Encourage homeowners to make their homes more sustainable

The sustainability of buildings also has consequences for the financial sector, according to a new DNB study. Banks, insurance companies and pension funds have invested a lot of money in residential and commercial property and have provided loans with buildings as collateral. Making these buildings more sustainable requires substantial investment, which may have a major impact on the value of the buildings. At present, many institutions are still unable to adequately assess the risks of this transition due to a lack of data and uncertainty about future climate policy.

Substantial investment needed to make buildings more sustainable

The Dutch government's ambition is for all buildings to become climate-neutral. According to the Dutch national Climate Agreement some 1.5 million homes must be made sustainable by 2030. The transition requires substantial investment, which will largely have to be borne by the owners of these buildings. Examples include investment in insulation and heat pump installations. The new study shows that in a scenario in which all residential and commercial buildings are fitted with an individual heat pump, the total value of investment required by owners could amount to as much as €200 billion (see Figure 1). This means homeowners would have to invest an average amount of almost €24,000 to make their homes natural gas-free. Other scenarios present lower costs, but are based on the assumption that almost everyone will be able to switch to “green” gas or, if that is not possible, that municipalities will manage to realise the cheapest alternative approach per district (“Second best” in Figure 1).

Figure 1: Required investment to make buildings in the Netherlands natural gas-free

Four out of five homeowners can afford sustainability measures

We analysed data on 4.3 million homeowners and found that four out of five homeowners are financially able to bear the costs of making their homes more sustainable. On out of five cannot afford the necessary investment from their savings, nor do they have enough room to borrow the money. Existing measures and subsidies only solve a small part of the problem.

Younger households on lower incomes in particular are often unable to finance sustainability measures. Relatively often these homes are located in municipalities where the population is shrinking or is expected to shrink, or in urban renewal areas. Given the financial vulnerability of these households, it is undesirable to increase their financing capacity by further raising lending standards. Therefore, the government must take additional measures specifically aimed at this group. Regional authorities could also play a role here, as these households are often clustered in certain regions.

Government can help to make sustainability investment more attractive

About half of all homeowners do have enough savings to invest in sustainability measures. Another 30% do not have the necessary money in their savings account, but could get it by extending their mortgage. These homeowners can afford sustainability measures, but often do not want to – yet. This is confirmed by results from the DNB household survey, which show that more than 30% of respondents 'never consider making their own home more sustainable' and less than 20% of respondents 'are prepared to invest more than €12,500 in making it more sustainable'.

The bottleneck for homeowners here seems to be a lack of financial incentives rather than a lack of available funding. In recent years, it has not been profitable to invest in sustainability measures in many cases. The current gas price increases may change this, but the question is to what extent these increases are of a structural nature. Moreover, many homeowners do not know what exactly is expected of them. Good information provision and policies that make it attractive to invest in sustainability improvements are therefore essential.

Policy to stimulate homeowners to improve sustainability should consist of a combination of pricing, subsidies and standards. Just pricing carbon emissions causes gas prices to rise, which would increase the risk of energy poverty. In parallel, the current price incentives should therefore be adjusted. At present, carbon emissions from gas consumption are taxed at a relatively lower rate than carbon emissions from electricity consumption. An increase in the tax on gas and simultaneous decrease in the tax on electricity may help sustainability measures to become profitable more quickly. Subsidies can also make the financial picture more attractive for households. Long-term subsidy schemes, rather than short-term and frequently changing schemes, can offer homeowners more security in this regard. Finally, the government must take the lead and provide clear transition paths, information and standards, so that homeowners and other building owners know where they stand.

Financial institutions should take into account the real estate sustainability challenge

Increasing the sustainability of the built environment also has implications for the financial sector. Collateralised loans and investment in real estate together account for over a quarter of total assets of Dutch banks, insurers and pension funds. Much of this property will have to be made more sustainable in the years ahead. The DNB study shows that about half of all real estate loans and investment may be affected in the next eight years, and some of these even sooner. For example, all office buildings must have at least a level C energy label effective from 2023, and financial institutions have exposure to office buildings that do not yet meet this requirement.

Financial institutions should therefore take potentially substantial sustainability investments into account in their real estate investment portfolios. This investment affects the value of buildings and the assets linked to them. Differences in the value between energy-efficient and non-energy-efficient buildings are only set to increase due to stricter sustainability requirements and higher carbon prices. The extent to which sustainability investment can be recouped through higher rental income is uncertain. Based on the available data on their investment in European real estate, the study shows that the cost of 'doing nothing' for Dutch institutional investors in some scenarios could amount to 60% of the value of the real estate investment concerned.

For loans collateralised by real estate, institutions depend on the sustainability investment made by the owner of these buildings. However, not in all cases will the owner be able or willing to finance the necessary investment. For one fifth of all commercial buildings used as collateral for bank loans, the investment required is more than 15% of the value of the building. If no sustainability investment is made, the value of the collateral decreases and the owner may also face rising energy bills. Taking out an additional loan for sustainability purposes can also lead to higher risks. Financial institutions must take this into account in their risk management. To identify these risks, financial institutions will need to further improve the availability of information on climate-related risks.