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There’s Too Much Money Out There Now, But In Future You Might Not Get A Loan If Your Building Isn’t Green

Lenders and regulators are not doing enough to push the real estate sector to decarbonise, a major new report released this week said. It is a missed opportunity that could have grave consequences for the planet.


The Urban Land Institute and PwC’s Emerging Trends in Real Estate Global report said that as a group, real estate lenders are being too passive, in many cases taking the stance that it is their job to follow where clients are leading when it comes to sustainability, rather than using the leverage they have to push clients to change. 

Regulators could be doing more to make it more profitable for banks in particular to lend to the greenest real estate or to make loans that allow existing properties to be made more green.

And there is another problem the sector as a whole needs to address, according to ULI and PwC — at the moment, even if your building isn’t green, there is so much money sloshing around real estate that you can probably still find someone to lend against it or buy it. That will change, but that abundance of liquidity slows the pace of change.

But the report said the first signs are emerging of a world where if your building is a big emitter of carbon, you won’t be able to borrow at all. 

The property industry's eyes are on how the pandemic will influence the environmental, social and governance movement. 

“The pandemic has already reinforced the importance of ESG for everyone in real estate,” ULI Europe chief executive Lisette van Doorn said in the report. “If anything, the interviews for Global Emerging Trends indicate even greater concerns this year around capital and operational expenditure as well as the risks associated with making real estate fit for purpose.”

The Organisation for Economic Co-operation and Development calls for $7T to be invested each year between now and 2030 for the world to meet climate and development objectives. “That will mean an historic reallocation of capital in real estate,” one of the anonymous interviewees for the report said.

Some interviewees for the report said that banks have the ability to catalyse their borrowers toward adopting greener practices, while others believe they can only follow, especially in times of abundant liquidity. 

“The glut of liquidity chasing real estate loans makes it harder,” one said. “To be frank, borrowers that are not so green can still get finance. So, until the liquidity dries up over time, you can’t really force the borrowers to adopt green practices. Quantitative easing lasted way too long.” 

In a world where debt finance is less plentiful, lenders will have the ability to make borrowers adhere to certain criteria, taking an active role in driving sustainability. “We feel that as lenders, we have a responsibility to move clients towards that goal,” one interviewee said. But some respondents said that isn’t the appropriate role for lenders.

“We don’t say that we will stop financing buildings which are not green,” one said. “We will never do that simply because that is not the reality of our client universe, and that actually doesn’t help the transition. It simply takes liquidity out of the market.” 

Most interviewees indicated they believe that lenders, particularly banks, are a step behind owners, investors and developers in grasping that funding the refurbishment and improvement of existing stock would have the biggest impact in helping real estate cut carbon emissions

“We finally have wrapped our heads around the fact that simply put, if you’re telling clients, you will only finance [existing] green buildings, you’re not really contributing, are you?” one lender said. “If a client comes to you and says, okay, we’re repositioning from brown to green, you need to put your money where your mouth is. And so that’s what we’re going to do more of. But we have been burned by development before.” 


The discussion of environmental sustainability in lending needs to go deeper than labels, and determining how and where to place funds can be complicated. For example, debt funds often provide finance for value-add refurbishment schemes. These unregulated funds are seen as less likely than banks to have a defined sustainability strategy or framework. But by funding such refurbishments, they are playing their part in the green transition, even if the debt they are providing is not designated a green loan.

At the same time, many lenders will provide “green development finance” to projects that will have a high energy efficiency rating when they are complete, without factoring in the embodied carbon created by a project. In that sense, they are providing finance for a project that is creating a significant amount of carbon but is still considered green. 

“It is just so hard to measure embodied carbon, and there is no standard definition or measurement of it, and that makes it difficult for lenders,” one interviewee said. 

Not all lenders in the sector are being passive. One interviewed for the report talked of putting in place a green loan framework specifically designed to help small and midsized enterprises access green finance, as a way of encouraging them to decarbonise their portfolios. Such companies typically do not have the resources to come up with their own green loan strategy or employ an ESG specialist, so the lender needs to do the heavy lifting for them, according to ULI and PwC. 

Such small companies will be vital if the broad real estate sector is to cut its emissions. Property is a long-tail industry, where even the biggest players own only a tiny fraction of the world’s real estate stock. 

“We developed a framework with SMEs in mind because we know that they are the ones who struggle the most when it comes to refinancing,” the interviewee said. “And the costs of getting a green loan done, hiring a specialist consultant, for these borrowers are prohibitively high. We have certain parameters. If the client is able to meet these parameters, they can get a green loan from us.” 

Some interviewees said that regulators have a lever that could be pulled to incentivise banks, in particular, to write more green loans

When banks make a loan, they have to hold a certain amount of capital on their balance sheet to guard against losses if the loan goes into default. The less risky the loan, the less capital they must hold, and the cost of capital of making that loan reduces. 

If bank regulators designated loans to more sustainable real estate as less risky, then the cost of capital for these loans would be reduced, and they would become more profitable for banks to make, incentivising them to write more of these loans. 

If loans to refurbish existing assets are designated less risky than loans on new development, then banks would be incentivised to make more of these loans, rather than fund new development that might not be necessary and may be net harmful to the environment. 

“The banking community was talking to the European Central Bank asking, can you link capital consumption to sustainability somehow? And the response was always well, no, sustainable assets are not necessarily less risky. So no, we cannot,” one interviewee said. “The mechanism does exist in the world of infrastructure, where social infrastructure loans need to have less capital held against them. If sustainable real estate loans were deemed less risky, you could invest more, or finance more competitively.” 

Some interviewees raised the prospect of a world where banks will finance only green properties, and borrowers who are suddenly unable to refinance resort to legal action because of the lack of agreement about what constitutes a green building

One lender said they have a target of getting their loan book to 25% green loans, a target that will rise over the coming years. To meet that target, at least 50% of their new loans need to be to green properties — your chance of getting financing from this lender drops by 50% overnight if your property isn’t green. 

“Banks are starting to say, at the moment, we’re giving you a quarter point incentive, in the next 10 years, we’re going to say we’re not renewing your loan, unless we see certain kinds of green improvement,” an interviewee told ULI and PwC. “That is quite controversial, because the borrowers are saying, if we can’t even agree on what the baseline is, how are we going to agree on what the improvement is? And if you just arbitrarily cancel my loan, that’s grounds for litigation.”