Owners of UK and European property are facing a challenge to improve their buildings’ environmental performance, with some in the industry saying loans which encourage greener real estate are not yet extensive enough to speed up the transition.
The buildings and construction sector is a big driver of climate change, consuming 32 per cent of global energy and accounting for 34 per cent of global CO₂ emissions, according to a report by the UN Environment Programme and the Global Alliance for Buildings and Construction.
The previous UK government in December 2020 proposed that commercial buildings should have an energy performance certificate of at least band B by 2030 for them still to be lettable. However, in 2023 it said “the proposed timelines . . . will require updating” and it is yet to become law.
In the EU, the Energy Performance of Buildings Directive, which will gradually introduce minimum standards for properties and aims for full decarbonised building stock by 2050, needs to be incorporated into national laws by May next year.
Risk management: Property
The article is part of a special report on risk management in the property sector. Other pieces cover cyber risks, fire threats, and the secondary office market.
Meanwhile, the Climate Change Committee, which advises the UK government, said earlier this year that greenhouse gas emissions from non-residential buildings need to fall by 87 per cent between 2023 and 2040 for the UK to reach net zero by 2050.
Occupiers are also increasingly concerned about the issue. A survey by property agency Knight Frank earlier this year found that 58 per cent of office occupiers said ESG factors affected their view of rents, with many expecting a discount for sub-par performance, and willing to pay a premium for buildings that meet higher standards.
But the industry still has a long way to go. Knight Frank last year found that 70 per cent of UK commercial property was rated at EPC C or below.
So-called green loans have been touted as a way of encouraging environmental improvements by offering lower interest rates to borrowers for new builds or renovations if certain targets are met. But some in the industry say this form of lending is not attractive or widespread enough to make a real difference.
Energy Performance Certificates
EPCs show a building’s energy efficiency, with properties graded from A, the most efficient, to G, the least. They are valid for 10 years and are needed when renting out or selling a property, when a building under construction is finished or when certain changes are made to the property. Commercial properties can only be let if they have at least an E rating.
“There has been a growth in green loans, but they’re still far from being the norm. The pricing advantage isn’t sufficient in itself to justify the [capital expenditure],” says Stephen Inglis, chief executive of London & Scottish Property Investment Management.
“The vast majority of loans are not green loans. It’s a very, very niche part of the market,” he adds.
Details of green loans vary from deal to deal, but typically they can offer a discount of roughly 0.1 to 0.2 or even 0.3 percentage points on the interest rate a borrower would otherwise pay, say market participants. This is because lenders see buildings with better green credentials as higher quality, more attractive and easier to let to a greater pool of occupiers.
But, given the various key performance indicators — which tend to differ from deal to deal — that need to be met, a green loan may offer little attraction to developers unless they are already making changes anyway.

Some in the market point to the extra administration and reporting obligations involved in green loans, with some lenders insisting on detailed data collection.
“While the intent is positive, the execution can be onerous and, in some cases, may limit the ability to deliver on [a] business plan,” says one real estate investor.
And the pricing advantage on offer can be small in comparison with broader moves in lending rates. Hugh White, head of national capital markets at BNP Paribas Real Estate, says the discount available can be “gobbled up” by changes to Sonia — the sterling overnight index average interest rate benchmark.
Many in the industry say the green loans sector needs to grow substantially in order to be a useful tool.
A report by Puma Property Finance and the UCL Centre for Sustainable Governance and Law in the Built Environment found that 26 per cent of lenders did not offer sustainable finance, while for a further 45 per cent it was unclear whether or not they did, based on their websites.
“This sort of financing needs to be scaled up,” says Hanane Hafraoui at the United Nations Environment Programme.
Nevertheless, some loans are being made. In May, Puma said it had provided a £21mn loan to Kier Property for a new industrial logistics unit in Milton Keynes that will include an environmentally friendly green roof. It has also made a £46mn loan to Global Mutual to retrofit a life sciences campus in Hertfordshire, which is targeting EPC A when finished.
Puma says it offers discounts of up to 1 per cent — much bigger than most on offer — deducted from the loan’s exit fee, subject to meeting certain green targets.
“I’m not sure that [standard discounts available on green loans] are driving changes in behaviour,” says Paul Frost, Puma Property Finance’s managing director. “We are willing to accept a lower return to drive that change.”
Some industry insiders, however, say that even without a fully developed green loan market, improving a building’s environmental credentials is worthwhile.
Private investment firm Urban Partners, which manages €22.7bn in assets, is building an office in Nordhavn in Copenhagen that will use geothermal energy and solar panels, meaning it will consume almost no energy not produced on site.
“It’s not the regulation that forces us to adapt and change, it’s more the opportunity and competitiveness,” says Rune Kock, co-head of real estate at Urban Partners. “Geothermals, heat pumps, insulation — it’s typically value-accretive.”