How Aviva and CLS worked ESG into their £154m loan deal

A new facility agreed by the two parties includes up to a 10bps margin discount should the borrower hit sustainability targets.

Listed UK property company CLS Holdings has joined the growing number of real estate investors that are agreeing to peg their borrowing costs to their sustainability performance.

On 30 September, the London-based firm announced it had sourced a £154 million (€168 million) ‘green’ loan from UK insurance company lender Aviva Investors. As part of the deal, it will receive a margin reduction of up to 10 basis points should it hit sustainability targets.

Kirkman: “The more we can improve those ESG targets, the more we can capture than 10 basis point reduction”

“It is the first time we have linked the margin to ESG,” Andrew Kirkman, chief financial officer at CLS, told Real Estate Capital. “We have been focusing on sustainability for over a decade and our purpose is to transform office properties into sustainable, modern properties to help businesses grow.”

The loan will refinance 11 office assets located across London and the south-east of England, which have a weighted average unexpired lease term of 5.2 years. It will also finance a mixed-use scheme comprising offices, a hotel and student accommodation in Vauxhall, London.

The facility is structured to include key performance indicators linked to the Green Loan Principles published by the UK’s Loan Market Association in 2018, and which were updated this year. CLS’s progress in hitting the targets will be assessed annually throughout the life of the facility.

The senior debt facility is split equally between a 10-year and a 12-year fixed rate tranche, which Kirkman said reduces maturity risk. The average interest rate across the two tranches was fixed at 2.62 percent. The 55 percent loan-to-value ratio is slighter higher than CLS’s group LTV of 33.7 percent, as of 30 June.

The loan refinanced three facilities that were due to expire in 2020 and 2021. Conversations began with Aviva in February and, while Kirkman said there were other potential lenders in the mix, the sustainability angle as well as the flexibility and long-term nature of the term sheet offered by Aviva “satisfied all of CLS’s requirements”.

Gregor Bamert, Aviva Investors’ head of real estate debt, said: “Targets have been set for the first half of the facility, with further targets to be defined for the remaining life of the facility over the next 12 months.”

While the exact targets remain confidential, Kirkman stressed that any improvements to the 12-building portfolio will be ESG-aligned, including reducing carbon use and ensuring all assets are environmentally certified by long-established sustainability standard BREEAM.

“The more we can improve those ESG targets, the more we can capture than 10 basis point reduction,” said Kirkman.

The real estate lending industry is shifting towards rewarding a “green premium” when financing ESG-led real estate project, according to global consultancy Savills, which presented its findings on the subject on its Financing Property webinar in June.

“We have been very encouraged during our lender interviews this year that, despite covid-19, many say pursuing an ESG-led lending strategy is still their priority,” said Ian Malden, head of valuations at Savills at the time.

“Lenders are now at the stage of being able to make the shift to rewarding exemplary projects with better terms, rather than just penalising those that clearly don’t follow sustainability principles.”