Egypt Needs to Decarbonize Construction Sector to Reach Climate Promises

July 26, 2022


Egypt is in the midst of a real estate construction renaissance that could last for decades. In December, Deputy Minister of Housing, Utilities and Urban Communities Khaled Abbas told AmCham Egypt about government plans to build 42 new cities by 2052 as part of its goal to increase inhabited land from 7% to 14% to accommodate the population’s 2.5% annual growth.

If not done right, however, this construction boom could conflict with Egypt’s environmental sustainability goals. According to the International Energy Agency (IEA), the buildings and construction sectors combined are responsible for almost one-third of total global final energy consumption. It also emits 28% of all energy-related greenhouse-gas emissions. Between 2020 and 2050, the sector will require nearly 50% more energy to meet global demand, noted the IEA.

To reduce the sector’s harmful emissions, governments should regulate, incentivize and secure financing for construction companies to lower their carbon footprint. A 2019 report from the International Finance Corp. (IFC) titled “Green Buildings: A Finance and Policy Blueprint for Emerging Markets” highlighted the opportunities and pitfalls of such a transition.

Making building green

According to the 84-page IFC report, identifying buildings as green is usually straightforward: “They can be tied to carbon and energy objectives.” That could include national emission targets or not exceeding the global benchmark of 1.5-degree Celsius warming. The objectives also might cover health and wellbeing standards.

However, the definition of a green building varies among countries, companies, and even investors.

The IFC recognizes a building as green if it is certified “under one of the internationally recognized standards or an approved national standard.” It must also be at least 20% more energy efficient than a “baseline building with no energy-efficient design.”

Additionally, construction and real estate developers who want the IFC to recognize buildings as green must “quantitatively report impact metrics.” They include energy and water savings, as well as reduction of harmful emissions. “Energy use can be measured and verified. However, focusing on this alone disregards the other benefits of green buildings, namely water-use efficiency and reduced … carbon in building materials.”

Green certification isn’t restricted to planned buildings and those under construction; it can also be applied to existing structures. “The vast majority of the buildings built today will still be used in 2050,” said the IFC. “Almost every building that is not carbon neutral will need to be retrofitted … in the next 30 years” to comply with environmentally friendly building standards.

Emerging markets

Middle-income emerging markets “represent one of the biggest investment opportunities over the next decade,” said the IFC. It estimates investment opportunities will reach $24.7 trillion by 2030, with the built area doubling by 2060. “Cities in emerging markets are expanding at a fast pace to keep up with high population growth and rapid urbanization.”

The MENA region’s investment in green buildings could reach $1.1 trillion by 2030, of which residential developments will account for $687 billion. Commercial real estate investment opportunities will total $450 billion.

The most significant commercial construction opportunities will be in education ($123 billion), healthcare ($89 billion), office space ($66 billion), and retail ($61 billion). The report also mentioned hotels and restaurants ($35 billion), warehouses ($23 billion), and transportation ($7 billion).

Capitalizing on those opportunities will require much government work to promote green construction. “Emerging markets, despite having ambitious targets for green buildings, struggle to put in place effective measures to mandate and incentivize large-scale adoption of green construction practices.”

The report explained the lag in green construction is due to “low technical capacity to build, operate and maintain green buildings, lack of knowledge, and weak enforcement regimes.” The IFC also highlighted shortfalls in “developing and implementing consistent standards and requirements for green construction across a highly local and decentralized industry.”

The document also noted the need for low and middle-income emerging markets to focus on affordable housing. “[This is] a challenge in itself without the added consideration of building green.”

Playing their part: Finance

The IFC said real estate investors, banks, and non-bank financing institutions hold “tremendous influence to shape and accelerate the market for green buildings.”

The report stressed the role of commercial banks as a “key source of financing,” as their scope covers construction finance, mortgages, home improvement loans, and specialized “green finance products for resource-efficient buildings.” The IFC also noted the importance of better financial terms, including lower interest rates and longer repayment periods.

To capitalize, banks likely will need to develop new specialized products and services to accommodate green construction projects. Additionally, financing green buildings could increase the value of their portfolios and reduce risk as they align with the vision of a more sustainable global economy. That could “potentially [reduce] their cost of capital.”

International non-bank financial institutions specializing in sustainable projects are another primary source of funds, noted the IFC: “They can … help scale up local currency financing through direct lending or equity investments. National and multinational development finance institutions can catalyze nascent markets and facilitate the entry of private investors.”

Non-bank institutions could target green building projects with “financial products not readily available in emerging markets,” noted the IFC. Those programs usually include technical support and capacity-building programs, which are vital for emerging market developers. “These institutions can also build the government’s capacity to develop enabling environments.”

Playing their part: Governments

The state is another major player in encouraging construction companies to make their operations more sustainable. The IFC noted governments have already signaled their interest in “building it right,” with 136 countries referencing green building in their Nationally Determined Contributions, non-binding national plans to mitigate the effects of climate change in line with the 2015 Paris Agreement.

That opens the door for more green construction than ever before. “Governments can help create a pipeline of green building assets and incentivize financiers to channel capital to the sector,” the IFC report said. One example is for the state to require all public buildings to be green. “As large owners of and investors in real estate, governments can contribute to investor appetite,” the IFC said. The government could also help scale technical capacity by offering training to designers, engineers, and workers building government-owned properties.

Legislative reforms in the construction sector are vital, but they are challenging to develop and implement in low- and middle-income emerging markets. “Two-thirds of expected future construction will be in countries that do not have building energy codes, and where they exist, they are often not robust or enforced. Governments need to translate ambitions into progressive regulations and incentives.”

One example of government action is fiscal incentives, including “tax breaks, grants, subsidies, loans and rebates,” the report said. However, governments should also provide non-fiscal stimulus, including “preferential or expedited permitting, [and] density” allowances.

To further entice private sector construction companies and developers, the government could create “labeling and energy performance certifications for buildings and appliances,” the report said. That would guarantee compliance with green standards, catalyzing the market for energy-efficient technologies. Ultimately, it could generate market data to help financial institutions focus on sustainable investments to select those projects, the IFC report said.

If successful, that could lead to “mandatory building codes and mandating third-party certification,” said the IFC. Standard requirements would “address green-washing concerns [where projects aren’t as sustainable or eco-friendly as their owners claim] and ensure incentives go to eligible recipients without extensive public sector overheads. These policy options can be tailored to local legal frameworks, socio-economic context and developmental priorities.”

Playing their part: Private sector

The IFC’s report also stressed the importance of the private sector taking the lead in green construction. “Voluntary adoption of green construction practices by a number of private real estate developers and owners has created momentum. But [it] must be scaled from limited commitments to industrywide actions, particularly in emerging markets. Current commitments range from greening individual buildings and entire portfolios to joining ambitious pledges throughout international platforms and initiatives.”

Certifications by internationally recognized rating bodies go a long way in encouraging construction companies to shift to green buildings. Among the international standards noted in the report are the IFC’s EDGE certification, Germany’s DGNB system, Australia’s Green Star rating system, the U.S. LEED rating system, and BREEAM, developed by the construction and real estate research firm BRE Group.

“These systems help expand the green building market by evaluating and benchmarking green buildings against local practices, as well as providing third-party verification,” the report explained.

Good for dwellers?

With investments in “certified green buildings” representing less than 10% of global construction spending, “the market remains small,” said the IFC report, “despite the growing evidence of the business case for green buildings.”

That is mainly due to low demand due partly to the perception that green residences would be too expensive. In reality, the IFC said the cost markup ranges from 0.5% to 12%.

The report blames developers for being reluctant to “absorb additional costs of green design.” Meanwhile, “owners often focus on immediate affordability.” Lastly, commercial banks “fail to provide additional financing to cover extra capital costs, [fearing] increasing non-payment risk.”

Those factors likely will fade with time as the extra cost of green construction decreases with technological advances in techniques and materials. Additionally, stricter construction codes will make conventional buildings more expensive, and “as more data becomes available from the growing green construction market, the perception of high costs will change.”

The IFC report also notes the cost of running households built using green construction principles will be significantly less than maintaining a conventionally built home, estimating that green buildings could decrease operational costs by 37%. That is particularly evident as green homeowners pay lower utility bills. “In South Africa … utility savings equate to one month’s rent per year for families renting some of their green-certified properties. Utility savings can be particularly significant for low-income families in emerging markets.”

Another advantage the IFC noted is green buildings are more resilient against climate crises than conventional buildings. That should be reflected in lower insurance premiums, making them more affordable to own and raising their collateral value if used to back loans.

As a result, certified green buildings globally have “up to 23% higher occupancy rates, [and] up to 8% higher rental income.” Additionally, they achieve sale premiums of up to 31% and quicker sales than conventional buildings.

The future of construction

The IFC report stresses that green construction represents the sector’s sustainable future. “Resource-inefficient buildings run the risk of losing economic value or becoming stranded assets due to increasingly stringent regulations, pressure from financial regulators to manage and disclose climate risks, changing consumer preferences, and shareholder demands.”

That opens the door to retrofitting existing properties to become certified green buildings. “Undertaking these retrofits presents … a significant investment opportunity … even in the short term,” the IFC report noted, “because, in addition to generating direct cost savings, these measures positively affect the overall value of buildings.”

All that said, it is still challenging to forecast the future of green construction in emerging markets in the long term. “Most evidence surrounding the benefits of green buildings comes from studies focused on developed markets,” said the IFC, while stressing that emerging markets should experience similar benefits. “The type and degree of benefits inherent in building green can differ depending on the climatic conditions of different regions.”

One significant benefit would be new job opportunities for skilled labor. “Due to economic linkages between sectors, jobs in manufacturing, services and waste management will also grow,” the IFC said. In addition, green construction reduces a country’s water and energy consumption.

Green construction is an attractive opportunity for the Egyptian government to maintain stable GDP growth rates amid risks emerging from the war between Russia and Ukraine and the pandemic’s supply-chain fallout. Yet, this could also require the state to pause construction to quickly develop local green building regulations and enforcement mechanisms, which could upend the domestic construction sector.

However, the government may find no option but to make such a pause in the long term. Said the report: “Sustainably developing the built environment to address climate risks is no longer a nice-to-have.”