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Asoka Wöhrmann, chief executive of German investment manager DWS, has resigned after a raid by German police on the company's offices.

Around 50 police officers raided DWS's Frankfurt headquarters on Tuesday as part of an investigation into prospectus fraud.

The manager, which is 80% owned by Deutsche Bank, has been under investigation by the German regulator BaFin since last year, after former head of sustainability Desiree Fixler alleged the company had made misleading statements in its 2020 annual report, which claimed €459 billion of its $900 billion assets under management were invested using ESG criteria.

In 2021, DWS stated that it stood by its annual report disclosures and said: "We firmly reject the allegations being made by a former employee."

However, in its 2021 annual report, published in March, DWS claimed only €115 billion in ESG assets.

DWS has €131 billion of real assets under management, including real estate and infrastructure. It is not known if the investigation is targeting real assets investment products.

Wöhrmann, pictured above, has been replaced by DB executive Stefan Hoops.

Green and sustainability- linked real estate lending is on the increase and is growing in sophistication and impact.

The commitment of banks and larger real estate investors to sustainable finance may even lead to it becoming the norm and non-compliant borrowers facing higher costs.

The terms ‘green loan’ and ‘sustainability-linked loan’ are not interchangeable. A green loan is used for ‘green’ projects: for example borrowing to upgrade the HVAC system of a building to make it more efficient and reduce energy usage.

A sustainability-linked loan, meanwhile, may be used for any purpose, such as to fund general corporate activities or to leverage an acquisition. However, the borrower’s sustainability performance over the life of the loan is measured against various key performance indicators (KPIs). 

Borrowers receive interest rate discounts if they hit targets and receive penalties or are considered in default if they miss them. It is difficult to get a picture of how much green and sustainability-linked finance is being extended in real estate globally, as practices vary, but there is no doubt it is growing.

Tom Brook, director, debt and structured finance, international capital markets EMEA, at JLL, says: “Last year JLL Debt Advisory transacted c$9.6 billion of financing across Europe of which $1.7 billion (18%) was either sustainably linked or was for assets with leading sustainability credentials.

“However, of the $4.1 billion of financings we have closed in Q1 of this year, $1.25 billion (30%) has been either sustainably linked or for assets with leading sustainability credentials, which demonstrates how this is becoming an increasingly important focus for the industry.”

From a lender’s point of view, the motivation for sustainable lending is to lower risk. Meeting sustainability targets should make a company or an asset more resilient to climate change and other factors, thus lowering the risk of financing them.

Gregor Bamert, head of real estate debt at Aviva Investors, which has allocated £1 billion ($1.3 billion) to sustainable real estate lending, says: “We are investing internal and external capital and need to be able to say there has been a positive economic outcome as a result of us reducing the margin. It is not just about doing something good. We can say that the measures taken future-proof the building and make it more attractive, thus reducing the exit risk of the loan.

“That means the lower margin has been offset by a reduction in risk. Being able to demonstrate the alignment between risk and reward is how you unlock capital.”

Jonathan Drew, managing director, sustainable finance, at HSBC, says: “HSBC recognises real estate has a crucial role to play in addressing the sustainability challenge and we want to contribute by directing capital into sectors and activities aligned to the broader objectives of the transition process. In real estate, the winners will be those whose buildings are resilient and connected to and contribute to their communities. so on a long- term risk-adjusted return basis, it is the smart place to put capital to work.”

Much of the early sustainability-linked lending was in the form of green bonds issued by listed companies and many sustainability-linked loans have been extended to companies rather than their assets. However, sustainable private lending to real estate assets is growing and Aviva has opted for the sustainability- linked rather than the green route, although it may well extend green loans in future.

Focus on existing assets

Bamert says: “Firstly, most of our lending is on existing assets and secondly, while there are great things happening in new developments, if we’re not going to fix the existing assets, then we’re really not going to move the dial in a big way.”

The motivation for borrowers is twofold: sustainable financing can help them meet their sustainability targets, and can also help them secure cheaper financing. However, in a world in which margins on real estate finance in developed markets is very tight, the discounts amount to a few basis points, which is unlikely to move the needle.

Brook says: “Typically where loans have sustainability linked key performance indicators (KPIs) a margin ratchet, either reduction or penalty, is applied of between 2bps and 20bps.”

Gavin Eustace, co-founder of boutique UK residential development lender Silbury Finance says meeting sustainable loan requirements “typically leads to a saving of around 20 basis points on the exit cost”.

Hong Kong’s Link REIT is the largest real estate investment trust in Asia, and owns assets in Hong Kong, mainland China, the UK and Australia. It issued its first green bond in 2016, raising $500 million at a fixed rate of 2.875%, which it says was one of the lowest rates achieved by a Hong Kong corporate. A HK$4 billion ($512 million) convertible bond followed in 2019, with a 1.6% coupon.

It has secured several sustainability-linked loans, in sterling, Hong Kong and Australian dollars, but this year announced a HK$12 billion ($1.54 billion) sustainability-linked loan from a consortium of 16 banks.

Kok Siong Ng, chief financial officer of Link REIT, says: “Seeking sustainability-linked financing is a way for us to pursue ongoing improvement in our ESG performance. The financial incentives serve to motivate ESG performance and the subsequent mandatory robust auditing process ensures that greenwashing is minimised. This also helps to set an example for our business partners and other organisations across our value chain to follow so that we augment sustainability efforts and overall impact.”

It is also open to question how material green and sustainability- linked lending is for borrowers. However, as sustainability becomes central in real estate, market players expect the split between the best and laggards to become clearer.

Link REIT’s Ng concurs: “Clearly the greener and more sustainable real estate companies will have more diversified sources of funding from investors and the credit community compared to underperforming companies and assets.

“Underperforming buildings will likely increasingly fall behind the market needs and brown discounts will become more real and material over time. Likewise, those real estate companies which fail to embrace and implement ESG effectively will likely face higher cost of capital and a reduced pool of potential investors.”

The full version of this article can be found in Sustain’s May issue. 

Developer and investment manager Quadrum has begun construction of an office building in Victoria, London which will be net zero in both construction and operation.

The redevelopment at 11 Belgrave Road will deliver 108,000 sq ft of Grade A space and is the first UK development to achieve an Excellent 5.5-star NABERS design-reviewed target rating for building efficiency and has a design stage BREEAM rating of ‘outstanding’ and a WELL Platinum rating. The Australian NABERS green building certification system was launched in the UK in 2020.

The building, designed by Eric Parry Architects, features 14,000 sq ft of communal space including multiple gardens and terraces. The building features passive ventilation, air source heat pumps and carbon air filters. 

Quadram COO Ilyas Aslam said: “By investing the time and effort to pre-certify the project’s credentials, we can demonstrate real value rather than intention.”

Robert Kennett, director at Eric Parry Architects, said: “The project will reduce the carbon emissions associated with construction by retaining a significant portion of the existing concrete frame, and by pushing best practice throughout the construction and specification.”

A group of European real estate organisations has launched an accreditation system for low carbon buildings. 

The Low Carbon Building Initiative, launched at MIPIM, is supported by listed Dutch investor NSI, Italy’s Generali Real Estate, France’s BNP Paribas Real Estate, developer BPI and investment manager ICAMAP and WO2 from Luxembourg, French real estate investment trust Covivio, Canada’s Ivanhoé Cambridge and, in a personal capacity, Struan Robertson, chairman of EMEA real estate, gaming and lodging at Bank of America Merrill Lynch. 

The French Association for the Development of Low Carbon Buildings (BBCA) will provide technical support for the initiative and has set up a scientific commission to develop a methodology for the new low-carbon label by summer 2022. Offices, residential buildings and hotels will be targeted initially and the first buildings will gain certification by the end of this year.

Stanislas Pottier, senior advisor to Amundi’s General Management and president of the BBCA said:  “If we want to reach net zero by 2050, we have to get it right carbon wise in the coming 15 years and to do that, we have to change practices in the next two to three years. That means shaping a real CO2 accountancy and analysis framework for buildings, cities and portfolios. BBCA is glad to support this European Low Carbon Building initiative, contributing its technical expertise acquired over the last 6 years.”

Stéphane Villemain, vice president, CSR at Ivanhoe Cambridge, stated: “We are proud to support this European initiative which represents a major step towards the decarbonization of the real estate sector. Greater account needs to be taken of the emission levels of buildings throughout their life cycle, including when they are actually being built. This initiative represents a real opportunity to extend low carbon practices in our sector and to favourably position our portfolio over the long term.”

Sustainability will be the driving force for stakeholders in Indian real estate in future, a new report from CBRE argues.

The Indian Real Estate’s ESG Landscape and its Progress to a Sustainable Future report highlights ongoing progress in sustainable real estate practices and outlines themes for the future. 

Abhinav Joshi, head of research, India, Middle East & North Africa, said: “ESG is fast becoming embedded into the collective conscious of businesses and investors. As commitments to decarbonise rise, demand for sustainable buildings is expected to follow suit. Our analysis of the certified built environment in India shows that this transformation is already underway.”

India’s supply of green certified buildings has grown by 37% in the past five years, compared with the previous five, adding more than 78 million sq ft of space. More and more developers are seeking certification, with LEED and Indian Green Building Council certification being the most popular. Both national and state governments offer incentives for green buildings, for example a rooftop solar subsidy equivalent to 30% of installation costs.

The share of certified buildings in total commercial stock is as high as 44% in Delhi NCR and Hyderabad, but certified buildings make up only 16% of total stock in Mumbai. Certified buildings tend to be new developments in peripheral office markets; there have been few refurbishments upgrading building certification.

CBRE predicts further Indian real estate will come under more regulatory pressure, both domestically and internationally. Coupled with this trend, benchmarking and reporting will also be crucial going forward. At present much regulation focuses on larger companies, but this is expected to change. 

The property adviser also predicts that proptech will be critical to achieving ESG goals, whether it is used to measure building performance or improve the tenant experience. An important focus of technology and other measures will be increasing the energy efficiency of buildings. 

Green finance will also grow strongly in India, CBRE says. India introduced a regulatory framework for green loans in 2017 and last year $16.5 billion of green bonds were issued. 

Joshi said: “Going forward, we believe that regulatory requirements around ESG adoption would continue to tighten, and sustainability reporting standards and benchmarks would gather more steam. As a result, markets with a proactive approach and a continuous focus on sustainability and climate risk mitigation strategies will be frontrunners as investment destinations.”

A perennial question for real estate investors is whether the cost of the sustainability measures they take in their portfolio leads to increased rents and therefore values. 

However, the industry is increasingly leaning towards the view that the search for a ‘green premium’ is a simplistic way to look at sustainability in real estate. Increasingly, good sustainability practice is indivisible from best practice in other areas. No real estate investor would disagree that the best buildings achieve the best rents, however it is much harder to say how much of this performance is due to sustainability initiatives.

A meta-analysis of 42 studies on the value of sustainability initiatives was conducted by Ben Dalton and Franz Fuerst for the Routledge Handbook of Sustainable Real Estate, 2018. It showed a 6% rental premium and a 7% sales premium for buildings with a green certification. However, there are few – if any – prime buildings being developed today without some sort of green certification. 

Matt Oakley, head of commercial research at Savills, says: “The reality is that we probably need to stop asking about a ‘green premium’, at least if we’re going to frame the question in narrow terms centred around rents. Instead, investors should be having a far more nuanced and wider conversation about the advantages energy-efficient buildings deliver and engage in better dialogue with occupiers about how these benefit both parties.”

Furthermore, many developers are now going beyond green certification and also looking at health and wellness. They are also taking into consideration the value of resilience to climate change and future extreme weather events. 

The coming years will show that while a green premium is a temporary add-on, a brown discount will have a much more material impact on the financial performance of a building. A 2020 report from the Urban Land Institute and Heitman found investors now commonly view local climate risks, such as wildfires, increasingly frequent and intense storms and sea-level rise, as core factors in investment decision-making.

JLL’s Return on Sustainability report also notes that investors are starting to consider both the operational and embedded carbon in buildings, something which is not always a consideration in building certification. JLL research suggests there is no observable correlation between LEED certification and carbon emissions. 

Overall, JLL suggests, there may be a shift from a “green premium” to a “brown discount”, where buildings which do not meet the requirements of tenants, investors and regulations could become stranded assets. 

Christian Ulbrich, global CEO at JLL, says: “The coming years will show that while a green premium is a temporary add-on, a brown discount will have a much more material impact on the financial performance of a building.”