\n<\/p>\n
Owners of UK and European property are facing a challenge to improve their buildings\u2019 environmental performance, with some in the industry saying loans which encourage greener real estate are not yet extensive enough to speed up the transition.<\/p>\n
The buildings and construction sector is a big driver of climate change, consuming 32 per cent of global energy and accounting for 34 per cent of global CO\u2082 emissions, according to a report by the UN Environment Programme and the Global Alliance for Buildings and Construction.<\/p>\n
The previous UK government in December 2020 proposed that commercial buildings should have an energy performance certificate of at least band B by 2030 for them still to be lettable. However, in 2023 it said \u201cthe proposed timelines\u2009.\u2009.\u2009.\u2009will require updating\u201d and it is yet to become law.<\/p>\n
In the EU, the Energy Performance of Buildings Directive, which will gradually introduce minimum standards for properties and aims for full decarbonised building stock by 2050, needs to be incorporated into national laws by May next year.<\/p>\n
The article is part of a special report on risk management in the property sector. Other pieces cover cyber risks, fire threats, and the secondary office market. <\/p>\n
Meanwhile, the Climate Change Committee, which advises the UK government, said earlier this year that greenhouse gas emissions from non-residential buildings need to fall by 87 per cent between 2023 and 2040 for the UK to reach net zero by 2050.<\/p>\n
Occupiers are also increasingly concerned about the issue. A survey by property agency Knight Frank earlier this year found that 58 per cent of office occupiers said ESG factors affected their view of rents, with many expecting a discount for sub-par performance, and willing to pay a premium for buildings that meet higher standards. <\/p>\n
But the industry still has a long way to go. Knight Frank last year found that 70 per cent of UK commercial property was rated at EPC C or below.<\/p>\n
So-called green loans have been touted as a way of encouraging environmental improvements by offering lower interest rates to borrowers for new builds or renovations if certain targets are met. But some in the industry say this form of lending is not attractive or widespread enough to make a real difference. <\/p>\n
EPCs show a building\u2019s energy efficiency, with properties graded from A, the most efficient, to G, the least. They are valid for 10 years and are needed when renting out or selling a property, when a building under construction is finished or when certain changes are made to the property. Commercial properties can only be let if they have at least an E rating.<\/p>\n
\u201cThere has been a growth in green loans, but they\u2019re still far from being the norm. The pricing advantage isn\u2019t sufficient in itself to justify the [capital expenditure],\u201d says Stephen Inglis, chief executive of London & Scottish Property Investment Management.<\/p>\n
\u201cThe vast majority of loans are not green loans. It\u2019s a very, very niche part of the market,\u201d he adds.<\/p>\n
Details of green loans vary from deal to deal, but typically they can offer a discount of roughly 0.1 to 0.2 or even 0.3 percentage points on the interest rate a borrower would otherwise pay, say market participants. This is because lenders see buildings with better green credentials as higher quality, more attractive and easier to let to a greater pool of occupiers.<\/p>\n
But, given the various key performance indicators \u2014 which tend to differ from deal to deal \u2014 that need to be met, a green loan may offer little attraction to developers unless they are already making changes anyway.<\/p>\n
A recent survey found that 58% of office occupiers said ESG factors affected their view of rents<\/span> \u00a9 Charlie Bibby\/FT<\/span><\/p>\n Some in the market point to the extra administration and reporting obligations involved in green loans, with some lenders insisting on detailed data collection.<\/p>\n \u201cWhile the intent is positive, the execution can be onerous and, in some cases, may limit the ability to deliver on [a] business plan,\u201d says one real estate investor.<\/p>\n And the pricing advantage on offer can be small in comparison with broader moves in lending rates. Hugh White, head of national capital markets at BNP Paribas Real Estate, says the discount available can be \u201cgobbled up\u201d by changes to Sonia \u2014 the sterling overnight index average interest rate benchmark.<\/p>\n Many in the industry say the green loans sector needs to grow substantially in order to be a useful tool.\u00a0<\/p>\n A report by Puma Property Finance and the UCL Centre for Sustainable Governance and Law in the Built Environment found that 26 per cent of lenders did not offer sustainable finance, while for a further 45 per cent it was unclear whether or not they did, based on their websites.\u00a0<\/p>\n I\u2019m not sure that [standard discounts available on green loans] are driving changes in behaviour<\/p>\n Paul Frost, Puma Property Finance <\/p>\n \u201cThis sort of financing needs to be scaled up,\u201d says Hanane Hafraoui at the United Nations Environment Programme.<\/p>\n Nevertheless, some loans are being made.\u00a0In May, Puma said it had provided a \u00a321mn loan to Kier Property for a new industrial logistics unit in Milton Keynes that will include an environmentally friendly green roof. It has also made a \u00a346mn loan to Global Mutual to retrofit a life sciences campus in Hertfordshire, which is targeting EPC A when finished.<\/p>\n Puma says it offers discounts of up to 1 per cent \u2014 much bigger than most on offer \u2014 deducted from the loan\u2019s exit fee, subject to meeting certain green targets.\u00a0<\/p>\n \u201cI\u2019m not sure that [standard discounts available on green loans] are driving changes in behaviour,\u201d says Paul Frost, Puma Property Finance\u2019s managing director. \u201cWe are willing to accept a lower return to drive that change.\u201d<\/p>\n Some industry insiders, however, say that even without a fully developed green loan market, improving a building\u2019s environmental credentials is worthwhile.\u00a0<\/p>\n Private investment firm Urban Partners, which manages \u20ac22.7bn in assets, is building an office in Nordhavn in Copenhagen that will use geothermal energy and solar panels, meaning it will consume almost no energy not produced on site.<\/p>\n \u201cIt\u2019s not the regulation that forces us to adapt and change, it\u2019s more the opportunity and competitiveness,\u201d says Rune Kock, co-head of real estate at Urban Partners. \u201cGeothermals, heat pumps, insulation \u2014 it\u2019s typically value-accretive.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":" Owners of UK and European property are facing a challenge to improve their buildings\u2019 environmental performance, with some in the industry saying loans which encourage greener real estate are not yet extensive enough to speed up the transition. 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