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No (re)Financing without sustainability
Real Estate picks up its pace in becoming green
How do you accelerate sustainability in the real estate sector? More stringent sustainability standards seem to help as does introducing requirements for (re)financing. Arnout Scholten, a Partner in the Real Estate and Construction team and Etienne Courbois, Counsel in the Banking & Finance team, see that the pace is picking up.
Sustainability is becoming an important factor in real estate financing and refinancing. What have you noticed within you practice?
Courbois: ‘Regulators and regulations are encouraging real estate investors and project developers to make their portfolios more sustainable. Another aspect is that financing and refinancing is becoming more difficult if you don’t. Therefore, the need to meet sustainability standards increases.’’
Scholten: ‘It can also have a preventive effect. For example, since the announcement a few years ago of the required C-label for office buildings (required as of January 1, 2023), we have noticed that banks are anticipating and will only finance buildings or portfolios, or will only adjust the financing requirements of these properties, if they have at least a C-label or if they can be brought to that level. The requirement has not even been introduced and there is already pressure to meet it. That’s good.’
Can you name some stumbling blocks in sustainability within real estate?
Scholten: ‘There are irksome regulations within real estate that could be much simpler. In real estate, long-term predictability is important. This is sometimes lacking in subsidies for more sustainability.
In contrast, the real estate owner is expected to invest in sustainability while the user reaps most of the benefits. That’s difficult. Sometimes there are restrictions in the present tenancy law for homes that do not allow additional costs for making a building more sustainable to be charged to the tenant. Tenants are often willing to help pay but this legislation can’t be fully boarded up and thus a choice is made for a less, or completely unsustainable, solution: unfortunate and a missed opportunity.’
We have seen that there is interest in real estate for logistics and health care. Where do you see the most growth, where is the decline and what is the role of sustainability and financing?
Scholten: ‘We, as lawyers, must be discreet. We say what we hear from our clients. What I hear and read is that retail real estate, especially in the (sub)urban regions, is being influenced negatively by the COVID-19 pandemic. These changes seem to be permanent and are causing a change in behavior. We think that this sector will lag behind. The use of office space is also changing, especially in the services sector. The current pandemic has shown that working from home is easy, which is why companies are looking into economizing on square metres. This will lead to a reduced or changing demand. The social aspect of a better balance between work and private life is certainly important but the decrease in cost weighs just as heavily. It’s a win-win situation.’
Courbois: ‘The COVID-19 pandemic has caused distribution centers to pop up like mushrooms, especially along the highways. I have seen banks look closely to see if financing new objects or refinancing others fits their sustainability goals. Data centers, as real estate objects, are difficult to make sustainable, but we sometimes see that they make use of wind and solar energy.’
Scholten: ‘Logistics is a real estate category for which COVID-19 has caused an acceleration in e-commerce and consumer behavior. The Brexit also plays a major role, because many suppliers want a distribution hub in Europe. These developments reinforce each other.’
CMS research, Real Estate Reset, paints a picture of the real estate market after the COVID-19 pandemic. How will this affect you and your work environment?
Courbois: ‘We will no longer be at the office five days a week. A new normal will be created, not only cost efficient but also good for employees. There will be more flexibility to combine work with other duties. However, partial remote work requires a different approach when educating young people. It is not possible to just drop by to discuss an assignment or problem. Everyone will have to learn to plan more efficiently.’
Scholten: ‘Working from home has been a revelation for me. Before, I didn’t think it possible for much of our work. But it is possible and it works. I believe we will eventually end up working from home for one or two days a week, and that helps with the E and the S in ESG (Environmental, Social, Governance). Less time in a car is better for the environment. At the same time, the office as a meeting place, is an important spot for the S (Social).’
Would you like to read more about real estate trends and how the market is reacting to the pandemic? Download Real Estate Reset – real estate’s journey from pandemic to purpose.
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