What valuers tell banks about energy efficiency: a snapshot of current practices

By Zsolt Toth, External Affairs & EU Liaison Manager, Europe RICS


Lenders rely on valuations as part of the risk assessment process of offering loans. When deciding whether to make a mortgage offer, lenders take into account, along with other factors, both the customer’s ability to make the payments and the advice provided by the valuer on the quality and market value of the property being offered as security against the mortgage loan. The role of the valuer is to supply advice and an estimate of the market value (MV) based on market evidence applied to an appropriate valuation methodology. Current prevailing practice for secured lending is that the valuer will not be instructed specifically about the energy rating of the property, however this is beginning to change as lenders are now asking for more information in relation to energy efficiency.

A survey currently being carried out among valuers and credit risk departments of significant European banks intends to gather market insights about the extent property features are typically considered to have an impact on securing the loan. The first, high level findings are presented below with the aim to stimulate further discussions among lenders and valuation professionals.

A diverse picture

The feedback received reflect the variety and cultural diversity of real estate and mortgage markets in Europe. The basis of any valuation, including the leeway of the valuer to include an assessment of energy efficiency and sustainability impacts, depends on both, the purpose for which it is being prepared as well as the regulatory framework within which the valuation is being carried out. For example, if a valuation based on market value according to Red Book standards is being prepared, the valuer would be expected to consider and comment on sustainability-related building features. However, this would not be the case if it were a valuation based on market value according to the German valuation order; here the valuer would only be expected to consider and comment on energy efficiency issues. Whereas a valuation based on mortgage lending value according to specific national valuation regimes might not even require the valuer to comment on any of those sustainability features.

Critical to the energy efficiency mortgages initiative is to understand what the underlying internal processes are within the financing institutions, who instructs the valuer and at what point of the mortgage origination process, as well as what is the weight placed on the valuer’s report. It should also be noted that in most European countries there are legislative and regulatory constraints on residential lending including different rules regarding both the basis and method of valuation to be applied.

Energy efficiency and value

One of the positive trends noted was that current valuation instructions already include requests to comment on energy efficiency. More than half of the major European banks participating in the survey instruct their valuers to consider the potential impact of the energy efficiency rating of the property (usually EPCs) with notable exceptions which go even further to include actual energy performance and wider environmental impacts. Energy efficiency features can also be picked up by valuers when doing physical inspections as 9 out of 10 banks require valuers to comment on the building fabric and the overall condition of the property. It is important to emphasise however, that a mortgage valuation is to inform the lender, not the borrower. The reality is that many borrower rely on a mortgage valuation when in fact they would be better served by purchasing their own report on a property to include environmental issues.

This is an encouraging finding which enables the EeMAP consortium to continue working closely with banks on developing valuation checklists and instructions to reflect energy efficiency in the valuation process in a more thorough and standardised way. It remains to be further explored how energy efficiency is accounted for in the risk assessment further down the underwriting stream. The replies suggest that it is a mix of traditional factors and value drivers that determines the creditworthiness of a property however, age and condition of the building envelope and technical equipment will count to a large degree.

Data availability

Rapid technological advances in most sectors, such as Internet of Things, Blockchain and Big Data, are responsible for an ever-growing avalanche of data and yet, despite this trend, a lack of data and information in the built environment real estate sector may be increasingly perceived as a tangible risk factor by those underwriting lending decisions. The survey looked at what building related data is being collected and stored in-house by banks, who provides this information and whether it is shared and used during the mortgage underwriting process. Core indicators which are routinely collected, considered and used in analysis and estimates include location, age, construction costs, transaction prices and tax values. Interestingly, energy performance and renewables have only been mentioned sparingly. Other environmental performance indicators such as carbon emissions, water, waste and adaptability to climate change feature even lower on the radar of both valuers and lenders, especially qualitative indicators such as user comfort and health.

Availability of data poses a significant challenge for valuation professionals as regardless of whether market evidence exists or not, it remains the responsibility of the valuer to take into account all those quality attributes which might have an impact on value. In the context of insufficient empirical evidence, the weighting of these attributes (especially in the case of qualitative indicators) remains with the professional judgement of the valuer. In this sense, improving the availability and consistency of data is an area which needs to be urgently addressed in order to reinforce the positive link between building performance and reduced risk.

Looking forward

EeMAP is quickly approaching a pilot phase to be launched early next year. In order to equip banks and their valuers with the necessary tools and skills to better recognise the impact of energy efficiency, a workshop was held on the 24th of November in Brussels to validate findings on existing valuation and risk assessment practices.

The ability of valuers to advise on the impact of energy efficiency is a key piece for lenders to calculate mortgage affordability without increasing the credit risk and thus allowing additional funds to be provided to the consumer. A better understanding of the relationship between energy efficiency and value is also important for a more robust and risk sensitive property rating in the loan portfolio of banks.

Individual Building Renovation Roadmaps (iBRoad): Developing customised tools for deep renovation and comfortable energy efficient homes

By Mariangiola Fabbri, Senior Project Manager, Buildings Performance Institute Europe (BPIE)

In Europe, buildings are responsible for around 40% of energy consumption. Without a long-term plan to renovate and decarbonise the European building stock, the road to achieve the EU’s climate and energy objectives and the Paris Climate Agreement commitments will be long and winding.

While building performance is constantly improving, only 3% of the EU’s building stock has been built to a standard that can be considered efficient. This means that 97% of the building stock needs upgrading[1] .


Renovating a building can be complex and time consuming. For building owners, together with the difficulty of accessing dedicated financing for renovation, the lack of knowledge about what to do and how to implement renovation measures are the main obstacles to improving the energy performance of their building. That is why, to succeed in such an endeavour, building owners need support.

The iBRoad project is helping to lift these barriers by developing an Individual Building Renovation Roadmap for single-family houses and small multi-family houses. This tool looks at the building as a whole and provides a customised renovation plan over a long-term horizon (15-20 years). At its core, the renovation roadmap is a home-improvement plan, which considers the occupant’s needs and specific situations (e.g. age, financial situation, composition and expected evolution of the household, etc.) and avoids the risk of ‘locking-in’ future renovation solutions due to a lack of foresight.

An individual Building Renovation Roadmap is an evolution of the Energy Performance Certificate (EPC), as it supports building owners with personalised suggestions on their renovation options. An on-site energy audit, fulfilling specific criteria and established with the owner, results in a ready-to-use, personalised renovation plan for the building owner, presenting all the measures to implement and the order to implement them, together with an explanation of the benefits to be expected after the renovation is completed, including energy savings and comfort improvements.

The plan will be combined with a repository of information (known as a building logbook) on aspects like the energy consumption, energy production, executed maintenance and building plans.

With its innovative approach, iBRoad aims to empower home owners and support them in taking informed decisions concerning renovation, based on their individual needs. By doing this, iBRoad will encourage cost-effective building renovation measures and boost deep renovation to achieve greater energy efficiency.

The project builds upon existing examples in Germany, France and Flanders (Belgium), to identify successful features and tools that can be adapted to different national conditions (such as climate zones and regulatory frameworks).

The concept and tools developed by iBRoad will be tested in Bulgaria, Poland, Portugal and Germany (Germany will only test the logbook). A training programme for auditors will also be provided. The feasibility and replicability of the iBRoad model in other building typologies and EU Member States will be assessed through auditor- and user experience feedback.

iBRoad and the Energy efficient Mortgage Action Plan (EeMAP) Initiative are  complementary in scope and expertise. By providing a user-friendly tool to guide building owners through a step-by-step deep renovation (iBRoad) and the financial means to implement it (EeMAP), together they can help to lift two of the main barriers to renovation (complexity and access to finance). The products resulting from these two projects can incentivise home owners to improve the energy performance of their building and to finance it through a dedicated energy efficiency mortgage available on the European market.

By maintaining an open and continuous dialogue between both iBRoad and EeMAP, and providing input to the development of the projects (including, stakeholder engagement, market research and customer surveys), the projects’ key features can be developed in tandem, ensuring that all relevant issues are considered and potential ‘lock-ins’ are avoided.

The iBRoad project is funded by the European Commission under the Horizon 2020 framework programme for research and innovation, under grant agreement N. 754045. The project started in 2017 and will run until June 2020. The project has 12 partners from 9 countries.

Twitter: @iBRoad _project

Website: http://iBRoad-project.eu/

[1] Only 3% of the EU building stock has an Energy Performance Certificate with an “A” label, which although definitions differ between countries, is broadly considered as a “very efficient” building.

Energy Efficient Mortgage Initiative Gains Strong National Support from Belgium

Second EeMAP National Roundtable event takes place in Brussels

Today, the Energy Efficient Mortgages Action Plan (EeMAP) Initiative takes another concrete step forward with the second in a series of national Roundtable events, this time focussing on Belgium. The event, organised in Brussels in cooperation with the Flemish Construction Confederation (VCB), brings together experts from the Belgian and European banking, construction, valuation and engineering sectors with a strong interest in building energy efficiency and its financing.

Significantly, today’s Roundtable event will also be attended by representatives of the Cabinets of the Belgian Regional Energy Ministers, underlining the political support that EeMAP is garnering also at national level.

The event’s aim is to discuss how energy measurement calculations and asset performance documentation developed and deployed in Belgium can be scaled up to support the development of an Energy Efficient Mortgage product for Europe, which will be put to the test in a forthcoming EeMAP Pilot Phase.

The first EeMAP national case study, with a focus on Italy, was launched 13 November 2017 in Milan. Other national Roundtable events are in the pipeline for later this year and early in 2018.

Luca Bertalot, EeMAP Coordinator, commented:

“We are excited to see so much interdisciplinary support from Belgium for this national EeMAP case study. We are particularly encouraged by the strong political interest from Belgium in the Initiative. Exchanges of this kind between local and European stakeholders are invaluable for identifying and incorporating national best practices into the EeMAP framework at European level and, ultimately, for the long-term success of the Initiative.”

 

Ivo Van Bulck (Secretary General UPC/BVK; Director Commercial Banking Febelfin), commented:

“The Belgian credit sector is playing a leading role in this European social initiative. This kind of close cooperation between the construction industry, the credit sector and the political world is absolutely crucial if Belgium and Europe still want to pursue the environmental objectives set for 2050. The Belgian credit sector is also prepared to assume its responsibility for the timely achievement of those goals.”

 

Marc Dillen, Managing Director, Flemish Construction Federation, commented:

“The goal set forward by the Flemish government to make all homes energy efficient by 2050 is very ambitious. In order to achieve this goal, we need initiatives on the national level as well as on the EU level, such as EeMAP. A major challenge is to find long-term financing for home renovations, therefore we have developed our ReCalculator tool to provide an accurate estimation of the real energy savings after renovation.”

 

Johan Van Der Biest, General Manager, Wienerberger, commented:

“Renovation of the existing housing stock is key to reach the CO2 reduction targets. The payback lies in the combination of energy cost reductions and the increase of the total value (physically and aesthetically) of the property. The focus must be on financing the reduction of energy consumption and upgrading the fundamental quality of the building, since they define the value, and not the production of green energy in a property.” 

Presentation materials are available here.

Italian banks take up COP23 challenge and organise first EeMAP Roundtable in Milan

First EeMAP national Roundtable event to focus on Italy

Following on from the presentation of EeMAP in Bonn at COP 23, the Energy Efficient Mortgages Action Plan (EeMAP) Initiative takes a concrete step forward with the first in a series of national Roundtable events, on this occasion focussing on Italy. The event, organised in Milan and hosted by UniCredit, brings together experts from the European Investment Bank (EIB) and the Italian banking, construction, valuation and energy sectors with a strong interest in building energy efficiency and its financing.

The purpose of the event is to gather practical input from national practitioners for the EeMAP Initiative, which seeks to scale-up mortgage financing for energy efficient buildings at European level. The outcomes of the event will feed into the EeMAP Pilot Phase, which will test the framework for energy efficient mortgages produced by the EeMAP project’s technical committees. The Pilot Phase is excepted to begin in 2018 with a view to delivering a final framework for an Energy efficient mortgage product in the final stage of the EeMAP Initiative in 2019.

Following today’s event, a second EeMAP national Roundtable event focussing on Belgium will be organised on 15 November 2017 in Brussels. Other national Roundtable events are in the pipeline for later this year and early in 2018.


Luca Bertalot, EeMAP Coordinator
, commented:

Today’s exchange will allow us to gather a lot of invaluable practical input for the preparation of the forthcoming pilot phase. We are delighted to see such interest from Italian stakeholders and are extremely grateful to UniCredit for leading the way in Italy on behalf of the EeMAP Consortium.

 

Luciano Chiarelli and Paolo Eliezer Foà, UniCredit, commented:

Mortgage markets have the potential to play a game-changing role in relation to energy efficiency investment in buildings, opening new market opportunities, stimulating best practices and making banks’ portfolios more resilient. UniCredit is therefore delighted to host the first EeMAP Roundtable in Italy. As a systemically important bank UniCredit believes that it can play an important role in relation to sustainability issues, especially in synergy with all relevant stakeholders, and enrich the whole economic system and its actors.