Barings hopes for ‘greater returns’ with its first sustainability-linked loans

The manager is on the hunt for borrowers with ESG-related business plans.

Barings has agreed its first sustainability-linked loans against European real estate as the investment manager seeks “to innovate in order to seek greater returns” for its investors.

The manager, a subsidiary of US insurer MassMutual, has provided a seven-year fixed-rate loan of £48.6 million (€56.4 million) under its separate account with investor Phoenix Group, a UK savings and retirement business that is looking for opportunities to invest in sustainability-linked debt.

The loan will finance the acquisition of The Brewery, a retail and leisure park in Romford, east of London, by a joint venture between Schroders Capital UK Real Estate Fund and Immobilien Europa Direkt. The loan will also be used to improve the ESG credentials of the scheme.

Barings has also provided a loan to a company managed by property investor Round Hill Capital to finance the refurbishment of the Rembrandt Park One building in Amsterdam into a sustainable office building with two additional floors, an additional office pavilion and public realm connecting the park with the rest of the city.

Borrowers with ESG-focused business plans are a strategic target for Barings as it invests capital for its own institutional sponsors, which are seeking ESG-related returns. Sam Mellor, head of European and Asia-Pacific real estate debt at Barings, said the two loans were “an example of our appetite to innovate in order to seek greater returns for investors and make a tangible environmental impact”.

Schroders Capital and Immobilien Europa Direkt will use some of the loan to retrofit existing buildings at The Brewery to increase the asset’s EPC ratings and maintain its current BREEAM ‘Excellent’ certification. It will also invest in initiatives that improve biodiversity on site, as well as health and wellbeing, and tenant and community engagement measures. The park will contribute to local renewable energy infrastructure through the installation of EV charging facilities.

Mellor added that the arrival of the Elizabeth rail line in Romford made the loan a “valuable addition” to its books.

At Amsterdam’s Rembrandt Park One, Round Hill Capital will focus on maximising the ESG credentials of the asset, targeting an energy performance rating of ‘A’ and BREEAM certification rating of ‘Excellent’, with on-site renewable energy generation by a thermal energy storage system and photovoltaics, as well as enhanced amenities including restaurant, on-site gym and 600 bicycle parking spaces.

Barings said it was drawn to invest in the asset, which is located in the largest city park of Amsterdam, because it is an area where there has been little office development activity over recent years. It also sees potential to invest in a competitive office property in compliance with recent Dutch BENG (Bijna Energie Neutrale Gebouwen meaning ‘Almost Energy Neutral Buildings’) regulations, introduced in January 2021, which rule that all new buildings must meet almost neutral energy building requirements.

In July, the investment manager announced it has raised more than €650 million of investor capital for its European whole loan strategy in which it would target higher absolute returns for loans where the underlying properties have a significant business plan, alongside loans for lower risk core-plus assets.