owner in the land register is objectively not entitled to the disposition (eg, because the land register has become incorrect due to an error or a change in law outside the register, and the buyer is not aware of this mistake). The accuracy of entries in the land register is construed in favour of the bona fide acquirer.
Sale and purchase
How are real estate brokers regulated in your jurisdiction (eg, through caps on commission or disclosure obligations)?
A simple registration at the competent trade agency is all that is required. There is no legal obligation to perform audits or similar tasks. A certain quality control is carried out by professional associations, such as the German Real Estate Association, but this is not comparable to institutions such as the Royal Institute of Chartered Surveyors. Maximum commissions and other regulations apply in relation to consumers only.
What due diligence should be conducted before conclusion of a real estate sale contract?
Depending on the volume and complexity of the transaction, comprehensive legal, tax, technical or structural, environmental, financial and commercial due diligence should be conducted and will be expected.
Are any preliminary agreements typically entered into before conclusion of a sale contract?
No. However, in commercial transactions, letters of intent (LOIs) are usually signed before entering into the due diligence phase of a transaction. Because any land transaction without notarisation will be void, LOIs have moral, rather than legal, significance. Infringement (eg, of an exclusivity agreement) will lead to claims for damages in rare cases only. Nonetheless, there is a likelihood that the low reliability of a party will spread word for larger projects in the market and make future activities of the party in breach of a LOI more difficult.
Non-disclosure agreements are common in the run-up to commercial transactions.
Must sale contracts be concluded in writing? If so, must they be notarised?
Real estate contracts are void unless a notary public has attested to the entire contract with all its exhibits. During notarisation, the notary must read aloud the entire contract to both parties. In larger transactions, the procedure can take more than a day.
Can sale contracts be concluded electronically?
What provisions are usually included in a sale contract?
A sale contract usually includes:
- the name, address and representatives of both parties;
- a description of the sales object;
- sales price;
- payment provisions and a mechanism to prevent the buyer from losing its money without becoming the owner of the land (through the registration of a preliminary notice in the land register as a prerequisite for the maturity of the purchase price);
- representations and warranties;
- closing mechanisms;
- regulations on the encumbrance of the land plot in favour of the buyer's lender;
- rules on the allocation of costs (costs and taxes are usually borne with the buyer); and
- power of attorney for the notary public or members of their staff, in order to make amendments to the contract with the parties’ consent, to avoid another meeting or to fulfil the formal requirements ordered by the land register.
Obligations and liabilities
What are the seller’s disclosure obligations and other liabilities, and what are the consequences of breach?
In principle, there are no special obligations for the seller to provide information. However, the seller must inform the buyer about defects of the purchase object if it knows them. The same obligation applies to disputes with neighbours, tenants or public authorities.
If the seller fraudulently conceals defects, it is liable for damages and the buyer can rescind the contract.
What contractual warranties are usually given by the seller?
Warranty regimes are regularly determined by the parties’ respective market power. As a rule, land (excluding plots with brand-new buildings) is sold without any warranty with respect to the state of the property. Warranties can be expected for facts that the buyer cannot verify, such as the payment of public charges or the absence of undisclosed tenancies.
Are there any other obligations on the buyer, aside from paying the purchase price?
The buyer must pay:
- notary fees;
- land register fees;
- real estate transfer tax (RETT);
- value added tax (VAT), if applicable;
- capital gains and income tax;
- corporate income tax; and
- trade tax.
What taxes are payable on the sale and purchase of real estate? Are any exemptions available?
The following are payable on the sale and purchase of real estate:
- RETT – this varies between 3.5% and 6.5% of the purchase price, depending on the federal state in which the transaction takes place. RETT applies to share deals if at least 95% of the shares in the real estate owner are transferred. RETT avoidance strategies through share deals are a controversial issue in German politics and there are likely to be legislative changes in the near future.
- VAT, if applicable – it is usually at the discretion of the parties to opt for VAT. As a general rule, real estate transactions are not subject to VAT.
- Capital gains tax – if the property qualifies as a business asset or was held for less than 10 years, the capital gains are taxable at the individual tax rate, including:
- income tax – up to 47.475%;
- corporate income tax – 15.825%; and
- trade tax – up to 17.5%.
Transfer of title
When does title in the property transfer?
Formal ownership title is transferred with the entry of the new owner in the land register. Usually, possession and all ownership rights, including the rights and duties from any rental relationships, are contractually transferred subject to payment of the purchase price.
What is the typical duration of a sale transaction?
The typical duration of a standard, medium-sized commercial transaction includes:
- LOI, due diligence, contract negotiations and signing – six weeks to three months;
- from notarisation to maturity of the purchase price – one to three months;
- payment and transfer of possession (entitlement to rents) – one to four weeks; and
- closure (entry of the buyer as the new owner in the land register) – two weeks to more than one year.
Must a lease agreement be concluded in writing?
A lease agreement need not be concluded in writing, unless it relates to a commercial lease with a fixed term of more than one year. In this case, a lease agreement which is not entirely concluded in writing will not be void but may be terminated by both parties with six months’ notice, even if a longer term had been agreed.
The written form requirement for commercial lease agreements is the most hazardous provision in German real estate law. A contract concluded in writing may still infringe the written form requirement if only one provision with more than minor significance to the contract has been missed in the contract document.
Are there any regulations setting out mandatory or prohibited provisions in lease agreements?
To answer this question, a distinction must first be made between residential tenancy law and commercial tenancy law. Tenancy law in general is governed by Sections 535 to 597 of the Civil Code. Most of these provisions relate to residential tenancy law. Due to its political significance, the law governing the rental of flats is strictly regulated; therefore, free market forces are largely suppressed and deviating regulations to the detriment of tenants are often null and void. For example, free dismissals or rent increases are permitted to a limited extent only. Rents for new rentals or the conversion of rented flats into condominiums are limited in most larger cities or are additionally regulated by local legislation.
In contrast, commercial tenancy law enjoys extensive contractual freedom; although there are restrictions here as well, which arise from the general regulations on general terms and conditions (Section 305ff of the Civil Code). In principle, regulations in commercial tenancy law can be ineffective if they inappropriately disadvantage the other contracting party in relation to the dispositive law and contrary to good faith.
What provisions are typically included in lease agreements?
Typically, commercial lease agreements include:
- the name, address and representatives of the tenant and property owner;
- a description of the premises, typically by reference to a map or plan of the building;
- permitted use and sub-letting rules;
- the term or duration of the lease;
- renewal options;
- monthly rent and advance payments and accounting mechanisms for service charges;
- a value added tax (VAT) clause, if applicable;
- a rent adjustment mechanism or index clause;
- a security deposit – typically, a surety bond of three monthly instalments from a large German bank is required;
- repair and maintenance obligations;
- for smaller commercial tenants, notarial submission to seizure for eviction;
- alienation and termination clauses; and
- insurance obligations.
What are the standard forms of lease agreement used in your jurisdiction?
There are no standard forms for commercial leases; commercial property owners or asset managers usually have their own customised general terms and conditions.
Residential property owners often use the general terms and conditions of the local home and landowners’ association because one of their main services is to keep track of the vast jurisdiction on residential tenancy law that sometimes varies between states and regions.
Length of term
Are there any regulations on minimum and maximum terms of leases?
Under commercial tenancy law, there is no minimum term of lease. The maximum term is 30 years, after which the lease becomes a lease with indefinite term, notwithstanding a longer fixed term. For a longer duration, the law favours the establishment of a hereditary building right.
Under residential tenancy law, there are no restrictions for tenants and there is a limited ability to restrict the term for the property owner.
Are long-term tenants accorded any special rights as to extension or renewal of leases?
Under commercial tenancy law, long-term tenants are accorded no such rights, as they are subject to lease contracts only.
Under residential tenancy law, there are no restrictions for tenants and there is a limited ability to restrict the term for the property owner.
What regulations (if any) govern rent increases?
Under commercial tenancy law, there are no regulations governing rent increases, as tenants are subject to lease contracts only.
Under residential tenancy law, rent increases are limited to a maximum of 15% in three years and in general no alteration above the official representative list of rents in the area.
What regulations (if any) govern rent security deposits?
There are no regulations governing rent security deposits for commercial leases, which are usually paid in three monthly instalments – although this is negotiable.
Under residential tenancy law, the security deposit must not exceed three monthly rent instalments.
Can the tenant withhold rent payments on any legal grounds?
In principle, the tenant can reduce the rent in case of rental defects. However, this right is typically excluded in commercial leases. The tenant must then pay subject to reservation and sue the overpaid rent in court.
Under what circumstances is sub-letting typically allowed?
In principle, the sub-letting of commercial property without the permission of the landlord is prohibited and repeat violation will constitute a legal ground for an extraordinary termination of the lease, as well as damage claims.
Special provisions apply in residential tenancy law.
Obligations and liabilities
What are the general obligations and liabilities of the landlord in respect of the property and what are the consequences of breach?
The landlord must:
- provide possession of the premises for use according to the usage specifications in the lease contract; and
- uphold the maintenance of the premises in a state suitable for use according to the contract (in commercial leases, this obligation is often transferred to the tenant, except in relation to structural and external parts of the building).
In case of breach, the tenant may:
- withhold or reclaim rent;
- substitute performance; and
- claim damages (including reimbursement for substitution performance).
Ultimately, the tenant has a right to extraordinary termination.
What are the general obligations and liabilities of the tenant in respect of the property and what are the consequences of breach?
The tenant must:
- pay rent and auxiliary costs;
- provide rental security and replenishment in case of drawdown;
- maintain and repair the property according to the lease contract;
- treat the premises with consideration and due care; and
- return the premises in a contractually agreed state on expiry of the lease term.
In case of breach, the landlord is entitled to claim for damages and has the right to extraordinary termination. In the event of a default in payment, the right to termination exists if the tenant is in default with at least two monthly rent instalments.
Are any taxes payable on rental income? If so, are any exemptions available?
Rental income may be subject to:
- income tax;
- corporate income tax; and
- trade tax.
VAT may be payable on the rent if a landlord opts to charge VAT.
Careful implementation of tax structuring is highly advisable.
Are the landlord and tenant bound by any insurance requirements?
The landlord is bound by statutory building liability insurance, which can be passed on to the tenants together with the auxiliary costs.
There is no mandatory insurance for tenants; however, general liability insurance is highly advisable.
Termination and eviction
What rules and procedures govern termination of the lease by the landlord and the tenant’s eviction from the property?
Under residential tenancy law, termination by a landlord requires legitimate interest in such action. This legitimate interest is usually accepted by the courts in cases of:
- default with rental payments;
- severe breach of contract; or
- the desire of the landlord or a member of their family to occupy the premises themselves.
Under commercial tenancy law, termination during a fixed lease term is permissible only on severe breach of contract. Termination of a commercial lease with indefinite term requires six months’ notice.
If a tenant fails to comply with the obligation to vacate, the landlord must seek a court order for eviction (the duration of the lawsuit in commercial leases can be over two years). Therefore, landlords are increasingly requesting a notarial submission to seizure for eviction in the lease contract.
What are the typical providers of real estate financing in your jurisdiction? Are there any restrictions on who may provide financing?
The available financing and financial providers depend on:
- the type of financing (eg, acquisition, refinancing or project development);
- the asset class (eg, commercial, residential or special, such as a hotel);
- the size of the transaction; and
- the location of the real estate.
Typically, senior debt is provided by banks and other financial institutions. However, insurers, pension funds, private equity funds, mezzanine funds, high-yield funds and family offices are increasingly providing financing sources.
The German Banking Act and the Capital Investment Code provide restrictions on the commercial granting of loans.
What are the most common structures used to secure real estate financing and how are these security interests perfected?
The security package will again depend on the type of financing, as well as the asset class. Typically, it comprises:
- an immediately enforceable land charge over the real estate, including an abstract acknowledgement of debt and an accompanying security purpose agreement;
- security assignment of receivables (eg, rent, insurances, claims under existing and future sale agreements and claims under work contracts);
- pledges over shares, accounts and hedging proceeds; and
- personal or corporate guarantees or suretyships (often limited to specific parts of the financing, such as the interest service or cost overrun).
In addition, in specific circumstances (eg, hotel transactions or production sites), further security in the form of a transfer of title may be requested with respect to certain tangible assets.
With respect to the form and perfection of security interests, the following principles apply:
- Land charge or abstract acknowledgment of debt – a notarial form and registration with the relevant land register are required. No specific form requirements apply to the security purpose agreement.
- Pledges – notification to the relevant parties is required, but there are no specific registration requirements. A pledge over shares may require notarial form (eg, in the case of a German limited liability company).
- Assignment of rights – there are no specific form or notification requirements. However, in the absence of a notification, a debtor can continue to make payment to the assignor with full discharging effect. If the underlying agreement restricts or prohibits the assignment of a claim, such consent is required in order for the assignment to become effective.
- Personal or corporate guarantees or suretyships – these can be made by way of agreement between the guarantor and the beneficiary or the guarantor and the debtor, or by unilateral declaration of the guarantor. Several sub-forms exist and certain restrictions apply to the admissibility of guarantees or suretyships issued on first demand.
What covenants are typically made in financing agreements?
Covenants are negotiated on a case-by-case basis and depend on the type of financing, the asset financed, the parties involved and the investment risk profile.
The covenants agreed can usually be divided into:
- financial covenants (loan-to-value, debt-service coverage ratio and interest-service coverage ratio);
- information undertakings;
- general undertakings; and
- property undertakings.
The form, scope and documentation of these covenants may differ substantially.
Enforcement of security
How are security interests enforced in the event of default?
The enforcement mechanism is usually set out in the relevant security document. However, specific rules apply to the enforcement of land charges and pledges.
What is the typical timeframe for the enforcement of security?
Again, this depends on the type of security and the procedure agreed. In case of enforcement of a land charge, an enforced sales proceeding will usually take between six and 12 months, but partial satisfaction from enforced administration can be obtained in less time.
What is the general climate of real estate investment in your jurisdiction?
The German investment market has been experiencing an extraordinarily strong and sustained period of growth over the past decade. The strong German economy, market size and variety of assets available continue to draw investors to the German real estate market, which is still considered a safe haven despite the continuing increase in prices and various political challenges. However, high competition and low interest rates put pressure on real estate yields. Therefore, many investors are looking for opportunities to invest in:
- B or C locations;
- value-added real estates;
- project developments; or
- special assets (eg, hotels, healthcare properties and student accommodation).
Who are the most common investors in real estate?
The German investment market is highly attractive on an international level and both domestic and international investors are active on the German real estate market. The capital invested by foreign investors originates not only from neighbouring European countries and North America, but also increasingly from Asia and the Middle East. The German real estate market has remained attractive for investors of all kind. Specialised funds remain the largest group of institutional investors, followed by private equity or real estate funds and listed real estate companies.
Are there any restrictions on foreign investment in real estate?
Apart from the general restrictions resulting from anti-money laundering regulations and UN or EU penalty lists, there are no restrictions on foreign investment in real estate.
What structures are typically used to invest in real estate and what are the advantages and disadvantages of each (including tax implications)?
When investing in German real estate, a number of structures can be used. The type of structure depends not only on the type of asset, the location of the investor and its exit strategy, but also on the selling entity and, in particular, its financial situation and corporate structure.
In some cases, the purchase of real estate may be structured as an asset deal or as a share deal (ie, the sale and transfer of the shares or partnership interests in the entity owning the real estate). The disadvantages relating to the acquisition of shares are mainly risks assumed on acquiring the target entity, including liabilities for:
- outstanding taxes;
- disadvantageous contracts with third parties to which the target company is a party;
- hidden reserves and trade tax risks; and
- share capital protection rules.
On the other hand, a share deal may be advantageous in respect of mitigating German real estate transfer tax (between 3.5% and 6.5%) as a result of:
- tax structuring or in cases of pre-emptive rights or rights of first refusal (which usually relate to the real property itself and are not triggered if shares or partnership interest is acquired); or
- the closing process in cases of a portfolio transaction.
However, German tax regulations are due to change, increasing the percentage of shares held by an unrelated party (and, in the future, remaining with the seller) to 10% and extending the holding period – thereby making the share deal structure less enticing for many investors.
German real estate investments can be made directly or indirectly, and using a domestic or foreign special purpose vehicle (SPV) (ie, a corporation or partnership, which acquires title to the land and in which the investors (indirectly) hold shares or participation interests). In commercial transactions involving foreign investors, an SPV domiciled in an EU member state other than Germany (eg, the Netherlands or Luxembourg) is often used in order to limit German income tax and mitigate German trade and withholding tax risks. The domiciliation and corporate form of such an SPV is usually determined by the location, the aims of the investor and existing double taxation treaties.
Planning and environmental issues
Which government authorities regulate planning and zoning for real estate development and use in your jurisdiction and what is the extent of their powers?
Zoning plans are determined by each municipality for its own area. The municipalities have a wide margin of discretion in issuing a new zoning plan, provided that it does not contravene other laws.
The erection, alteration or change of usage of a building requires a building permit, which is issued by the building authority. For plots in smaller municipalities, this is often the district; in bigger cities, it is mostly the city itself. The building authority is obliged to issue the building permit if the applicant fulfils all requirements stipulated by planning law (in most cases, a zoning plan).
What are the eligibility, procedural and documentary requirements to obtain planning permission?
A building permit must be applied for. The application must contain various documents (eg, plans of the building), which are determined in ordinances for each federal state. The extent of documents depends on the type of building.
Can planning decisions be appealed? If so, what is the appeal procedure?
A zoning plan can be appealed before the higher administration courts. To challenge a zoning plan, the applicant must prove that there is at least a possibility that the plan contravenes its personal interests. If the applicant can prove this, the higher administrative court will fully assess the legality of the zoning plan (ie, not only the breach of the applicant’s personal rights). If the zoning plan breaches legal obligations, the court will declare it to be null and void.
A building permit can also be challenged before the administrative courts. In contrast to the proceedings above, the administrative court will rescind the building permit only if it is unlawful and the plaintiff’s rights have been violated (ie, only the violation of a personal right will lead to a successful lawsuit). In some federal states, the plaintiff must file an administrative objection to the competent authority before it can challenge the permit before the courts.
What are the consequences of failure to comply with planning decisions or regulations?
If the holder of a building permit does not comply with the permit, the competent authority may issue an administrative order in which it prohibits the use of a building or even orders dismantling measures. However, the extent of such an administrative order depends on the individual case and the extent of non-compliance.
What regime governs the protection and development of historic and cultural buildings?
The protection and development of historic and cultural buildings are governed by the heritage protection laws of each federal state. Generally, any alteration of a protected building requires a specific permit from the competent authority.
What regime applies to government expropriation of real estate?
The expropriation of real estate is possible only in individual cases where it is required for a public good and the purpose cannot be reasonably achieved by any other means. Such cases are, among other things, determined by the Federal Building Code (eg, if a zoning plan designates a public purpose for a property plot, such as areas for a public road).
What is the required notice period for expropriation and how is compensation calculated?
Before any expropriation, the competent authority must try to buy the property (for a reasonable price). The expropriation is a formal proceeding with hearings and may be challenged before the courts.
Compensation is calculated by a stately committee on the basis of standardised market values (ie, the price that would be achieved in an ordinary transaction at the time that the assessment is made, without considering any extraordinary or personal circumstances).
What environmental certifications are required for the development of real estate and how are they obtained?
Environmental certifications depend on the individual case and the kind of real estate. Ordinary buildings require a building permit only. Some commercial operations also require permits under environmental laws, such as the Federal Emission Control Act and the Federal Water Act. Such permits must be applied for at the competent authorities.
What environmental disclosure obligations apply to real estate sales?
Generally, if the seller has knowledge of any environmental damage, it must disclose the issue to the buyer.
What rules and procedures govern environmental clean-up of property? Which parties are responsible for clean-up and what is the extent of their liability?
The clean-up of property is mainly governed by the Federal Soil Protection Act. Generally, the competent authority can issue clean-up orders against:
- the owner of the property;
- the polluter;
- the legal successor of the polluter; and
- the holder of actual control over the property (eg, a tenant).
These parties are fully liable with regard to the authority. Whether they have a right of recourse against one another depends on the causation of the other party or contracts with that party (eg, an environmental clause in a sales and purchase agreement).
Are there any regulations or incentive schemes in place to promote energy efficiency and emissions reductions in buildings?
Yes, the Energy Saving Ordinance contains strict legal standards with regard to the energy efficiency of buildings.