This article first appeared in July’s print edition of Business Monthly magazine.
For local private-sector companies, the International Finance Corporation (IFC) is a major financier and adviser. Last fiscal year, it invested $7 billion in Egypt-based projects, while its local “advisory portfolio” reached $34 billion.
Additionally, the government appointed the IFC in June 2023 as a “strategic adviser” to help privatize state-owned firms. “The IFC is uniquely placed to play this role given its neutrality, strong reputation, broad global experience in privatization transactions, IPOs, trade sales, and PPP tenders,” Prime Minister Mostafa Madbouly said in announcing the partnership.
Local construction and real estate development companies will likely be the top beneficiaries of IFC’s programs. David Owen, senior economist at S&P Global Market Intelligence, said construction in Egypt witnessed “a turnaround in activity” in the country’s June Purchasers Manager’s Index, which measures non–oil private sector activity. Meanwhile, “manufacturing, wholesale and retail [witnessed] ongoing downturns.”
The IFC sees construction and real estate development as lucrative long-term opportunities. “Cities in emerging markets are expanding at a fast pace to keep up with high population growth and rapid urbanization,” Alzbeta Klein, IFC director of climate business, said in the blueprint policy and investment document for green buildings.
IFC’s priority is financing eco-friendly and sustainable construction. “Green buildings represent one of the biggest investment opportunities of the next decade,” the report said. It forecasts green buildings will be a $1.14 trillion investment opportunity in MENA by 2030, with residential accounting for more than 60% of that figure.
To capitalize, private sector developers and the government should consider IFC’s guidelines in its “Green Building: A Finance and Policy Blueprint for Emerging Markets” document.
IFC’s green buildings
According to the IFC document, green buildings can be tied to carbon and energy objectives such as net zero emissions or being 1.5°C-compliant, as well as considerations for people’s health and wellbeing.
For the IFC to classify a building as green, it should have the IFC’s EDGE certificate or “one of the internationally recognized certification standards or an approved national standard,” such as BREEAM, DNGB, Green Star, and LEED.
EDGE has three tiers. The standard certification requires buildings from the design stage to achieve at least a 20% cut in the use of energy, water, and embodied energy in materials compared to conventional buildings without energy-saving features.
EDGE Advance requires a 40% reduction in energy use and 20% savings in water and materials. The top-tier certificate, EDGE Zero Carbon, requires projects to be “100% carbon neutral through renewables or carbon offsets at the operational stage.”
IFC-recognized green developers must “quantitatively report impact metrics, such as energy and water savings, and greenhouse-gas emission reduction.”
Additionally, the IFC follows up with “client banks and other financial intermediaries [lending to] green building projects” to ensure the projects they finance adhere to classification requirements. “For residential projects such as low-income housing, additional metrics include the number of households or people served.”
Green IFC money
Banks are a cornerstone of green real estate development and construction. While “institutional investors are essential to accelerate the uptake of green building practices … helping inject liquidity,” commercial banks can “significantly accelerate the uptake of green building practices by developers and owners through new green financial products for resource-efficient buildings.”
The first step in the blueprint document is training commercial bank staff and green building company employees on how to run and finance a green, versus a conventional, business. “To reap these benefits, investors and financiers will need to adjust how they do business,” the document said. That ranges “from modifying internal practices and procedures to overcoming barriers in the green buildings market.”
The second step for banks “to ensure that beneficial financial terms will be used for green construction, [is to] start with a conventional loan until the [debtor receives] preliminary green certification,” the IFC paper said. Once they receive that credential, “the beneficial conditions of a green loan will kick in, with clear requirements of the timeframe within which the building has to be completed and certified green.”
Commercial banks also could develop “green residential mortgages,” where “banks can finance the same building twice: through green construction finance and through green mortgages,” the IFC paper said.
Green mortgages would be similar to conventional versions but with better valuations and terms, given the asset’s green credentials. “Banks can adjust the debt-to-income ratio by treating [water, energy, and waste] savings as an increase in a customer’s income,” the IFC document said. “They can also pass lower interest rates for green financing to end customers.”
The IFC stressed the importance of issuing green bonds whose long-term maturities match that of property development. “Building a portfolio of certified green buildings provides an opportunity … to increase their liquidity, develop new capital markets products, expand their access to lower-cost capital, and for institutional investors to put their capital in green assets.”
Green ecosystem
“Not all financiers are [voluntarily] willing to undertake such efforts,” the IFC document noted. Many await government regulations “to create an enabling environment for developers to build green.”
Accordingly, the government must send “clear market signals … to amplify the pace and scale of green construction.”
One way is via “stricter building codes to improve benchmarks,” the IFC paper said. Governments “can incentivize the private sector to outperform those codes.” The government could also upgrade green building codes to “incorporate energy efficiency and green measures.”
The IFC believes that would incentivize “developers to build a pipeline of green buildings, aided by fiscal and non-fiscal incentives to exceed the minimum code requirements.” Such incentives might involve property tax breaks, technical assistance, grant provisions, and loan programs.
The blueprint document said the government could “require publicly owned and financed buildings to be green.” That would “shift the market, [given] their huge aggregate demand, which … can trigger the development of a pipeline of green buildings and related products.”
The government also could develop a tiered green property certification or labeling system to “help investors verify, compare, and manage their investments to expand their green portfolios.”
The IFC said National Determined Contributions reports, which highlight a country’s progress toward net zero emissions, can help guide “economy-wide energy efficiency policies.” Egypt is one of 168 nations publishing those reports.
On the other hand, the IFC recommends governments levy carbon taxes on non-green property. They “place an explicit price on emissions or energy use to encourage businesses to find innovative, cost-effective ways to reduce their energy consumption or carbon footprint.”
However, the IFC report noted such solutions can be “politically unfeasible for the residential sector and may disproportionately affect vulnerable groups.” It recommends “hybrid models that combine elements of quantity-based emissions trading systems and price-based tax instruments.”
The IFC report said unilateral efforts from the private sector in MENA may not be enough to attract the institutional investments emerging markets need. “The private sector, governments and financial institutions need to work together to transform real estate.” It stressed that such an alignment is vital “especially in emerging markets, where most of the construction will happen and where green buildings could have the greatest impact.”
