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Aberdeen Standard to offer sustainability-oriented margin discounts to incentivise capex

The UK manager plans to apply a new lending framework to all its real estate loans, starting with a soon-to-be-launched debt fund.

Aberdeen Standard Investments’ real estate lending business, which is close to launching its latest debt fund, has told Real Estate Capital it will structure future property loans to feature margin discounts for sponsors that improve the sustainability of their assets.

The UK asset manager’s property finance team has put together a lending framework through which it will agree a range of improvement targets with sponsors at the outset of each financing deal. If sponsors invest in their assets and meet the targets, they will be eligible for a reduction to the loan margin of as much as 10 basis points.

The framework will be introduced as part of a new semi-open-ended debt fund that the company plans to launch this summer – Aberdeen Standard Investments Commercial Real Estate Debt II. Through the vehicle, Aberdeen Standard plans to write whole loans in the UK market, targeting a fund-level return of between 4 percent and 6 percent. It is understood to be in talks with potential investors, with a view to launching with as much as £500 million (€581 million) of capital in the next two months.

Martin Barnewell, investment director in Aberdeen Standard’s commercial real estate debt division, told Real Estate Capital that, while the framework will be introduced through the new fund, the company plans to apply it across all its property financing activity, to be what he called its “business as usual” approach to real estate lending.

“This is down to our view that sustainability is the biggest challenge facing all real estate sectors and we want to make sure all our borrowers are focused and motivated to improve their assets. We are going to be part of that solution,” he said.

The framework incorporates elements of finance industry body the Loan Market Association’s Sustainability Linked Loan Principles, which promote environmental and socially sustainable economic activity. It is also based around a proprietary tool, developed by Aberdeen Standard’s wider real estate division and its head of ESG for private markets, designed to assess properties across a broad range of sustainability factors.

According to Barnewell, this encompasses three key areas – planet, people and progress. The planet area includes carbon footprint, waste, water quality and flood risk, while people includes affordability, accessibility and inclusion. Meanwhile, progress includes connectivity and smart technology, and policy includes diversity and occupier engagement.

Using the framework, Aberdeen Standard will measure the sustainability footprint of the loan collateral, to identify areas for improvement and set targets in collaboration with the sponsor.

“It will offer a small but incentivising margin ratchet where the sponsor has delivered meaningful changes to an asset,” Barnewell said. “We are not just giving out of the goodness of our hearts – they will have improved the asset, and therefore improved our credit. So, we acknowledge the reduction in credit risk with a slightly lower margin, and as a result it has created a more liquid, attractive property that is more likely to be let and ultimately a more sustainable asset.”

The need for capital expenditure by building owners to ensure their assets meet occupiers increasingly higher expectations has become a major talking point in the real estate industry. During a recent panel discussion on the post-pandemic future of the office sector, hosted in June by the Commercial Real Estate Finance Council Europe, lenders noted sponsors are more willing to invest in their assets as the industry’s sustainability standards increase.

“Good landlords should be doing this anyway,” Barnewell said. “But we will be looking for meaningful changes over and above routine improvements that create a more sustainable asset.”

The evergreen CRED II vehicle will be the successor to the original CRED fund, which was launched by Standard Life in 2014, prior to the company’s 2017 merger with Aberdeen Asset Management. The fund reached final close in 2015 on £155 million.

According to the 2021 Real Estate Capital Debt Fund 30 ranking, published in June, Aberdeen Standard raised $2.64 billion for European real estate debt strategies between 1 January 2016 and 31 December 2020. During 2019 and 2020, it raised more than £900 million through a series of four segregated mandates and has continued to raise capital throughout 2021.

The company also lends against real estate through its multi-sector private credit fund – Secure Credit – which closed on £420 million in 2018, with a second multi-sector private credit fund launched in March 2020, with £138 million of commitments at launch.