How Berlin Hyp is targeting social impact through its latest loan product

The lender has introduced a loan framework designed to fund affordable housing in Germany and the Netherlands.

This month, German mortgage bank Berlin Hyp launched a ‘social loan’ product to finance affordable housing in Germany and the Netherlands. The bank, a subsidiary of Stuttgart-based LBBW, said the product is its first specifically designed to support social sustainability.

Speaking to Real Estate Capital Europe, Assem El Alami, head of international real estate finance at Berlin Hyp, described affordable housing as the bank’s route into tackling the social element of the environmental, social and governance agenda.

“The social loan framework could be modified to include other aspects of social responsibility eventually, but we looked at our portfolio for where we can make a difference to the social landscape of Germany and the Netherlands, and we found the lack of affordable housing to be one of the key social challenges of the moment,” he explained.

Three key criteria must be met for a social loan to be granted, El Alami explained. “First, we consider purchase power in the region in which the housing is located. We take a different view in a wealthy city like Munich to a town like, say, Kaiserslautern. We apply different levels of affordability.”

Second, the bank sets a maximum gross ‘cold’ rent, excluding heating but including ancillary costs. “In Germany, we determine an average apartment size for the object and on this basis the possible number of household members. On this basis, we determine a maximum rent in accordance with the applicable regulations.”

Third, social loans are only granted in situations where the bank is satisfied environmental standards are being met. “Affordability cannot impact energy efficiency,” El Alami explained. “We cannot have a conflict between the ‘E’ and the ‘S’. The assets must belong to the top 70 percent of the most energy-efficient assets on the market.”

Social loans are being offered to municipal housing companies and construction cooperatives, as well as private housing companies and project developers.

“What is important to us is that the client has stated a clear commitment to social responsibility and the provision of affordable housing. There needs to be a clear ESG agenda, ideally with key performance indicators,” said El Alami.

“Of course, we also monitor compliance with our social loan criteria during the term of the loan,” he added.

One method of incentivising borrowers is a margin discount, which is conditional on the sponsor complying with affordable housing plans. “In the housing community, this is a significant incentive,” El Alami said.

Lenders are typically thinking about the social side of ESG, he added, although initiatives currently vary. However, he argued, initiatives like Berlin Hyp’s social loan product represent a first step towards factoring societal challenges into the business activities of finance providers.

“To take social responsibility seriously, it is important to consider the major challenges to society. We are trying to do something as intelligently as possible, but there are certainly other intelligent ideas out there in the market.”