GREEN MORTGAGES FOR CLIMATE RESILIENT FUTURE KENYAN CITIES

Date: 02 March 2018

Kenya has already proven to its neighbors, Africa and the world that a growing economy and attempts to combat a changing climate can, and should, go together. Our investments in renewable energy grew virtually from zero in 2009 to US$ 3.56 billion in 2016 across renewable technologies such as wind, small-scale hydro, geothermal, and biofuels. In fact, Kenya is still the largest producer of geothermal power in Africa with an output of 200 MW channeled into the national grid. Despite these successes in renewable energy sector, now is the time to develop our strengths and position our country as a regional hub with a potential to play a game changing role in the ‘green’ property market.
Over the past decade, Kenyan cities have experienced dramatic growth as a result of rapid population growth and economic transformations triggered by a combination of rapid technological and political change. Around 5 million people—virtually 10% of the Kenyan population-now lives in its three cities- Nairobi, Mombasa and Kisumu. And while these cities command an increasingly dominant role in the country’s economy as centers of both production and consumption, rapid urban growth coupled with unsustainable energy consumption strategies is seriously outstripping their capacity to yield gross energy savings to unlock low cost energy resource for Kenyan economy.
The transition to a low carbon and climate resilient cities is a multi-billion shillings investment opportunity and a vital part of our green growth strategy and Medium Term Plan III in the Kenya Vision 2030. It is, therefore, incumbent upon various stakeholders including the government, Kenya Green Building Society, and the financial sector among others to establish a sustainable finance taskforce that will help Kenyan businesses in fully exploiting this opportunity. In recent times, our financial services sector has been Kenya’s success story and I believe the sector has the power and the muscles to drive ‘green’ property agenda for sustainable cities. As we seek to green the Kenya’s property sector, it is also vital to remember that a green property should be both energy efficient and climate resilient.
Presently, there is no clear definition of green mortgages, but they usually refer to an arrangement where a financial institution or mortgage lender offers a house buyer preferential terms upon proving that the property for which they are borrowing conforms to certain environmental standards or has been constructed with sustainable materials. Of course, this could include acquiring a newly built property with existing sustainability rating, or where the borrower will commit to invest in refurbishing an existing construction to improve its sustainability performance. Put differently, a green mortgage is a mortgage for green buildings but with preferential financing conditions.

To put the potential of green mortgages in enhancing the progress towards climate resilient cities into perspective, the Kenyan construction sector was valued at USD 3.53 billion in 2015 and the sector is expected to grow at an average compound annual growth rate of 6.8% to 2020. Kenyan cities experiences a demand of 250,000 housing units per annum and a deficit of 350,000 square meters commercial office space exists- the demand is expected to rise over the next three years. Banking on this potential, there is growing evidence which suggests green mortgages have the potential to revolutionize energy efficiency and put Kenyan cities on the path to sustainability.
First, owners of green homes might be less likely to default on their payments as compared to owners of ‘brown’ properties. Reason being, resource efficiency reduces utility bills. This might make the borrowers less likely to default on their mortgage payment (diminishing what the banks call ‘probability of default) because of accrued disposable income. A 2013 study conducted by IMT finds that energy efficient homeowners are 32% less likely to default on their mortgage payments. This is a very assuring finding, however, it requires further endorsement to make a strong case of causality between sustainable building and diminished mortgage default risks. Tout ensemble, there is likelihood that banks can offer more favorable terms, such as, lower interest rates to owners of green buildings if they have a lower score in probability of default. With further development in the mortgage industry, banks could even start considering climate resilience and energy efficiency bands as a component of their affordability computations.
Secondly, green mortgages offer the channel for unlocking “green value’- this refers to higher rating associated with green buildings as compared to equivalent property lacking sustainability credentials. This is particularly important with increased consumer appetite for green properties and diminishing demands for less green buildings (‘brown discount effect’). Considering that mortgage repayments often go for as long as 20-30 years and the brown discount is expected to increase over time, increasing green value and averting future brown discount is a more logical option for a loaner seeking to diminish the risks associated with its loans. Again, if the prospects of ‘loan to value’ ratio seem beneficial, lending more money to green buildings versus ‘brown’ buildings becomes justifiable.
Availability of green mortgages also puts the energy efficiency and sustainability agenda at the fore front in early stages of property development. This is an important stage in construction because more often than not, it is the point where decisions about property renovations may be reached. A 2015 research by the Energy Saving Trust, a UK based organization devoted to promoting energy efficiency, suggests that the bulk share of major renovations in the UK are conducted within the first year of possession. The green mortgages, therefore, offer a way of opening up additional finance for renovation from the private sector hence bringing on board more stakeholders into the campaign for sustainable buildings.
Another raison d'être for promoting green mortgages is that in the near future it is very likely that the government will consider dampening financial regulation for sustainable financial products with the aim of enhancing green investment. Kenya has a strong agenda for green growth and it’s highly probable that green mortgages might be singled out in particular as the pioneer sectors that could gain from this type of preferential regulatory scheme. For instance, Frans Timmermans, the Vice President of the European Commission announced in 2017 that the EU might just consider such a move.
Finally, large-scale private investment will be necessary to meet the vast demands on investment being created by Kenya’s transition towards a low-carbon economy. Opportunities exist for SMEs, investors and businesses to play an active role in retrofitting of buildings to become more energy efficient and sustainable. This will in turn boost Kenyan SMEs sector, thereby contributing to the country’s sustainable development.
To this end, the proposed green mortgage initiative can help fill the sustainable innovation gap in the Kenya’s property and finance sectors through private financing for green buildings, and in this way position Kenya as a regional leader in climate resilience and energy efficiency. However, before establishing policy decisions, a more adept and complete delineation of the climate risks facing the Kenya’s property market is a must. Amid threats from a changing climate, it is also obvious that the cost of fossils fuels has been unstable over the past few years and consumers are increasingly looking at ways of finding cheaper alternatives or adopting energy efficiency strategies at home. All in all, it remains to be seen if green mortgages will become popular among the majority of Kenyan homeowners and that will be very much dictated by cost savings in the long-term. In conclusion, with more research and development alongside our commitment to reduce global warming, the Kenyan government has the capability to offer incentives for ‘sustainable finance’ including green mortgages as we embark on our transition to green and climate resilient cities.