How place-based models can unlock retrofit finance

Buildings are central to many aspects of our lives, from providing basic shelter to creating spaces where civil society can thrive. But these crucial structures are also a major contributor to climate change, accounting for approximately 40% of carbon emissions.

The world is expected to add a further 1.2 million square kilometres of urban built-up area by 2030. At the same time, about 80% of today’s buildings will still likely be in use in 2050. Therefore, tackling the energy transition of existing buildings is an urgent priority.

Retrofitting is the introduction of new materials, products and technologies into an existing building to reduce the energy needed to occupy it. However, progress to date has been slow, with the global retrofit rate currently running at just 1% of the building stock per year.

For residential buildings, BwB research has found a complex network of social and financial factors limiting the acceleration of retrofit activity. Underpinning many of these is the overwhelming reliance on individual homeowners to take action.

With costs between $20,000 and $100,000 per home, retrofits are simply out of the financial reach of most households.

Significant pools of potential financing do exist. For example, assets under management by wealth managers are expected to rise to $145 trillion by 2025, from $85 trillion in 2016, with infrastructure assets forecast to expand more than five-fold over the same period.

Channelling a portion of these private investment funds into housing retrofits would be transformational for accelerating climate resilience activity.

The challenge is bridging the gap between "where the finance is" (institutional finance providers) and "where the finance needs to be" (retrofit projects). The residential sector’s highly diffuse ownership structure severely limits the investible scale if the emphasis remains on individual households.

BwB has been developing innovative solutions that adopt a centrally driven, place-based approach to overcome the current mismatch.

Key features of this approach include:

The place-based retrofit market is in the early stages of development. Various funding and delivery models are being piloted but are not yet operating at scale. A track record is needed to show that these models can work and critically, can be investable.

BwB is playing an active role in expanding this space by:

The firm has developed a core overarching framework for local leaders to follow: RENEW Districts – Resilience, Equity, Neutrality, Environment, and Well-being.

As an example, BwB is partnering with several UK local authorities on the "Net Zero Neighbourhood" model to improve residential energy efficiency alongside broader place-focused interventions (e.g., green infrastructure and mobility options).

The local authorities are piloting the model by developing detailed feasibility studies for identified areas, conducting community engagement, and piloting retrofit interventions within a small group of homes.

These pilot projects aim to establish a track record of viability and facilitate dialogue with private finance providers.

Successful place-based models also require a central project development body that is trusted by local communities. Local and city councils are well placed to take up this role but can lack sufficient financial know-how and capacity to facilitate the development of investable projects.

BwB has been addressing this issue through its work with over 100 cities as part of the consortium that is supporting the European Union’s (EU) 100 Climate-Neutral and Smart Cities Mission (Cities Mission).

Central to these efforts is the deployment of "city finance specialists," on-the-ground financial professionals with in-depth local knowledge who can provide technical assistance for projects, support the mobilization of capital and upskill relevant city officials.

As to "where the finance is," retrofitting has not been a core focus within real estate investment but there are signs that this is starting to change. For example, real estate transition funds are emerging as a vehicle for transforming older, energy-inefficient buildings into sustainable spaces and importantly, seeking to invest in upgrading residential properties.

However, transition finance for this sector needs to go beyond the real estate investment industry. Broader participation from financial institutions and other private sector players must be harnessed.

To tackle this challenge, BwB launched the Climate City Capital Hub (Capital Hub) in June 2024. This neutral capital centre aims to unlock the estimated €650 billion in funding that is needed to close the investment gap identified by cities that are part of the Cities Mission.

The Capital Hub provides investors access to a robust, reliable and expanding pipeline of financially viable climate-related investment opportunities spanning a range of sectors and geographic profiles.

With the place-based retrofit approach still in its infancy, attracting increased flows of private finance will generally require blended finance solutions, under which funding and financing are drawn from a combination of sources.

BwB estimates that at least half of investment costs will need to come from non-return-seeking funding (e.g. public grants with additional participation from philanthropy or other private sector donations).

Depending on size, technology readiness, and return profiles, the private finance portion could come from various institutional finance providers. The Capital Hub engages a wide range of finance providers, including development banks, pension funds, insurance funds, infrastructure funds and impact investors.

The key is to ensure projects are bankable and to match their characteristics to the requirements of finance providers.

Place-based models are an emerging enabler with the potential to accelerate the pace of retrofit activity. Looking at retrofits through a place-based lens provides opportunities to strengthen a sense of community while targeting environmental resilience, facilitating functionality and benefiting from additional economic value.