As market participants contemplate a business landscape changed by covid-19, sustainability matters have been propelled even further up commercial real estate lenders’ agendas.
In the spring edition of Real Estate Capital, due to be published in print and on recapitalnews.com on 1 March, we take a Deep Dive into how environmental, social and governance considerations are being factored into real estate finance. To date, the environmental element of ESG is where property lenders have made most progress. Loans written using environmental financing frameworks have become a market feature and look set to grow in prominence.
Meanwhile, lenders are still getting to grips with how social sustainability can be factored into loan agreements. Sources agreed a key challenge is in measuring social metrics – although many have now been identified and progress in this area can be expected. With regards to governance, sources argued it is a difficult concept to bake into a loan agreement. Rather than being seen in isolation, most agreed good governance in a lending deal means ensuring the sponsor is properly set up to deliver on the E and S parts.
There will be further debate around how best to incorporate the S and G of ESG into real estate finance. But there is already a clear imperative for lenders to lend in environmentally focused loan structures. Here are five reasons why it benefits them.
Cheaper wholesale funding: By issuing green bonds in the capital markets, banks can source cheaper funding than by issuing conventional bonds. Bodo Winkler-Viti, head of funding and investor relations at German bank Berlin Hyp, told Real Estate Capital there is a slight price advantage in the market for green bonds. “If I can refinance myself cheaper, I can also lend cheaper,” he commented.
Risk mitigation: Real estate equity investors have recognised that crafting environmentally sustainable portfolios is the best way to protect future value, as owners of property adhere to increasingly stringent green strategies. Lenders too are recognising the market value of sustainable loan collateral is likely to be more resilient, meaning lower risk can justify potential margin discounts.
Easier syndication: As holders of debt aim to create sustainable portfolios, secondary demand for green loans is increasing. As lenders told us, that makes it easier to syndicate a green loan, because so many buyers are eager to stuff their balance sheets with such debt. The same principle holds in the bond market, with real estate companies increasingly tapping investor demand for green notes.
Success in internal targets: More sustainable loan portfolios contribute to company decarbonisation targets, raising organisations’ market standing. For lenders, ‘greening’ a loan portfolio contributes to their organisations’ own ESG targets.
Attracting future talent: Banks have an obligation to report on their own commitments. By providing green and sustainable loans, and publicly announcing them, they can contribute to the improvement of the real estate finance industry’s public image. Nathalie Sarel, executive director of sustainable banking at French group Crédit Agricole, told us the bank has received plenty of approaches from students, especially in its sustainability banking department, attracted by what they have heard about its activities in green and social financing.
Pressure on debt providers to offer defined sustainable lending products will grow in 2021. These factors demonstrate it is in their own interests to create them.