India, boasting the world’s second-largest urban population, is on the brink of a construction revolution. With an expected doubling of its urban populace by 2050—adding 416 million people—there's an unprecedented opportunity to integrate energy-efficient, green buildings into India's rapidly expanding urban landscape. Fund Hospitality is committed to exploring and fostering this transformative shift towards sustainable development.
The Emergence of Green Buildings
The demand for new buildings in India, covering housing, retail, commercial, hospitality, and healthcare, is set to surge by 2030, with 70% of the required structures yet to be constructed. As buildings currently account for 30% of India's energy consumption—a figure projected to rise to 48% by 2042—the need for certified green buildings is paramount. These buildings promise energy savings of 20-30% and water savings of 30-50%, aligning perfectly with India’s goal to reduce greenhouse gas emissions by 33-35% from 2005 levels.
Regulatory Evolution and Certification Systems
India's regulatory framework for green buildings is progressively strengthening. The National Building Code 2016 now includes the Energy Conservation Building Code (ECBC), developed by the Bureau of Energy Efficiency (BEE). The ECBC, updated in 2017, sets energy use standards for new commercial buildings. For existing structures, the BEE promotes energy efficiency through Energy Service Companies (ESCOs) and design guidelines for energy-efficient multi-storey residential buildings.
The certification landscape for green buildings is also robust. The BEE’s Buildings Star Rating System evaluates buildings based on energy usage, complemented by the Green Rating for Integrated Habitat Assessment (GRIHA) and the Leadership in Energy & Environmental Design (LEED). While GRIHA is an indigenous system developed by TERI and the Ministry of New and Renewable Energy, LEED is an international standard from the U.S. Green Building Council (USGBC).
Leading States and Incentives
Approximately 5% of Indian buildings are currently green, with Maharashtra, Tamil Nadu, and Karnataka leading in LEED-certified structures. States like Andhra Pradesh, Bihar, Haryana, Maharashtra, Punjab, and Uttar Pradesh are incentivizing green building through increased Floor Area Ratio (FAR), subsidies on fixed capital (excluding land costs), and municipal tax discounts.
Financial Opportunities and Market Barriers
Green architecture presents a $1.4 trillion market opportunity for India, according to the International Finance Corporation (IFC). This encompasses $1.25 trillion in the residential sector and $228 billion in commercial development. The World Green Building Council estimates that green buildings can achieve sales premiums up to 31%, higher occupancy rates by 23%, and increased rental income by up to 8%.
Despite these benefits, green real estate investments remain underexplored due to market barriers such as information asymmetry and limited financial products.
Catalyzing ESG Investments in Green Real Estate
ESG investments are gaining traction in India, with ESG mutual funds, exchange-traded funds, and index funds already in operation. To enhance ESG investments in green real estate, a diversified financial ecosystem is essential. This ecosystem should involve investors, debt and equity markets, credit rating agencies, green certification bodies, developers, and end-users, supported by innovative financial instruments.
Key Financial Instruments for Green Buildings
Green Mortgages and Green Construction Loans: Commercial banks and Non-Banking Finance Companies (NBFCs) play a crucial role in the green building financial architecture. Green mortgages offer discounts or larger loans for green-certified homes, potentially qualifying as a subcategory under RBI’s priority sector lending norms. Linking home loan interest rates to green building certifications can further incentivize buyers.
Green Bonds and Mortgage-Backed Securities: Issuing asset-backed securities with underlying green mortgages and loans can scale up credit for green buildings. Such securities, with a credit rating and green certification, appeal to ESG investors.
Green Real Estate Investment Trusts (REITs): REITs investing in green properties offer a viable option for ESG equity investors. India’s first REIT, launched by Embassy Office Parks and The Blackstone Group, demonstrated substantial investor interest by gaining 50% from its listing price by December 2019.
Conclusion and Future Directions
Green buildings are integral to India's climate strategy, and financing them is crucial for mainstream adoption. Fund Hospitality proposes the following research priorities to support this transition:
Developing a comprehensive regulatory and policy framework with incentives for green construction and financial sectors.
Enhancing green credit for real estate.
Assessing and adapting financial modalities suitable for the Indian market, leveraging international best practices.
Strengthening rating and certification mechanisms for financial applications.
Creating systems to monitor financial flows in green construction.
By focusing on these areas, Fund Hospitality aims to lead the way in integrating green building finance into India’s urban development strategy, fostering a sustainable future.
