The incorporation of the environmental, social and governance rating measured by the Global Real Estate Sustainability Benchmark into a recent unsecured loan from ING to French REIT Gecina is a significant step towards fostering a sustainable property finance market.
Pegging the margin of the €150 million unsecured ‘sustainable improvement loan’ to the borrower’s GRESB rating demonstrates the scope for lenders to arrange finance deals in reference to an ESG indicator that is gaining recognition across the property sector.
In recent years, a challenge in creating a sustainable lending market in the real estate space was the lack of a standardised benchmark against which to measure environmental and social performance. The GRESB rating assesses real estate owners’ portfolios and is becoming accepted across the industry; in 2017, 850 property companies and real estate funds completed its GRESB Real Estate Assessment. GRESB has also developed a Debt Assessment, which it describes as an ESG tool designed for real estate lenders to identify best practices in areas such as loan origination and due diligence underwriting.
Meanwhile, Europe’s Loan Market Association has taken its first steps towards standardising environmentally-friendly lending. In March, the industry body set up new Green Loan Principles to provide a consistent methodology. By creating a framework through which to write environmentally-friendly loans, the principles will surely benefit those lending to real estate.
Although it is gaining traction, the sustainable real estate lending market remains in its early stages of development. So far, green bonds have been the usual route for those property firms aiming to raise capital specifically to invest in environmentally-friendly assets. Across sectors, more than $160 billion of green bonds were issued during 2017, up from $81 billion the previous year, according to the not-for-profit Climate Bonds Initiative.
Property lenders and borrowers have the potential to work together to grow a sustainable real estate loan market. Their main driver for action must be a commitment to the environment and reducing CO2 emissions. However, debt providers and their sponsors also stand to benefit from additional incentives.
The additional level of scrutiny of underlying assets which is required for sustainable lending can help debt providers to better manage risk across their portfolios and reward sponsors with a commitment to the sustainable agenda through favourable financing rates.
As highlighted by UK landlord collective the Better Buildings Partnership, property lenders can also benefit through improved engagement with their borrowers. For instance, ING and ABN Amro are already using innovative technology to help sponsors identify energy improvement measures that will provide both a financial return and improved environmental performance.
The ability for lenders to take the lead in offering new products into the market is also an incentive. By mid-January, Lloyds Bank had issued around £900 million (€1 billion) of loans through its Green Lending Initiative – in which loans to environmentally-sustainable buildings benefit from a margin discount. The scheme’s most recent financings in the UK have funded science parks, pubs and development, generating lending business – not to mention good publicity – for the UK bank.
More debt providers are getting on board with sustainability. This week, M&G Investments launched a private debt fund which will invest in projects with a positive social or environmental impact, including ‘green real estate’ and social housing.
The sustainable real estate financing market remains a niche, but as ESG becomes easier to measure and the principle of lending against such criteria becomes more accepted, it is well within financiers’ scope to help build momentum.
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