Commercial real estate debt providers are undergoing a “dramatic shift in attitudes” towards the sustainability agenda, with the leading players establishing a new regime of best practice in green lending that goes well beyond traditional risk management.
That is the main assertion of the latest report from the Better Buildings Partnership, a collaboration of the UK’s commercial property owners that are working together to improve sustainability in the built environment.
According to Peter Cosmetatos, chief executive of the Commercial Real Estate Finance Council Europe, one of the report’s sponsors, the more progressive lenders not only acknowledge the risks of paying insufficient attention to sustainability but actually see this as an opportunity to win business – “a real transformation compared to just two or three years ago”.
The publication of the BBP’s Beyond Risk Management report in late April coincided with news of Lloyds Bank Commercial Banking’s €600 million (£509 million) syndicated financing for French REIT Unibail-Rodamco, which the bank priced against ‘green’ performance criteria.
The loan is the most high-profile to be arranged by Lloyds under its £1 billion Green Lending Initiative, which it launched in March 2016 to subsidise loan margin discounts of up to 20 basis points for borrowers that commit to energy efficiency targets on the commercial properties underlying the loans.
The UK clearer features prominently in the BBP report as one of the “forward-thinking” lenders around today – alongside ING, ABN Amro, Hermes Investment Management and TH Real Estate – that can see the possibilities for debt finance to be good for both business and the environment.
Richard MacDowel, Lloyds’ relationship director, commercial real estate – major private groups, acknowledges that the initiative plays to the bank’s corporate social responsibility policy while the commercial arguments are still “evolving … but are becoming stronger”.
“There is certainly a link between good credit discipline and credit worthiness in environmental buildings and supporting asset managers that invest in our underlying loan collateral,” he says. “The Unibail deal has been enormously brand-enhancing, and certainly we’re seeing within the UK business people sitting up and seeing us as an innovative lender that is supporting its customer base.”
Lloyds’ portion of the Unibail deal is understood to be around £42 million, which has taken the bank’s overall green lending to £175 million since launching the initiative. Though not Lloyds’ largest individual green loan, MacDowel regards the Unibail deal as a “fantastic endorsement” of the initiative. “[Unibail] has raised a number of green bonds, which raised quite large fixed amounts of capital for specific projects, whereas this loan is for general working capital,” he says. “It brings funding diversification and enables them to support cap-ex programmes across the business rather than just focused on one or two assets.”
The deal is also significant because it was syndicated to as many as 12 lenders – so far undisclosed although believed to include ING. Whereas at the start of the initiative MacDowel was often met with “stunned silence”, he says the idea of green lending is taking root, with lenders and borrowers starting to understand what he calls an alignment in the interests between equity and debt. “We’re seeing far more in-bound inquiries,” he says.
There is undoubtedly regulatory pressure on lenders, indirectly through regulation which affects borrowers. The UK’s Minimum Energy Eﬀiciency Standards, for instance, come into force in April 2018 when no commercial building that fails to attain an energy efficiency certificate will be permitted to be leased. “Starting to agree some sort of consensus around how the banking community is going to respond to these forces is, I think, a good thing,” says MacDowel. “We become more of a force if we join up in aggregate.”
This echoes the collaborative tone of the BBP report, which showcases best practice in green lending, including the use of technology, such as an app developed by ING to help its borrowers identify energy improvement measures that will provide both a financial return and improved environmental performance.
However, the most significant incentive lenders can offer is a green discount on conventional loan terms. For example, on a notional loan of £50 million secured by £80 million of gross assets, Lloyds’ 20 bps would equate to £100,000 per year. “On a five-year loan, that’s £500,000,” says MacDowel, “enough to pay for LED roll-out or support the investment in new M&E. It won’t fund serious cap-ex projects in itself but it may make a difference between whether an investment decision is made or not.”
Non-compliance does not result in a loan default; the borrower simply does not benefit from the margin discount. At the same time, such a discount clearly eats into Lloyds’ profits, which as MacDowel says, need to be recouped. “That’s our challenge and it’s not straightforward but it’s one we think that we’re meeting.”
It is yet to be demonstrated whether such discounts are financially sustainable for lenders as green lending becomes more prevalent. Lloyds stops short of setting a target for its green loan book. “Certainly, we’d like to spend the £1 billion, and we’ve got internal support to be able to do that,” says MacDowel. “It feels, still, quite early days.”
In the Netherlands, where environmental regulations are tougher than the UK, ING gives a discount of 0.5 percent on green loans. Its policy is to grow 15 percent in green assets per year to attain an almost 100 percent green portfolio by 2023, which is a particularly demanding target. As the bank says, sustainability is accepted by institutional investors but for the significant number of non-institutional investors in the Netherlands, it acknowledges it still has a challenge. ING’s target outside the Netherlands is 10 percent a year.
There are signs of sustainability being taken more seriously in Germany, where regulation is arguably less demanding. Mortgage bank Berlin Hyp issued a green pfandbrief in 2015, increased it to €1 billion of loans by April 2016 and followed up in September by raising €500 million in its first unsecured ‘green’ bond. The latest results show that its green finance portfolio accounted for 11 percent of all mortgage loans at €2.02 billion for the year to 28 February 2017 – double the amount for the previous year.
Berlin Hyp’s growth has been fuelled by a 10 bps discount on green lending. Whether or not that is sustainable long term is hard to predict, says Bodo Winkler, head of investor relations and sales. “But for the time being [green lending] is a strategic issue in our company, and that’s not only for altruistic reasons. In the commercial real estate market, there’s quite a lot of competition going on. We are deeply convinced that a modern, sustainable, energy-efficient building will perform better than others, especially in markets that will not permanently increase.”
This year, Berlin Hyp has raised the stakes, at least as far as its German competitors are concerned, by declaring its target for green building finance – 20 percent of its overall loan book, equating to €4 billion, by 2020.
“The bank had established itself as a green lender,” says Winkler. “It’s only logical to define on a corporate, strategical level a certain goal, and that goal should be demanding, and this is demanding. But we have the feeling that we can do it.
“I hope more [banks] take this as a positive example because banks sit in a very powerful position when it comes to the development of the real estate market and how it can contribute efficiently to reach a commonly set goal. The European Commission wants to have 90 percent savings on greenhouse emissions, having in mind that one third of all carbon emissions come from real estate, there is a big [potential] levy if you play on that field.”