Alexandra Tracy, Green Finance Advisor of Friends of the Earth (HK)
Hong Kong is one of the world’s most densely populated places, with most of its more than 7.4 million residents living and working in high rise buildings. Hong Kong’s major source of electricity consumption is its buildings, which account for around 90 percent of total consumption, compared to a global average of 39 percent. This high level of energy consumption by buildings accounts for 60% of the city’s greenhouse gas emissions. Greening the building stock, therefore is an essential part of achieving Hong Kong’s carbon reduction targets.
Increased availability of sustainable finance products is crucial to enable the development of greener and energy efficient buildings. Some of Hong Kong’s largest property companies, such as Swire Properties, Hong Kong Land and Sun Hung Kai Properties, have already raised funding from green bonds and loans. More recently, individual home owners in Hong Kong can also access sustainable financing in the form of green mortgages.
What is a Green Mortgage?
Green mortgages provide funding to home owners to purchase an energy efficient property, which meets stipulated environmental standards, or to make sustainable and eco-friendly upgrades to an existing home. They offer favourable interest rates, repayment terms and other incentives to encourage green home improvements. For new mortgages, lenders may also take future energy savings into account, so a larger loan can be available without a bigger down payment. Alternatively, a green mortgage could be rolled into a home owner’s existing mortgage to finance upgrades.
Green mortgages offer benefits to both borrowers and lenders:
- Energy efficient homes cost less to power, reducing utility bills and realising cash savings for borrowers, which in turn make them less likely to default on their mortgage loans, reducing the bank’s credit risk.
- Growing demand for more sustainable homes means that energy efficient improvements may increase the value of the property over time, which is positive for the home owner and reduces the bank’s asset risk.
Hong Kong’s Green Building Standard Paves the Way
As part of Hong Kong’s Climate Action Plan 2030+, which contains a carbon intensity reduction target of 65-70% by 2030 compared to the 2005 level, the government has introduced green certification standards, designed by the Hong Kong Green Building Council. To meet its BEAM Plus standard, building developers must meet a comprehensive set of sustainability performance criteria ranging from planning and construction to the fitting out, operation and maintenance of the building. Buildings are rated bronze, silver, gold or platinum according to their delivery against the criteria.
More than 1,600 buildings and development projects in Hong Kong already have a BEAM Plus certification, which has paved the way for the development of the first green mortgage products in Hong Kong.
Hong Kong Green Mortgage Programmes Launched
In September 2021, the first green mortgage plan was launched in Hong Kong by Bank of China (HK) in partnership with Sino Land. Under the plan, paperless and digital mortgage services were made available to purchasers of Sino Land four residential projects that received the BEAM Plus Platinum or Gold rating, giving them a lower carbon footprint compared to the typical mortgage application process. In addition, borrowers received a cash reward, a premium fee waiver on the home insurance plan and other digital wealth management rewards. Bank of China (HK) has extended the scheme to a number of other developers, with several thousand units available for sale.
Over the last year, several of Hong Kong’s largest banks have developed their own green mortgage plans tied to BEAM Plus building certifications. For example, Bank of East Asia’s offering is available for purchase or refinancing of new and second hand housing with BEAM Plus Platinum or Gold ratings. Borrowers receive a preferential mortgage interest rate and other incentives, such as a cash rebate and an attractive deposit savings scheme. In addition to generous cash rebates, HSBC is even seeking to attract borrowers under its green mortgage plan with prizes such as a Tesla electric car !
The Future is Green Mortgage Securitisation
Securitisation is a process whereby banks transform a pool of illiquid financial assets, such as mortgages, into tradable financial instruments, known as asset backed securities. This enables a bank to sell its pool of mortgage assets to institutional investors, thus freeing up its balance sheet and generating new lending capacity.
There is growing institutional demand for securities where the underlying assets are themselves defined as sustainable, such as green mortgages on certified buildings. Sales of green mortgage backed instruments have seen significant growth in the United States and Europe.
The volume of green mortgage assets in Hong Kong is currently too low to support securitisation deals, but is likely to increase rapidly over time. The Hong Kong Mortgage Corporation, which provides mortgage insurance cover to local banks and is responsible for promoting the development of the mortgage backed securities market in Hong Kong, is already considering ways to encourage issuance of green asset backed securities in the city.