Why should the private sector get involved in the development of green housing?

Este artículo está también disponible en / This post is also available in: Spanish

Before COVID-19 came into our lives, no one could have imagined that for many of us, the world would be largely reduced to the four walls of our home for almost two years. Lockdown underscored just how important our homes are for our quality of life and the urgent need to guarantee access to housing for all, especially in Latin America and the Caribbean (LAC), where there is an acute shortage of adequate, affordable housing.

In this blog post, which is part of a series about the IDB Group´s 2022 Housing Forum, we address the important role of the private sector, and especially that of housing developers, in closing the housing gap of our region through a greater focus on green housing. You can access the recording of the panel (in Spanish) Solutions to the housing deficit through sustainable housing of social interest of the Forum below:

Keep reading to learn about some of the challenges that were covered in this panel!

Latin America and the Caribbean needs green homes to face climate change

In LAC there is a quantitative housing deficit (absence of housing) estimated at more than 23 million homes, and a qualitative deficit (houses in poor condition) of more than 43 million homes. Therefore, reducing the housing deficit is not just a matter of building houses, but of ensuring that they are of high quality, have access to basic services and are in accordance with urban planning policies. Another very important aspect is the need to have green homes. Buildings in LAC are estimated to consume 21% of treated water and 42% of electricity and generate 25% of CO₂ emissions. A transition to green buildings could help reduce energy consumption by 50%, water consumption by 40% and CO₂ emissions by 39%.

At the same time, the effects of climate change exacerbate the challenge of providing access to adequate housing. Climate change causes damage to existing housing and basic infrastructure, and over 17 million people in LAC are expected to migrate to avoid the impacts of climate change. Low-income populations are the most vulnerable: estimates predict that the effects of climate change will push 2.4 to 5.8 million people in LAC into extreme poverty by 2030.

Clearly, focusing on the construction of homes without consideration for improving climate mitigation and resilience is counterproductive and may even aggravate the problem. Given the immense scale of the challenge that lays ahead, it is crucial to bring all relevant stakeholders to the table such as the public sector, regulators, consumers, investors, and other private sector actors in the housing industry. With this in mind, private sector housing developers have an important role to play in complementing strained public resources to deliver on the green housing agenda.

What exactly is “green housing”?

Defining this concept is challenging since the green technologies incorporated into homes exist on a spectrum; from homes that include some energy efficient features, right up to homes which have been carefully designed to be zero carbon. Additionally, the different solutions vary significantly from one country to the next. Generally speaking, most standard-setting bodies require a minimum of 20% energy and water savings for a housing development to be considered green.

Homes designed with green features have direct environmental benefits, such as water and energy savings, which ultimately help avoid greenhouse gas (GHG) emissions. There are also knock-on benefits from these green features. For example, resource efficiency helps reduces the strain on public utilities and lowers utility bills for households. They can also save taxpayer dollars in regions where utilities are subsidized. Other indirect benefits of green housing come in the form of green mortgages, which allow households to access financing at lower rates.

Green housing is a business opportunity for developers

The business case for green housing is growing rapidly. Residential green building opportunities are expected to reach $15.7 trillion by 2030, representing an immense opportunity for private sector actors to adapt their business models in line with shifting consumer demand, investor appetite, and regulations. Governments in LAC have already put in place policies to encourage the development of green housing, from fiscal incentives such as tax breaks and permit fee discounts to non-fiscal incentives such as regulatory flexibility and expedited permit processes.

There is a common misperception among developers that green housing is significantly more expensive to construct. However, evidence from emerging markets shows that the actual increase in design and construction costs can be as little as 1% to achieve energy savings of up to 30%. While low-income households often can’t afford to pay higher prices, green houses are sold more quickly, which reduces the cost of financing for developers and offsets slightly higher design and construction costs. Projects in countries such as Colombia, Brazil, Haiti, and Mexico show that the private sector can deliver on green-certified affordable housing while maintaining profitability. Development finance institutions, including IDB Invest, are playing an important role in promoting and financing these initiatives.

While many developers include green technologies in the design and construction of their developments, obtaining green certification—such as the Excellence in Design for Greater Efficiencies (EDGE) or a nationally recognized green certification—is essential for the market to formally recognize such developments as green. Green housing certification gives developers the option to tap into thematic loan and bond markets, often at preferential rates, since credible green certification options are aligned with green finance standards, such as the International Capital Market Association’s Green Bond Principles.

IDB Invest supports green housing with innovative financing alternatives

While developers in LAC are increasingly steering towards a more sustainable path, there is still much to be done. IDB Invest has developed a range of innovative solutions to facilitate investment in affordable green housing. We have partnered with leading developers in countries such as Mexico and Peru to support the design and development of affordable green housing via committed revolving facilities and thematic bonds. For instance, we issued a guarantee to support the first green bond in the LAC housing industry as certified by the Climate Bond Initiative (CBI). Additionally, IDB Invest has developed technical assistance focused on building our clients’ green housing capabilities, helping them obtain green certifications, and strengthening their sustainability strategies.

Green affordable housing not only presents a business opportunity for housing developers but is also a powerful tool to reduce the housing deficit while tackling the biggest challenge of our generation: a green and just transition.