Europa Capital rolls out €210m ESG loan facility

The strategy includes margin incentives that are conditional on meeting sustainability targets.

Europa Capital has set up a €210 million ESG-oriented revolving credit facility via RBS International, a UK-based commercial bank. Europa, a London-based investment manager, obtained the credit facility on behalf of its latest value-add fund, Europa Fund VI, at a time when sustainability is rapidly climbing to the top of investors’ agendas.

“The silver lining of the pandemic has been the environmental awakenings that it has caused across the board and how it has accelerated. Understanding of that agenda [is greater] globally as well as being reflected in our client base,” Jason Oram, partner and fund manager at Europa Capital, told Real Estate Capital Europe.

“Driving our ESG agenda is something that is not necessarily product specific, it’s relevant to us as an investment management business and is absolutely central to what we do,” Oram added. “When reaching agreements with other stakeholders in our industry, you need to try and pervade this thinking, both within your organisation and externally.”

The revolving credit facility will assist with fund acquisitions as well as pay management fees and operating costs for the fund. It includes margin incentives conditional on sustainability linked targets, including improved waste diversion, the use of green energy and minimum EPC ratings of C for the fund’s major refurbishment and redevelopment projects. If targets are met between now and the middle of the second quarter of this year, the margin will be reduced.

Once the targets have been achieved, new targets will be set for the subsequent terms in order to either continue with the discount board or bring it back to the original margin rate.

“Signing up to such targets allows us to have a measuring stick to point to the things that have been achieved during the facility term and goal congruence in order to achieve those,” Michael Daniell, managing director of Europa Capital, told Real Estate Capital Europe. “If we do not achieve them there will be a penalty, so there’s some skin in the game from us in terms of incentivising and achieving these environmental targets.”

The team expects this product type to be more common moving forward.

“It’s still in its infancy but others are seeking like-minded counterparties within the industry. It’s certainly something that investors are becoming more conscious of,” Daniell said.

Discussions with RBS International to obtain the facility came about at the start of 2021. And while banks are evidently jumping on the ESG bandwagon, Europa Capital believes it will require a manager’s input and dedication to make the most of a product.

“We think this is the direction of travel,” said Oram. “We’re an early mover, but I’m sure it’s not going to wither on the vine. I’m sure we’re going to see a lot more of this as the year goes on.”

Incorporating ESG can open the door to new opportunities, too.

“We have green criteria that we’re looking to try and satisfy with lenders which doesn’t always lead to a ratcheted improvement in pricing, but it can open you up to a broader audience in terms of your counterparties, banks, institutions for whom this is similarly important,” added Daniell. “And that can create more competitive pricing for further leverage that you’re looking to secure.”

The firm expects an acceleration in how environmental benchmarks are reviewed, particularly around working with the existing fabric of real estate.

“How do you measure the benefits of working with existing structures?” Daniell asked. “I think the metrics will accelerate to better reflect that as an important part of improving our built environment, rather than just always looking at it from a new ground-up approach.”

Europa Fund VI

Investors in Europa Fund VI can be broken down roughly as a third US-based, a third Canadian and a third European, with some Asian clients, specifically Japan-based.

The fund focuses on the residential and logistics sectors, as well as selective offices in need of refurbishment. Within residential, multifamily is a key component. A newer focus, however, is senior living. “The living sector is becoming incredibly nuanced and in undertaking a leasing strategy, you have to, as the landlord, be very mindful of the demographic that you’re targeting, Oram said. “We feel that there’s growth in rental demand amongst not just the young, but also in senior living.”