For the last 32 years, Savills has made an annual presentation on the topic of financing property, each of which has focused on a pertinent theme.
It would have been reasonable to guess that the latest, conducted via webcast on 11 June, would be dominated by covid-19. But although the pandemic was given airtime, it was refreshing to see the real estate consultancy prioritising the defining issue of our time: sustainability.
Ian Malden, the firm’s head of valuations, argued property lenders remain focused on pursuing environmental, social and governance initiatives, notwithstanding the challenges posed by the coronavirus. Indeed, he suggested the current crisis would lead to a greater focus among debt providers on how they contribute to the fight against climate change and to promoting a positive societal impact from the real estate industry’s activities.
In recent years, lenders pondered how to meaningfully incorporate ESG considerations into their business plans. In 2020, it is no longer considered acceptable by investors, or tenants, for real estate developers and managers to not have a clear and constructive stance on these matters. However, debt providers, one step removed from the bricks and mortar, have made varying, but often lesser, degrees of progress. Nevertheless, real strides have been made by some. Those lenders that have been proactive clearly recognise the importance of funding sustainable assets, in part so the buildings behind their loans are not obsolete by the end of the loan terms. Several lenders have shown that it is possible to work with sponsors to craft debt facilities in which ESG performance dictates the terms.
It is therefore crucial that the covid-19 crisis does not take the lending industry’s eyes off ESG. The economic fallout of the pandemic poses a huge challenge, and many will be in survival mode as a result. But the climate crisis and the role of the built environment in society are issues that will not go away.
As Malden argued, ESG will become even more important as a result of covid. It may not be entirely clear how, but the real estate industry will be changed by the pandemic. For some asset classes, this period represents the crossing of the Rubicon. The way people work, shop and spend their leisure time are all bound to be shaped by it, and the industry will need to adapt. This will present opportunities to put ESG even closer to the heart of decisions. As lenders reevaluate how they underwrite property and how their loan portfolios should look, ESG is a factor they cannot afford to lose sight of.
In April, Peter Epping, senior managing director at US manager Hines, told sister title PERE that investing in highly sustainable real estate, particularly in times of crisis, is a form of future-proofing. ESG, he explained, encompasses issues such as resilience of assets and their operations – important things to consider in terms of downside protection. Lenders also acknowledge the very real impact ESG has on the value of the assets they finance. This month, Max Sinclair, head of UK CRE lending at US bank Wells Fargo, told us that a growing number of real estate sponsors would only buy assets that meet high sustainability standards.
Before covid became a known threat, commercial real estate professionals were already asking themselves big questions about how the industry should adapt to societal and commercial trends. Those questions are even more important now, and ESG will be a major part of the solution. Real estate lenders can play a key role in driving sustainability, and it is crucial for them to continue embedding ESG into their financing activities.
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