Energy Real Estate Refurbishment

Introduction

The landscape of real estate finance in Germany is undergoing a notable shift, placing sustainable building refurbishment at its core. These refurbishments have the highest potential to reach the goal of reducing greenhouse gas emissions, as the buildings sector is responsible for about 40% of global CO2 emissions. Increasing regulatory requirements, evolving client demands for sustainable alternatives, a diversified array of green products and strategic marketing efforts targeting affected property owners drive the transformation. This blogpost offers a comprehensive overview of the relevant standards and implications to ensure that financial institutions are prepared to navigate and capitalize on the future of sustainable real estate financing.

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Regulatory & Outlook

The “Fit for 55” EU policy intends to reduce net greenhouse gas emissions by 55% by 2030 and the “Green Deal” commits to no net emissions of greenhouse gases by 2050. At the forefront of green real estate finance transformation is a wide range of regulations, both global and regional.

Internationally, the United Nations’ Sustainable Development Goals (SDGs) reflect the strategic course of the partnering countries and serve as a critical compass. Among these, Goal 11 “Sustainable cities and communities” accentuates the imperativeness of developing sustainable cities and settlements — a clear call for enhanced environmental considerations in urban infrastructural decisions.[1]

The European regulations Sustainable Finance Reporting Disclosure (SFRD) and Corporate Sustainability Reporting Directive (CSRD) act as a comprehensive disclosure regime to mandate ESG disclosure requirements to asset managers and other participants in the financial markets.[2]

Additionally, the EU Taxonomy enables precise classification of environmentally sustainable economic activities. It provides a unified framework to guide investors, companies, and policymakers in transitioning to a low-carbon, resilient, and sustainable economy, ensuring that investments and projects meet specific criteria to be recognized as "green" or sustainable.[3]

Deepening into transparency and governance, the European Banking Authority (EBA) Guidelines are instrumental. Banks must transparently demonstrate the use of investment funds and disclose the Implementing Technical Standards on supervisory reporting (ITS) with the addition of the Green Asset Ratio (GAR) as a published KPI.[4]

Not only banks are affected by new regulations, but also real estate owners themselves must upgrade their buildings’ energy efficiency to comply with new sustainability requirements.

The most recent and important change in regulation is the federal legislation of the Building Energy Act (Geb?udeenergiegesetz - GEG). It implements the EU’s revised Energy Performance of Buildings Directive in Germany. It sets requirements for the energy performance of buildings, including energy used for heating, cooling, ventilation, hot water, and lighting. The law also contains specifications for insulation standard and heat protection of buildings. Beginning in 2024, oil and gas heating systems will be governed by the GEG, with certain regulations applying between 2026 and 2028. For new buildings, the act specifies certain proportions of renewable energies that the building must use for heating or cooling.[5]

A clear understanding ensures that financing terms and conditions align with the phased implementation of the regulation. The GEG enhances regulatory oversight by mandating the documentation of a building's energy quality through performance certificates. This introduces both financial challenges and opportunities for property owners, along with a compelling obligation to act.

The integration of such multifaceted regulatory frameworks necessitates a shift in traditional banking operations. It underscores the importance for banks to recalibrate their offerings, ensuring alignment with these regulatory standards while addressing the rising demand for financing sustainable solutions.

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Green Asset Ratio and Green Loan Principles

The forthcoming introduction of the Green Asset Ratio in the European banking system is a significant step towards sustainable finance and underlines the importance of sustainable lending. At its core, GAR provides a clear picture of a bank’s commitment to green financing by assessing how well environmentally sustainable assets are integrated into the portfolio. Starting in 2024, all European banks will need to adopt and report this ratio. Essentially, GAR will measure the proportion of environmentally sustainable assets against a bank’s total assets.[6]

A higher GAR indicates a stronger focus on sustainability, which can also improve a bank's ESG (Environmental, Social, Governance) rating.

The implications of GAR go beyond just ESG metrics. In the financial markets, where investor sentiment can play a pivotal role in directing capital, a favorable GAR becomes a crucial indicator for both institutional and retail investors. It indicates the proportion of taxonomy-aligned exposures (green assets) compared to total assets.

But GAR's importance is not just about compliance, it has actual implications for banks:

·?????? Role of Sustainable Lending: To achieve a good GAR score, banks need to focus on issuing more sustainable loans. This not only aligns with regulatory requirements but also strengthens a bank's sustainable asset base.

·?????? Tracking Sustainable Assets: GAR acts as a regular check on how many of a bank's assets are green or sustainable, providing a tangible measure of its green efforts.

·?????? Transparency and Dedication: While different banks might have slightly varying definitions or methods for calculating GAR, its main goal is consistent across the board: to show a bank's dedication to green and sustainable practices transparently.

·?????? Impact on Financial Performance: A strong GAR, especially when aligned with the EU Taxonomy’s criteria for environmental activities, can positively influence a bank's stock price and its ability to raise capital.

An adoption of the GAR creates a shift towards recognizing and emphasizing sustainable finance. This metric will serve as a tangible measurement of a bank’s environmental commitment. Rising emphasis will not be solely on compliance, but on the broader implications of GAR in financial strategies, operations, reputation and the ability to attract talent.

The wholesale green loan market promotes environmentally sustainable activities. In addition to being aligned with the EU taxonomy, loans can also comply with the Green Loan Principles (GLP).[7] Developed by experts, they set standards and guidelines for the green loan sector. These principles offer a unified approach to ensure consistency while maintaining flexibility for individual loan products. The four core dimensions of GLP are:

1)?? the specific use of proceeds for green projects,

2)?? the project evaluation and selection process,

3)?? management of proceeds, and

4)?? regular reporting on the use of funds.

Although voluntary, the GLP guidelines aim to define when a loan can be labeled as “green” to enhance market integrity as it grows.

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Opportunities for banks and housing owners

In the realm of energy-efficient building refurbishment, understanding the various funding mechanisms is essential. Multiple institutions, both at the national and regional levels, offer financial support to ensure the sustainable development of real estate.

The German state-owned development and investment bank KfW (Kreditanstalt für Wiederaufbau) provides the basic framework for all funding opportunities and grants limited low-interest loans to private owners and corporations for projects involving the energy-efficient refurbishment of real estate.[8]

With the Federal Funding for Efficient Buildings (Bundesf?rderung für effiziente Geb?ude - BEG) passed by the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle – BAFA), several measures to improve buildings’ efficiency (e.g., building covers, systems engineering, heat generation and heating optimization for residential buildings, non-residential buildings and individual measures) are supported.[9]

Grants and subsidies are disbursed by BAFA to enable more property owners to act in a sustainable and future-oriented manner. The BAFA's subsidy program offers an opportunity for banks to provide loans to eligible individuals under the "BEG für Einzelma?nahmen" program. These individuals could then receive subsidies from BAFA, allowing for a combination of funding sources in line with the program's guidelines. This collaboration between banks and BAFA could facilitate financial support for energy-efficient projects and other initiatives, promoting economic growth and property owners to act in a sustainable and future-oriented manner.

With the funding on state level, clients are supported in financing part of the building refurbishment measures. Loans from banks can complement this by offering different conditions for various clients.

A market analysis by Capgemini has unveiled that, although most banks provide subsidies for building envelope improvements, numerous sectors, for instance battery storage systems, wind turbines or biomass systems, remain underserved. This represents a significant opportunity for banks to expand their presence into overlooked segments.

A best practice example from the industry is to clearly define interest, independent of credit worthiness. High flexibility with a clear final target and purpose of use are representative for a well though-out product portfolio with easily accessible information on credit conditions, purpose and requirements to their customers.

In conclusion, the future of real estate finance is heavily intertwined with sustainable building refurbishment, driven by evolving regulatory landscapes and market dynamics. Banks, as pivotal stakeholders in this ecosystem, need to understand and adapt to these shifts, particularly considering regulations like the GEG and the introduction of the GAR in the European banking system.

Opportunities arise in the realm of real estate energy refurbishment, from covering underserved sectors to offering innovative, transparent, and flexible financial solutions. As the demand for sustainable refurbishments increases, banks equipped with the right knowledge and proactive strategies are assumed to not only navigate but thrive in this transformative phase of real estate finance. This can be achieved by Capgemini’s GenAI tool to identify clients and offer tailored loans to customers, also xconsidering operational and regulatory compliance.

Navigating in the evolving landscape of sustainable real estate finance with the current regulation and market dynamics requires specialized expertise and forward-thinking strategies. As outlined in this post, the emergence of the Green Asset Ratio and the implications of the building energy act (GEG) are set to redefine how institutions approach green financing and building refurbishments in the property sector. At Capgemini Invent, we are equipped to guide and support financial institutions through these transformative times. Leveraging profound expertise in sustainability initiatives, a wide array of partnerships and hands-on experience in addressing challenges in the green finance domain, we stand ready to assist. We are ready to assist with our holistic approach from target operating model, regulatory compliance, loan application and approval, fund monitoring to after sales support. We invite you to engage with our multidisciplinary team of experts in the Sustainability@Banking sector. Let’s shape the future of sustainable real estate finance together!

[1] (United Nations Department of Economic and Social Affairs, 2023)

[2] (EUR-Lex, 2019)

[3]?(European Commision, 2023)

[4]?(European Banking Authority, 2021)

[5]?(Bundesministerium für Wohnen, Stadtentwirklung und Bauwesen, 2023)

[6] (Springer, 2023)

[7]?(International Capital Markets Association, 2018)

[8]?(Kreditanstalt für Wiederaufbau, 2023)

[9]?(Bundesamt für Wirtschaft und Ausfuhrkontrolle, 2023)