Non-bank lenders will be crucial in helping the real estate industry to meet challenges around energy efficiency, stepping in where traditional financiers can no longer tread.
That was the message from the team at CBRE Investment Management, arguing in a new report that there is a “clear, substantial need for non-bank lenders to lead the way” in financing the climate-friendly refurbishment of commercial real estate stock.
That need is growing, CBRE IM noted, given that as of 2023 it will be illegal in the UK to let a building with an energy performance certificate rating of below E, and potentially from 2030 illegal to let one rated lower than B.
Across Europe, CBRE IM said between 60% and 75% of non-residential real estate stock is in need of refurbishment to reach a B rating, representing up to €900bn (£758bn) of debt. The agency added that the cost of upgrading an office from a rating of F or G to B or C has been estimated at around £200-£300 per sq m.
CBRE said banks alone will be unable to provide the necessary finance as regulation prevents them from making riskier loans.
Dominic Smith, senior director for credit research at CBRE IM, said: “With a significant majority of real estate rapidly requiring an energy efficiency upgrade, and concerns about banks’ ability or preparedness to finance projects in sufficient volume, the need for an alternative source of funding is clear – as is the size of the opportunity. Non-bank lenders who have built capability to meet one of real estate’s most pressing challenges will be able to deliver strong returns and improved ESG performance to investors.”
He added: “However, the sheer scale of the task compared with their aggregate size means these lenders will effectively pick and choose the schemes that offer the best margins and strongest location fundamentals. The risk is that retrofitting will be concentrated in the most desirable areas, perhaps leaving some areas with a shortage of lettable stock.”
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