Funders needed for real estate’s retrofit revolution

Non-bank lenders are being asked to step up to the plate to help address the environmental, social and governance standards expected to be met by European commercial real estate.

A new report from CBRE Investment Management finds that 60 percent to 75 percent of Europe’s real estate stock is in need of refurbishment to meet required Energy Performance Certificate standards, representing a debt requirement of between €720 billion and €900 billion. Around half of this is accounted for by the office sector.

The report says that banks alone cannot provide the required financing, partly because of slotting and Basel IV regulations encouraging a move away from value-add lending. This means non-bank lenders are being called upon to support the funding need.

“The need for an alternative source of funding is clear – as is the size of the opportunity,” says Dominic Smith, senior director, credit research at CBRE Investment Management. “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.”

However, Smith cautions that such lenders will “pick and choose the schemes that offer the best margins and strongest location fundamentals”, and that retrofitting concentrated in the most desirable areas will leave other areas with a shortage of lettable stock.