15 July, 2020

By Javier Kindelan Williams, CEO Valuation Advisory EMEA & Vice President CBRE Spain

The COP25 United Nations Conference on Climate Change and the recent COVID-19 pandemic is a clear reminder to everyone that we need to take better care of our planet.

2020 is definitely one for the history books and will be remembered as not only the year the world endured a global pandemic, but also the year we experienced the speed at which nature can heal itself. 

The International Energy Agency has forecast the CO2 impact of the crisis, suggesting emissions could fall by 8% this year, some 2,600MtCO2.” - Such a drop would be the largest ever recorded in terms of tonnes of CO2, some six times greater than the impact of the 2008 financial crisis.

As more and more of us accept our responsibility to take action and protect the environment, new green initiatives are cropping up across many different sectors. In the real estate industry, energy efficiency is becoming a non-negotiable requirement for not just architects, developers, builders, tenants and buyers, but also lenders and investors.

Green Mortgages POST COVID_452x300Considering our baseline, this change cannot come quickly enough. According to data from the Green Building Council (GBC), buildings are responsible for more than 39% of all global carbon emissions, due to the energy needed to cool, heat and supply electricity to our homes and workplaces.

According to “The European Green Deal roadmap for making the EU's economy sustainable” - The building sector is crucial for achieving the EU's energy and environmental goals. At the same time, better and more energy efficient buildings improve the quality of citizens lives while also benefiting the economy and society.

To boost the energy performance of buildings, the EU has established a legislative framework that includes the Energy Performance of Buildings Directive.

All EU countries must develop a strategy for renovating their building stock to become highly efficient and decarbonised by 2050. The requirement for EU countries to adopt a long-term renovation strategy is set out in the Energy Performance of Buildings Directive (2010/31/EU), which was revised in 2018 (2018/844/EU). These strategies will form part of EU countries’ integrated National Energy and Climate Plans (NECPs).

Still, all ambitious goals require ambitious decisions, which is why the GBC has challenged itself to see that all new-build properties are carbon neutral by 2030. To accomplish this feat, everyone in the real estate sector will need to turn their thoughts to improving the energy efficiency of new developments and remedying the poor performance of older properties. Builders, developers and managers will all need to roll up their sleeves and get involved, but investors and lenders should be zeroing in on energy performance too.

While the real estate sector is committed to producing more sustainable properties, with energy ratings translating into lower running costs, other relevant sectors must take up the gauntlet too. Banks, for example, can do their part by developing green financial products.

The sustainable green mortgage originated from an analysis of the US mortgage sector in 2017, which highlighted an apparent correlation between mortgage holder loan performance, and home energy efficiency ratings. Since that discovery, it has become apparent that underwriters still need encouragement to integrate energy efficient performance indicators into mortgage assessments.   

“Bringing energy efficiency into the conversation between banks and consumers by means of a standardised approach to the financing of energy-efficient buildings/renovation…. it could be possible to respond to increasing demand for ‘green’ on the funding side of the mortgage business by delivering a new asset class. Taking the form of an energy-efficient mortgage, the asset would be used for the purposes of green bond and green covered-bond issuance. ,” says Luca Bertalot, secretary general of the European Mortgage Federation/European Covered Bond Council (EMF-ECBC).

The rapidly growing Green lending model lets banks link the property’s energy rating to the interest rate paid by the borrower, rewarding more sustainable construction methods and encouraging more developers to build green. By choosing a green mortgage, home buyers are not only contributing to a more sustainable future – but they also stand to save some money. Not only are energy efficient homes cheaper to run, but any work undertaken to improve a property’s energy rating will bump up its value considerably, making the loan a less risky prospect.

European Mortgage Foundation, through its Energy Efficient Mortgage Action Plan (EeMAP) is running a pilot scheme where lending institutions will be asked to provide certain data useful for measuring the impact of energy efficiency on credit risk. In other words, researchers will be looking at market evidence to assess the viability of including sustainability provisions in credit agreements. In this way, the sector hopes to align itself with the European Commission’s Action Plan on Sustainable Finance.

It is worth bearing in mind that the organisations taking part in the pilot scheme currently account for 45% of all mortgages granted in Europe, the equivalent of 21% of the continent’s combined GDP.

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Although the concept of green mortgages is no longer a novelty, it is still too early to predict just how they will work. We are at a very early stage, and the basic architecture of sustainable finance is still being worked out. At the end of 2019, just 25 of the world’s 50 largest banks had sustainable finance targets or a green lending option in place, according to a report published by the World Resource Institute.

By encouraging more and more banks to get on board , we can also ensure that the lending market is tuned in to innovation and the potential of sustainable financial products that demonstrate a clear commitment to the environment, therefore making this green approach to mortgage lending the new norm

While action on the part of private lenders is important, so too are public funding campaigns aimed at promoting sustainable choices. At the moment, there is still little public funding available, either from the national government or at the regional level.

We also need to see more social recognition of the value of sustainable buildings. In this respect, green mortgages can help raise awareness in the construction and developer sector, so that more new developments are built to these high sustainability standards. They also send a message to the general public, nudging homeowners to take structural measures to improve energy performance, which as we observed from the majority of EPC (Energy Performance Certificate) reports, most existing properties will require.

A home’s energy performance is widely regarded as the most important factor in sustainable construction. It’s true economic value, on the other hand, can be gleaned from the difference in market price between a sustainable property and one built to traditional standards. At present, the effect of the energy performance rating is quantified only by the property’s lower running costs, but before long, we will start to see it reflected in capital value. Not only will sustainable properties fetch more on the open market, but those that fail to meet the minimum criteria for energy efficiency will start to depreciate.

These are the two most important factors for promoting and normalising green loans as a lever for sustainable growth in the real estate sector: a clear, standardised set of criteria that apply to all and the sustainability premium enjoyed by the most efficient properties.

Sustainable buildings remain in peak performance and operational condition for longer, contributing significantly towards its competitiveness and liquidity.

Until now, green financing has been limited to offering preferential borrowing conditions, in some cases at a lower rate of interest. In the next few years, however, we will start to see a range of increasingly competitive, efficient and well-designed financial products from the banking sector – one more step towards a sustainable future.