Loans to commercial real estate are subject to new requirements at some of the largest banks in the world, which could influence the industry’s ability to obtain funding.
The carbon emissions of buildings and the anticipated cost of the necessary improvements to comply with the latest green laws are at stake. The Energy Performance of Buildings Directive (EPBD), one of the many net zero laws being enacted by the European Union, was just ratified. Banks that are too big to fail are beginning to respond.
The largest bank in the European Union, BNP Paribas SA, has set targets for reductions that until 2030 may reach as high as 41% of the emissions intensity of its commercial real estate portfolio. ING Groep NV, Banco Santander SA, Barclays Plc, NatWest Group Plc, and others have either previously taken similar action or are considering it.
This represents a new level of risk management for banks in their loan books. Banks are facing a new challenge with their CRE portfolios, which have already been impacted by increased interest rates and unstable occupancy rates following the pandemic. These banks are dealing with an excess of older properties that require renovations to comply with the latest green regulations.
Chief product officer Roxana Isaiu of ESG data and benchmarking supplier GRESB says her company has just begun to engage with bankers who are keen to learn about the new green construction criteria. “The regulators’ signals are evident,” stated Isaiu, who has only addressed equity investors thus far.
Although the implementation of EPBD by the EU is expected to take several years, it is evident that buildings that lag behind run the risk of becoming stranded assets that are no longer able to be rented or sold. According to EU estimates, 75% of the buildings in the union have “poor energy performance,” while approximately 85% of the structures were constructed before 2000.
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According to Isaiu, the hazards differ depending on the nation; the Netherlands is one example of a region where commercial real estate is more energy efficient than most. However, she added that even in that case, a third of the market does not satisfy the minimal requirement of an energy performance certificate level (EPC) of C, which has been in effect since the beginning of 2023.
Furthermore, Isaiu stated that European efforts to address the problem are “coming much slower than anybody would have expected.”
Banks may use the private markets to unload risk if they find themselves burdened by CRE assets that are too expensive to remodel. Additionally, there is evidence that certain banks are beginning to look into what are known as “synthetic securitizations,” which transfer the risk of rising capital costs related to emissions to external investors, thereby protecting them from such expenses.
Banks find it more difficult to manage such risks because, in contrast to private equity or private credit investors, they frequently have less access to pertinent energy-performance data for their CRE portfolios.
In an email response to inquiries, BNP stated that upgrading the current building portfolio is “heavily reliant” on the commercial real estate sector’s capacity to keep up with the anticipated shift to a lower-carbon economy. There must be a “significant acceleration in renovations” for the approximately 80% of current structures that are anticipated to still stand in 2050, according to the bank.