Property linked finance, has already been proved in three Australian states. It is now gaining momentum as a transformative finance tool that could enable both new, highly efficient homes and enable millions of existing inefficient houses to become the homes Australians deserve.
The residential property and construction sector often cites its role as an economic powerhouse generating jobs, profits and capital for the Australian economy. However, what no-one is yet talking about is the $3.9 trillion solution the sector has available to it for resolving three of its biggest challenges – energy transition, housing affordability and the cost-of-living crisis.
property linked finance offers a solution to unlock building upgrades and high performing new buildings by attaching the funding to the property, rather than individuals, overcoming traditional lending barriers
This structure solves a fundamental challenge in commercial property too. With projects such as upgrade to facades, air conditioning and other big ticket items, owners bear the cost of the improvements, while tenants receive the utility bill savings.
Why do we need property linked loans?
In big picture terms, we have an emerging threat landscape of both physical climate risk and the material financial risks associated with climate change.
This involves everything from insurance availability through to global investment shifting towards low carbon assets. Housing is particularly vulnerable in parts of Australia that become uninsurable.
Banks don’t want to lend against assets that are not insured.
The risk is sliding property values and entire communities starting on a down downward spiral.
Safe, resilient and comfortable homes remove the risks
Part of the solution is to move away from thinking about houses as an economic unit and value them instead as the homes people deserve.
Homes that are safe, resilient and comfortable have intrinsic value, and financial value because they are insurable and a worthwhile asset for banks to lend against.
The other big benefit is that they have a lower environmental impact.
We aspire to a home that welcomes people into comforting spaces. If it also has the other required aspirational features that constitute marketable sales value, then we can rationally justify the cost.
Basically, we need to make sustainability outcomes aspirational in the housing market.
Electrification
The current push for electrification is important, but simply swapping gas appliances for electric ones in poorly designed homes misses the heart of what makes a house a home.
Many of the incentive schemes we are familiar with, such as using superannuation to fund home purchases and subsidies such as first homebuyer grants, barely scratch the surface in terms of ensuring good housing.
Without addressing the fundamentals of quality – insulation, windows, sealing, and thermal performance – we’re merely building more bad homes and electrifying all our inefficient boxes
The upfront costs of upgrades present very real barriers. The expenses need to be justified within a realistic timeframe of ownership, or there is a risk of overcapitalisation, and many homeowners and most renters lack access to capital for comprehensive upgrades.
For Australia’s 10.9 million households, subsidies for electric appliances such as solar panels and heat pumps can lessen the financial challenges and offer quick emissions reduction wins, but fiscal responsibility means the public purse can’t entirely subsidise every home, everywhere. The scale is simply too large.
We need to leverage capital value to deliver results
Property linked finance has already been proved in three Australian states and is taking off globally. It is a financing tool that could help deliver new, highly efficient homes while transforming millions of existing inefficient houses into the homes Australians deserve.
It’s a financial form of public-private partnership that is government enabled, and private sector funded.
PLF works by attaching the finance for upgrades to the land rather than the owner. This creates better alignment of the cost of the upgrade with the benefits.
If a home is sold, the next owner continues the payments and benefits from greater comfort and lower energy costs.
The system enables high upfront costs of retrofits to be spread over longer terms, across multiple owners, while capturing the increased benefits of reduced utility costs, healthier habitations and protection from loss of value as the market shifts to preference energy efficient, low-carbon property.
Australia was ahead of the curve with Environmental Upgrade Finance Agreements
Australia was already one of the global leaders establishing Environmental Upgrade Finance in 2010, alongside the United States where PACE finance deployed $US15.5 billion ($A23.3 billion) since 2008. We remain one of only two countries with proven, multi-jurisdiction PLF programs.
The capital deployed in the US via PACE is meaningful, while still illiquid and subscale, taking a long period to grow to a meaningful asset class. The UK, with its focus now to attract green investment is looking to build upon the lead of the US and Australia.
The UK is keen to get property linked finance off the ground
The Green Finance Institute, an independent, global not-for-profit organisation, is hoping to get property linked finance introduced into the UK upon a single, scalable and nationally consistent basis.
In its report, released in conjunction with industry partners NatWest Group and Lloyds Banking Group, A Greenprint for Property Linked Finance in the UK, the organisation outlines the need for national legislation to establish PLF to help bridge the £360 billion ($A703 billion) investment gap needed to decarbonise UK buildings.
Globally, the numbers are staggering. Buildings are responsible for 39 per cent of global energy-related emissions and it is estimated adapting our built environment requires $51 trillion ($A76.6 trillion) in climate mitigation investment by 2050 plus up to a further $1.8 trillion ($A2.7 trillion) annually for climate resilience.
In 2021, climate-related events caused $US252 billion
($A378 billion) in damage and affected over 100 million people. Yet in 2023, investment into climate mitigation dropped by 4.43 per cent to $US243.7 billion ($A365.7 billion), catastrophically short of what’s needed.
That’s why PLF is such an essential tool for ratcheting up our action to ensure our homes reduce their contribution to climate emergency, while also providing better protection from the locked-in effects.
The benefits of PLF bridge the split incentive: renters gain better quality, all-electrified homes which are energy, water and waste efficient without rent increases, while landlords benefit from improved property values.
The model has been proved in Australia with a number of businesses benefitting from funding Environmental Upgrade Finance over the past 15 years with increased cashflow thanks to solar, batteries and other projects that reduce operational expenses without requiring the big upfront capex injection.
In the US, PACE finance has been used across residential and commercial properties, reducing the cost of capital for newly constructed buildings. For new construction, analysis shows PLF advanced to developers could deliver high efficiency completed homes at less cost than the benchmark, while creating homes that are superior quality and cheaper to occupy.
The money is out there
Our $3.9 trillion superannuation sector craves stable, ESG-aligned returns, creating a perfect opportunity. However, without the enabling mechanism there’s a critical mismatch: institutional investors seek large-scale, liquid investments, while homes are built and improved one at a time.
Current fragmented state-by-state programs, with their varying rules and limited coverage, prevent investors from deploying meaningful capital via PLF. Both the US and Australian experience has shown that market fragmentation and complexity prevent secondary debt markets from engaging due to the lack of scale and liquidity of investment required.
The solution lies in national legislation to create consistent a PLF market architecture that aligns private capital, public good and consumer demand. Supported by a long-term commitment to market development and alignment of existing government stimulus, this is an opportunity to encourage investment into a proven model where Australia has comparative advantage. By creating a nationally consistent framework, we can unlock the scale needed for institutional investment while addressing housing affordability and climate challenges without straining government budgets.