The American Property Assessed Clean Energy (PACE) programme allows property owners to finance environmentally-friendly upgrades to their property. The programme has proved so popular that similar schemes are launching internationally.

What is PACE?

PACE is a form of tax financing for renewable energy and energy efficiency improvements on residential properties. It allows property owners to buy new and more efficient heating and cooling systems, solar panels, add insulation to their property, and more.

PACE pays for 100% of the upgrade cost, which owners can choose to pay back over a period of up to 30 years. Repayments of the contract are added to the property’s tax bill. Furthermore the financing stays with the building upon sale. And because it is not debt, residential PACE financing does not affect a homeowner’s credit rating.

PACE is run and paid for by local governments, municipalities, or cities, benefitting them in numerous ways. They draw private capital into supporting renewable energy and energy efficiencies, reducing CO2 and creating jobs in the process.

How does PACE securitisation benefit investors?

PACE is extremely popular in the US, not only with property owners but also with the securitisations community (see previous article “Property Assessed Clean Energy (PACE) securitisation market on the rise”).

PACE benefits investors as well as property owners and government bodies. Being a tax-based financing vehicle and therefore a senior lean asset, PACE sits ahead of the mortgage. It is property-secured so there is little risk of cancellation, even in cases of bankruptcy.

PACE repayment rates are traditionally near perfect: there have been no foreclosures in the US PACE industry in the nine years since the programme’s establishment. This shows the debt is a high quality asset with a reliable payment stream.

A long pay-out

One of the most attractive aspects of PACE for investors is its duration. At 30 years, with the option of the property owner repaying sooner, most of these loans continue for much longer than the average Asset Backed Security (ABS) duration of around six years. For many investors looking for reliable securitised products with a longer horizon – such as pension funds and insurance companies – this is a game-changer.

However, the long duration also comes with challenges – not least rising interest rates. The longer the time horizon, the greater the chance that interest rates could rise and reduce the security’s profitability.

PACE is crossing the ocean

PACE has been so successful in the US – we anticipate originations for 2017 will hit the $4bn mark – that it has begun attracting attention around the world. PACE-like projects are under development in Canada, while in Australia the Environmental Upgrade Agreements (EUA) programme has already funded over $20m of sustainable improvements. In Cape Town, South Africa, a PACE program is also on its way.

In Europe, some countries have already been experimenting with energy efficiency financing programmes, with Germany and France taking the lead. Meanwhile the European Commission has investigated a possible PACE-like package for Europe, aimed at households.

Europe would be fertile ground for an energy efficiency financing programme. The EU has ambitious clean energy and CO2 emission reduction targets for 2030 and 2050; and the majority of European real estate is currently not energy efficient but will be in use well into and after 2050. A gap exists for market-based solutions to the problem.

Europe has two problems to tackle before adopting a PACE-like programme:

  1. The region should further develop and adapt EU-wide and member state policies on energy efficiency financing
  2. European citizens and commercial property owners should be involved more, to build demand for self-financed energy efficiency improvements to properties.

Conclusion

The European real estate market is ideally-suited for a PACE-like programme, and the funds and political will both exist. We believe it is increasingly likely that PACE – or something like it – will cross the Atlantic.