The £86.8 million (€101 million) loan ICG Real Estate provided this month to fund the acquisition and renovation of a UK office campus suggests there is lender appetite for the sector, in cases where the sponsor has plans to upgrade properties to meet changing occupier expectations.
Also, the fact that ICG Real Estate structured the facility as a green loan – the company’s first for its senior lending programme – hints that lenders are keen to back value-add projects that align with sustainability upgrades.
The debt fund manager, the property division of alternative asset manager Intermediate Capital Group, provided the loan to London-based real estate investor Tristan Capital Partners. Tristan bought Reading International Business Park, a 400,000 square feet office campus in the Thames Valley town, in December 2020 through its EPISO 5 opportunistic fund.
The property was completed in 2001 as the European headquarters for wireless network operator Verizon, and is now multi-let to occupiers including US-listed consultancy Accenture and London and Johannesburg-headquartered bank Investec. Tristan intends, to quote its announcement, “to refurbish the building to deliver a grade A specification and improved amenities, suited to all types of occupiers”.
According to David Mortimer, head of senior debt at ICG Real Estate, Tristan’s upgrade plans for the campus convinced the firm to finance it. “We like the fact that there is potential upside from renovating vacant space, so they can grow the income and value overtime, and we liked the fact that Tristan is now in a position to reposition the property for office 2.0,” he told Real Estate Capital.
Mortimer added that future-proofing existing assets is particularly relevant in the challenging office sector, where future occupier use of space and demand remains uncertain. “Reading International is already a landmark asset. But Tristan’s plans to invest in the property to deliver a true best-in-class building were particularly compelling,” he said. “In today’s market, occupiers are rightly demanding sustainable, flexible workspace with high quality amenities for their staff, and Tristan is in a position to meet those expectations. There aren’t many buildings in the market outside speculative development that can really do that.”
The campus’s location in what he described as a growing tech cluster and the long-term leases in place with existing tenants were, according to Mortimer, also benefits of the deal, as well as the fact Tristan is the sponsor. “This is the first time we have funded one of their projects, so their quality was a real incentive,” he said.
Written at a 60 percent loan-to-value, the loan was provided through Senior Real Estate Vintage IV, a senior debt strategy, which had a £630 million final close in Q1 2021.
Green loan opportunities
As part of the deal, Tristan will receive a margin reduction if it meets pre-agreed sustainability targets for the property. While the exact targets remain confidential, Mortimer explained that upgrades to the asset will be aligned to factors including improvements to energy performance and enhancements to social infrastructure.
“Environmental improvements are easily measurable through market accreditations like BREEAM but there are also an increasing number of certificates that measure social infrastructure, including well ratings, which measure, certify and monitor features of the built environment that impact human health and wellbeing,” he said. “You can almost overlap environmental with social improvements, so we wanted to make sure there was a balance.”
Mortimer said the scale of the project was a consideration in ICG Real Estate’s decision to finance it: “There are many opportunities to support game-changing sustainable initiatives, but they do not tend to have this scale.”
Speaking about the wider market, Mortimer said there is significant potential for lenders to provide ‘green’ finance by backing improvement schemes for existing buildings. “There are just around 300 buildings in London environmentally certified with the sustainability standard BREEAM,” he said. “Whereas if you consider all the buildings that have the capacity to be upgraded, the universe is much wider. The opportunity set for lenders, and investors, is much bigger and that is where we see most opportunities to provide green loans in our programme.”
He added: “Around 80 percent of the buildings we will have in 2050 already exist today so, in order to meet net zero and emission reduction’s obligations over the next 30 years, there will be a lot of renovation needed to upgrade the buildings to meet those standards. We want to play a part in financing them.”