Värde’s Mooney: Higher demand and tighter pricing not reasons for our green bond

The head of real estate at the alternative investor explains the rationale behind the €300m green bond financing of one of its portfolio companies.

Vía Célere, a Spanish housebuilder owned by alternative asset manager Värde Partners, last week became the first residential development company to issue a green bond in the euro-denominated market.

On 18 March, the company issued a €300 million high-yield bond, priced at a 5.25 percent coupon and with a term of five years. It was issued in accordance with the International Capital Markets Association’s Green Bond Principles, and was reviewed by environmental, social and governance research and ratings company Sustainalytics.

The proceeds will fund Vía Célere’s growth across Iberia, where it has a significant landbank. Future developments must meet the bond’s eligibility framework by achieving an Energy Performance Certificate rating in the top 15 percent of local housing.

Real Estate Capital caught up with Tim Mooney, Värde’s global head of real estate, to discuss the rationale behind the financing.

Tim Mooney, Varde Partners
Mooney: Green bond issuance sends a signal to the market

Why did you opt for a green bond for Vía Célere?

The answer is not as straightforward as you might think, in that it was not about driving demand or pricing, per se. At Värde, we are in the business of providing debt and equity capital, so we are always aware of the latest financing trends. Green real estate finance is clearly a growing trend. However, it was not born perfect, and the real estate world often does a good job of creating awards it can win. It is important that green real estate finance does not become that.

With Vía Célere, the aspiration to fund the company via a green bond, and have that status opined on by a group like Sustainalytics, was more about confirming to the market what kind of company it is and that it is committed to advance the shift to a low-carbon economy, because that is what customers are demanding.

Unlike other green bond issuances in the real estate sector, which to date have financed properties that already exist, we were seeking finance to enable us to create new sustainable product. We were not simply trying to generate higher demand for a bond by badging it as green.

What impact do you think the bond’s green status had on demand and pricing?

The impact on demand was marginal. I do not think it had any impact on the pricing. It would have been four times oversubscribed and it would have priced at 5.25 percent regardless of the green wrapper.

So, what was the benefit to you of issuing the bond as a green note?

It keeps front and centre in the minds of our management team that sustainable development is what we do through Vía Célere. The management team was already doing a lot of great things, and felt it was important to set up a green bond framework and committee, and then track and report on all aspects of its sustainable measures as they are important to the business and our customers.

It is difficult to quantify the benefits of the financing being green beyond this – but I think it is safe to say we did not price at a tighter spread because of it. But it does send a signal about what kind of company Vía Célere is and aspires to be.

The green bond was not a tactical decision. We came to the decision relatively late in the process, after recognising the benefits and discussing it with our bankers, JP Morgan and Deutsche Bank.

Is sustainable real estate finance becoming a meaningful part of the debt industry?

Although the overall quantum of the sustainable real estate financing market is not huge yet, it is important to be out in front of and really understand a trend like that. Right now, there is not a universe of bond buyers that are forced to buy a limited supply of products that are labelled green. However, long term, we believe there will be capital focused on such strategies, and allocators will use ratings by companies such as Sustainalytics in the same way they use credit ratings from agencies such as S&P and Fitch today.

The idea that there is some fully formed green real estate financing market today is a little overcooked. But it will happen, and it will be an increasingly important part of the real estate capital market. I think the organisations that will be judged over time to have used it appropriately in its early days are those that are aspirational about sustainability, rather than those using sustainability tactically. It is important to be authentic, albeit realistic, about how you use it and what it requires of you, rather than simply trying to get a 25-basis-points reduction in coupon.

Taking the green aspect out of the equation, why did a bond financing make sense for Vía Célere?

The legacy of the global financial crisis is still so fresh in people’s minds in the banking market that residential development is still an unloved sector, 10 years on.

In Spain, the supply of bank finance got worse despite the residential development market becoming safer. In the middle of the pandemic, sales were up. There has been consolidation in the Spanish banking system, so there are fewer organisations willing to provide residential development finance.

Vía Célere’s business model is to buy land and then source finance for the development of houses. In recent years, banks asked for 30-40 percent of a scheme to be pre-sold. Today, they can ask for up to 60 percent because they want to take less and less risk. So, financing the company through a bond means we do not need to reply on banks as heavily, and the business plan is now fully funded for three to four years.

This is critical in this environment, as it allows the company to grow and meet customer demand for more sustainable product.