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How green is your loan?

Lloyds’ €600m syndicated financing of Unibail-Rodamco – complete with sustainability incentives – hints at the possibilities for a European ‘green’ property lending market.

UK clearing bank Lloyds has styled itself as something of a real estate banking eco-warrior. Last March, it launched a £1 billion Green Lending Initiative, designed to subsidise loan margin discounts of up to 20 basis points for borrowers which commit to energy efficiency targets on the commercial properties underlying the loans.

Last week, the bank closed the most ambitious financing through the initiative – a €600 million revolving credit facility for the French REIT Unibail-Rodamco. Significantly, it was the first time a loan arranged through the scheme was syndicated, meaning that Lloyds used the GLI on its portion of the financing and its syndication partners followed the principle.

Unibail-Rodamco is a good fit for a loan like this. It is pursuing its own well-documented sustainability agenda as part of a corporate social responsibility programme. The ‘key performance indicators’ in the Lloyds-arranged loan were tailored around those commitments.

Whereas the wider commercial real estate industry has long adopted the environmental agenda, green lending in the CRE finance market remains a niche activity. But there is more in this than a good bit of PR.

Green capital is a growing part of global finance. Public and private sector leaders alike have heralded it as a major opportunity for economic growth and a drive to foster a green financing market is underway. Some banks have created distinct green financing streams which includes them funding themselves on the capital markets and eventually writing loans with low-carbon credentials.

In the capital markets, the not-for-profit Climate Bonds Initiative reports that $81 billion of green bonds were issued during 2016, with $150 billion forecast for this year. Granted, green finance remains a tiny part of the global debt markets, but it has massive potential.

There is also significant potential for a green finance market within European real estate debt. Given the nature of the underlying assets, developers, investors and tenants have a vested interest in sustainable properties. The Lloyds deal demonstrates that there are banks willing to take syndicated pieces in green loans, hinting at the possibilities for loan distribution to lenders which are on-board with the green agenda.

Real estate investors and lenders have also made attempts to tap the wider green capital markets. Unibail-Rodamco issued green bonds in 2014 and 2015. In September 2016, German bank Berlin Hyp placed its first green senior unsecured bond with a volume of €500 million, the proceeds of which are used to refinance loans secured on buildings deemed to meet sustainable criteria. A year earlier, the bank launched the first Green Pfandbriefe covered bond, to which it announced last year than more than €1 billion of loans had been allocated.

As environmental legislation tightens, lenders will need to adapt their lending. In December, ING announced that it will only offer new financing for office buildings in its home market of the Netherlands for buildings that meet certain energy requirements. The bank’s plans are in line with new legislation saying that from 2023 buildings must have at least a certain energy label to be rented as office space.

In the UK, from April 2018, no commercial building which fails to attain a certain energy efficiency certificate will be permitted to be leased under new legislation. Looking forward, buildings’ environmental performance will have an impact on their valuations.

While specific green initiatives in the real estate lending space remain noteworthy by their relative rarity for the time being, such schemes could contribute to a genuine marketplace for green real estate debt, which makes financial sense for lenders and borrowers. If lenders can create paper which can be sold into a green syndication or bond market, and if borrowers can benefit from reduced loan margins by committing to sustainable measures, a market could emerge.