There will be a significant impact on the valuation of banks’ current property portfolios. While for new loans banks will be able to require an EPC and calculate any renovation costs, for existing mortgages, even those with an EPC, it will not be easy to assess the investment needed for the property to reach the minimum required energy performance.
Since most countries have a fairly low percentage of their building stock with an EPC, it will be a challenge for banks to establish a realistic valuation. It is logical to expect that they will have to rely on proxies and external providers to estimate energy performance and renovation costs, with an increase in costs that will probably be reflected in the cost of borrowing.
Another point concerns historic buildings. The new EPBD allows Member States to exclude certain buildings from the EPC and from minimum energy performance requirements, in order to protect their integrity. However, this could cause a considerable devaluation of historic buildings.
Consequently, in the portfolios of some banks – those with a large share of buildings excluded from the EPBD – the risk of having stranded assets could increase.
Let us turn to climate risks. As climate risk situations (floods, foundation rot, fires, to name but a few) are expected to intensify over the next decade, financial institutions will have to tackle the transition towards a more sustainable portfolio while also making it more resilient to climate change.
The EPBD revision will open up a new market of loans and renovation products for financial institutions
Setting aside these objective difficulties in adapting to the new rules, the analysts’ forecast is clear: this directive will open up a new market of loans and renovation products.
The expected demand for energy upgrades will increase.
For banks it will be an opportunity to design new products to meet this demand properly.
ING acknowledges, on the other hand, that it will be essential to enable all homeowners to access the necessary financial means, so that the transition does not take on features of social disparity and injustice.
In conclusion. The actual quantitative impact of the revision of the EPBD on the lending activity of financial institutions is still difficult to assess precisely. However, the forecast is that the implementation of strict minimum energy performance requirements will trigger, in addition to a higher renovation rate, a gradual introduction of a premium for energy-efficient buildings on the property market.
And for homeowners?
For the category of owners, whether small or large, there are at least two relevant aspects to consider.
The first is the complexity of the procedure. A great deal of information will in fact be needed to understand and estimate the renovation and regulatory requirements.
The second is the liquidity needed to comply with the new policy.
In this sense, the conclusion of the ING report identifies new scope for the activity of financial institutions. Banks will in fact have to play a role in both of these aspects: gathering suitable information for their customers, and designing innovative loan products to promote this important renovation activity without leaving out a potentially large segment of users with limited financial means.
