Creating Carbon Neutral Real Estate Is Just As Much About Improving The Old As It Is The New

Following COP26, financial institutions across the world signed a pledge to limit greenhouse gas emissions. They recognised the role that finance will need to play in the economic transformation required to move the globe toward net zero and help limit global warming to 1.5c.

From a UK real estate perspective, action needs to be taken on two fronts, Aldermore Bank Commercial Director for Commercial Real Estate John Carter said.

“Banks need to consider not only how they can finance the development of new net-zero carbon assets, but also how they can assist financing the energy efficiency of existing real estate,” he said. “It’s widely accepted that 80% of current properties will be in use in 2050. This presents a huge challenge.”   

Funding Carbon Neutrality Or Low Carbon

Starting with new development, Carter highlighted how many banks and financial institutions are already starting to support carbon-neutral or low-carbon development schemes.

“When new development is being planned, it’s within the bank’s gift to support projects that are carbon neutral or low carbon,” he said. “As a bank, we’re about to complete on a number of transactions with debt of over £35M in deals that have these characteristics.” 

Despite this, the amount of finance banks can provide for these projects can be restricted because of the increased capital it must hold against development funding, compared to traditional commercial real estate finance.  

“This measure was brought in post the global financial crisis to ensure banks improved their capital, but it may limit them in supporting innovative developers who are truly embedding climate change into their approach to development and are trying to create sustainable communities,” Carter said. “Perhaps a more efficient method of driving more competitive funding for sustainable development would be to reduce the risk weighting for banks to fund such assets. This would effectively release more capital and/or more competitive finance for qualifying loans.”

Funding Improvements

The second, and arguably more impactful, way a bank or financial institution can help real estate move toward net zero is by funding improvements to existing properties. This is a high priority for the UK government, evidenced by its recent commitment to spend £179M improving the energy efficiency of 20,000 social housing properties in England. The government has also proposed that all new residential rental properties after 2025 in England and Wales will require an EPC rating of C or above, while the requisite for all commercial properties will be a rating of B or above. 

“Many properties within England and Wales fall below the current EPC criteria, let alone the proposed changes,” Carter said. “Therefore, it’s a huge challenge for property owners to plan, fund and undertake the works that will be required. The proposed changes aren’t legislated yet, but we can’t hide from them. The need for change is here now and, fundamentally, reducing the carbon emissions of real estate is necessary if we’re to have any hope of reducing its impact on climate change.”

Improving properties on a wider scale will require expertise and undoubtedly some level of funding, Carter said. Aldermore is actively looking to make its customers aware of the proposed changes and how they can improve their assets, as well as seeing how the bank might be able to provide financial support to do so. 

“Undertaking works might not necessarily mean a property is worth more right now, but doing nothing might mean a property is worth less in the future,” Carter said. “Long-term viability will be improved with better energy efficiency and it’s not just investors who are assessing properties like this. Improving a building’s credentials could attract better tenants that want to address their ESG requirements.”

Many investors already appear to recognise that long-term viability of property assets will depend on energy efficiency, Carter said. Half of residential properties bought by investors so far in 2022 have an EPC rating of at least C, compared to 39% in 2021 and 33% in 2020. However, to others, 2025 or 2030 still sounds a long way off. 

“But these are not overnight fixes,” Carter said. “It’s important to have a plan in place, even if work isn’t planned to start straightaway. This is about having a realistic, time-based strategy and it’s a learning curve for all parties.”

To Carter, the way to head in the right direction toward tackling the challenges the real estate sector faces is to move together. The alternative — doing nothing — is not an option, he said. Aldermore for one looks forward to continuing to evolve its sustainable funding proposition. 

This article was produced in collaboration between Aldermore Bank and Studio B. Bisnow news staff was not involved in the production of this content.

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