Commercial property owners across the UK and Europe are under pressure to improve the environmental performance of their buildings, but market experts say financial incentives such as “green loans” remain too limited to accelerate the shift.
Buildings and construction account for about 32 per cent of global energy use and 34 per cent of carbon dioxide emissions, according to the UN Environment Programme and the Global Alliance for Buildings and Construction.
Despite that, the policy landscape remains patchy, and many landlords are slow to upgrade.
Regulation still uncertain
The UK government proposed in late 2020 that commercial buildings must reach at least a Band B energy performance certificate (EPC) rating by 2030 to continue being let.
But in 2023, the government said those timelines would need revising, and the rule has not yet become law.
Across the EU, the Energy Performance of Buildings Directive aims for a fully decarbonised building stock by 2050.
Member states must embed its minimum efficiency standards into national legislation by May 2026.
Advisers say the clock is ticking.
The UK’s independent Climate Change Committee has warned that emissions from non-residential buildings need to drop 87 per cent between 2023 and 2040 to stay on track for net zero by 2050.
Tenants demand better standards
Occupiers are increasingly weighing sustainability in leasing decisions.
A Knight Frank survey this year found 58 per cent of office tenants say ESG performance affects the rent they are willing to pay. Poorly rated buildings can expect discounts, while greener assets command a premium.
Yet the UK market remains heavily exposed. Knight Frank data shows 70 per cent of commercial stock is still rated EPC C or worse.
Green finance slow to catch on
Green loans, which typically offer small interest rate discounts for developments or refurbishments that meet sustainability goal, have grown in profile but remain a niche product.
Discounts generally range from 0.1 to 0.3 percentage points, according to lenders.
Some banks see efficient buildings as lower risk and easier to lease, but the price benefit is often modest compared, reports the Financial Times.
“There’s been progress, but green loans are far from mainstream,” said Stephen Inglis, chief executive of London & Scottish Property Investment Management.
“The pricing advantage rarely justifies the capital spend required.”
A study by Puma Property Finance and UCL’s Centre for Sustainable Governance and Law found that 26 per cent of lenders offer no sustainable finance at all, while for 45 per cent it was unclear whether such products were available.
Some loans do stand out. In May, Puma funded Kier Property with a £21mn (about AUD39mn) facility to build an industrial logistics hub in Milton Keynes, featuring a green roof.
It also extended a £46mn (about AUD86mn) loan to Global Mutual to retrofit a life sciences campus in Hertfordshire, aiming for an EPC A rating once completed.
Puma says it can cut borrowing costs by up to 1 percentage point on the loan’s exit fee if projects meet strict sustainability targets.
But for most of the market, the extra reporting and data collection required for green loans can be off-putting.
And with interest rates fluctuating, small discounts can be “gobbled up,” said Hugh White, head of national capital markets at BNP Paribas Real Estate.
Long-term value still drives some investors
Despite weak incentives, some developers are pursuing low-carbon strategies to remain competitive.
Urban Partners, a private investment firm managing €22.7bn (about AUD37bn), is building a nearly self-sufficient office in Nordhavn, Copenhagen, powered by geothermal energy and solar panels.
“It’s less about regulation and more about opportunity,” said Rune Kock, co-head of real estate at Urban Partners. “Using geothermals, heat pumps and better insulation is usually value-accretive.”
Analysts say that unless green finance grows significantly, many landlords will delay expensive retrofits, a risk as climate policies tighten and tenants become more selective.
