The covid-19 pandemic may have stalled property debt transactions for the time being, but Max Sinclair, head of UK commercial real estate at US bank Wells Fargo, argues it could lead to a greater focus on sustainable financing.
In May, the bank provided a €200 million ‘green’ debt facility to Irish property investor IPUT Real Estate, as part of an a five-year, €300 million revolving credit facility that upsized and extended a loan provided in 2016. The borrower said the green component is the largest facility of its type to be provided to date in Ireland.
Under the terms of the deal, IPUT will use the tranche to finance development that meets a defined set of sustainability criteria under its green finance framework, based on the ‘green loan principles’ developed by the European Loan Market Association. The criteria include a minimum LEED gold equivalent rating for environment efficiency, an improved building energy rating and a range of other renewable metrics.
The firm said it will use the green debt to fund development at the 600,000 sq ft (55,742 sq m) Wilton Park estate in Dublin.
“One of the things that covid-19 has done is encourage people to step back and take a look at the world they live in,” Sinclair told Real Estate Capital. “There’s a lot of commentary in the media about how much cleaner our air is as a result of the reduction in transport usage.”
“It wouldn’t surprise me if one of the features that comes to the forefront after life settles down is to ensure that whatever we’re doing, we’re doing it in the best way that’s sustainable for the planet.”
According to Sinclair, a growing number of real estate sponsors are focused on only owning assets that meet high sustainability standards.
“As a developer, if you don’t develop a green asset these days, there are going to be a number of tenants who are just not going to be interesting in that building. Due to this change in sentiment from end users, many investors will now only buy buildings which tick all of the green boxes. If these boxes are not ticked, there will be a discount applied to the yield to reflect this.”
He said that IPUT sought an extension for its existing €250 million RCF from Wells Fargo – its very first loan from a bank – in order to finance its increased development activity and to diversify its sources of debt.
“At the time of the existing RCF, there were a number of clients, particularly in the UK, who were looking at putting green lending facilities in place,” said Sinclair. “We considered it would be appropriate for IPUT, as they’re all about developing and owning assets that provide a sustainable future with as low as a carbon footprint as possible.”
The €300 million RCF will be used to fund the Wilton Park development, a sustainable mixed-use scheme in Dublin, which is mostly comprised of grade A office space that has been pre-let to LinkedIn.
The loan deal was agreed in early 2020 and closed on 20 March, just after covid-19 restrictions were put in place in Ireland.
“The commercial terms were all agreed well in advance of signing so we were very well placed,” IPUT chief operating officer Pat McGinley told Real Estate Capital.
Wilton Park and a separate project to convert a warehouse into offices that will also be funded through the €300 million RCF, are due to complete respectively in 2023 and 2021, although McGinley said he anticipates construction delays of around three months due to covid-19.
McGinley said the loan facility was priced very competitively given “IPUT’s low leverage and the quality and location of the portfolio”.
“[The 2016 RCF] was probably one of the lowest levered deals we’ve ever done at less than 10 percent loan-to-value,” said Sinclair.
Despite the impact of current market conditions on lending market activity, Sinclair is confident that real estate lenders will remain keen to provide debt facilities featuring sustainability criteria.
“I expect that there may be a pause for all types of financing in the short-term, but when the market stabilises, I see every reason why there should be a continuation of the arrangement of debt facilities and green debt facilities,” he said.
McGinley agreed: “There may be a delay in the execution of some transactions in the coming months, but we do expect to see many more green financing deals in the coming years.”