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EU's energy efficiency drive risky for property market, covered bond collateral

Publication Date: 23 Apr 2019 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav S.

Environmental, Social & Governance Equity Fundamental Macro Multi Asset Equity EU UK

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Europe's transition to energy efficient buildings, as per emerging European Union norms, creates credit risks for covered bond collateral that does not comply with increasing requirements. 

In a recent report for its clients, rating agency Moody’s said given that most covered bonds are backed by residential, commercial or multi-family mortgage loans, the EU targets for reducing carbon emissions from buildings will create credit risks for noncompliant loan collateral. 

Cover pool loans are exposed to the value and marketability of the building stock securing them, characteristics that will increasingly be driven by the EU's energy efficiency agenda, the agency noted further.

"As the drive towards energy efficient buildings gains momentum, the risk of property value impairment will increase for buildings that don't comply with energy efficiency standards. Building owners will also face costs to upgrade properties to improve energy efficiency," said Jane Soldera, Senior Vice President at Moody's.

Commercial property will bear the burden of adapting to the changes more immediately than residential, given that commercial landlords already face changing tenant preferences toward greener properties in addition to growing regulatory pressure.

Moody’s noted that the scale of the challenge in transforming the energy efficiency of European buildings can be measured by the age of the existing building stock, and varies across different countries. In Italy, for example, the vast majority of the building stock dates back to before 1980.

The EU has ambitious targets for reducing carbon emissions from buildings, while most of the underlying collateral for cover pool loans is residential, commercial or multi-family property. Issuers may decide to reduce the risks of noncompliant collateral in cover pools, for example by evaluating energy efficiency of building collateral when underwriting.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav S.

 

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