Collaboration and data are needed to drive decarbonisation and climate resilience in Asia Pacific, ULI conference delegates heard this week.
The first session of the ULI Asia Pacific Summit, which took place in Hong Kong on August 30 and 31, focused on industry efforts to decarbonise and to mitigate climate risk.
The summit also saw the launch of a joint report by ULI and HSBC, looking at climate risk in the Greater Bay Area of China, which consists of major Southern China cities such as Guangzhou and Shenzhen, as well as Hong Kong.
The report found that market participants were only in the early stages of assessing, pricing and mitigating climate risk. Limited availability of high-resolution data was cited as a prime roadblock for dealing with climate risk.
Throughout the session, leading Asian real estate experts called for more industry collaboration to address the issues of decarbonisation and climate resilience. Sharon Quinlan, head of real estate finance at HSBC, said there was “a variable degree of understanding” across the real estate industry about climate risk.
Jenny Lee, undersecretary general for the Hong Kong Green Finance Association, said market players needed access to climate data in order to fulfil their regulatory obligations; she added that the finance industry needed to upskill in ESG.
Raymond Yau, general manager, technical services & sustainable development, at Swire Properties, said the need to engage with tenants over Scope 3 emissions had been a major motivation for Swire’s collaborative efforts in sustainability.
Barings has made its first sustainability-linked real estate loans in Europe.
The investment manager has agreed two sustainability-linked loans against assets in the UK and the Netherlands, saying Europe was “a key area of growth for the portfolio”.
Barings provided a seven-year fixed-rate loan worth £48.6 million to finance the acquisition of The Brewery, a retail and leisure park in Romford, east London, by a joint venture between Schroders Capital UK Real Estate Fund and Immobilien Europa Direkt.
The loan was extended from Barings’ separate account with investor Phoenix Group, a UK long-term savings and retirement business, which invests in sustainability-linked debt.
The loan will be used to retrofit existing buildings to increase EPC ratings and investing in initiatives that enhance biodiversity net gain, health and wellbeing, and tenant and community engagement.
Barings has also provided a loan to a company managed by Round Hill Capital to finance the refurbishment of the Rembrandt Park One building in Amsterdam into a Grade A sustainable office building with two additional floors, an additional office pavilion and public realm connecting the park with the rest of the city.
Charles Weeks, head of European and APAC Real Estate at Barings, said: “Barings is increasingly seeking to apply strong ESG standards to our projects. While we’ve had many more opportunities to focus and shape our assets secured through equity up until now, we’ve been eager to find the right opportunities for sustainability-linked loans for some time. With a growing team, including new colleagues in real estate debt and ESG, we’re keen to explore further such loans across Europe.”
The demands of investors and regulations are pushing commercial real estate lenders into ESG disclosures, a new survey found.
The US-based CRE Finance Council (CREFC), an industry association which represents the $5.1 trillion commercial real estate finance industry, has released its 2022 ESG Survey, regarding members’ sentiment on ESG issues in commercial real estate finance.
Client demand (cited by 58% of respondents) and present or future regulatory pressure (42%) were the two external factors cited by lenders for their ESG disclosure and reporting frameworks.
However, the survey found that, while 55% of industry participants have an ESG framework in place, more than half of those (55%), report that they do not use the ESG disclosure frameworks promoted by policymakers, primarily the Task Force on Climate-Related Financial Disclosures (TCFD). Only 20% overall used TCFD as the basis for disclosure (see above).
“While the CRE industry anticipates increased regulatory oversight of ESG investments and offerings, the lack of standardisation for compliance and disclosure requirements across different sectors, subsectors, and industries creates challenges,” said Sairah Burki, managing director, regulatory affairs & sustainability, CREFC.
The majority (67%) of market participants view property-level data as the most important information when making an investment decision. Tenant data (34%) is also gaining significance, followed by sponsor ESG policies (33%).
Aviva Investors said investors need to focus on driving improvements in the built environment, as it released an update on its progress towards 2025 sustainability targets.
The UK institutional investor gave updates on its five 2025 targets for its real assets group, which form part of its 2040 net zero commitment. The achievements include:
Aviva said heightened competition for assets with the best sustainable credentials was expected to increase, with poor-quality assets set to attract a “brown discount” as a result. It also noted a growing trend for investors to prioritise renewables and already-green assets, rather than working to improve the built environment.
Ed Dixon, head of ESG, real assets, at Aviva Investors, said: “The focus on net zero targets has resulted in a lot of money chasing sustainable assets with attractive decarbonisation pathways, as investors try to lock-in short-term reductions in the carbon footprint of their portfolios.
“There is also an overreliance on energy performance certificates and green building certifications, neither of which are correlated to energy and carbon intensity.
“However, if institutional investor capital is to be truly effective in supporting the transition towards a low-carbon future, it must be funnelled into more impact-based investment activities, such as improving existing buildings and infrastructure.”
Aviva Investors has hit its target for real estate sustainable transition loans three years early.
The UK investment manager had committed to £1 billion of sustainable real estate lending by 2025 but has now breached this target with a £227 million loan to Romulus, a London-based investment and development company.
Gregor Bamert, head of real estate debt at Aviva Investors, said: “It is great to have a long-standing borrower client help us reach our £1 billion origination target. When we created the Sustainable Transition Loans Framework, this figure seemed both challenging and substantial, however the reaction and engagement from borrowers has been astounding and we look forward to setting ourselves some even more challenging targets in the next phase of the programme.”
Aviva has extended a ten-year, fixed-rate loan to Romulus, secured against a number of assets located across central London. The full value of the loan will be subject to sustainability-linked KPIs, with more favourable borrowing rates available upon Romulus achieving measurable environmental improvements in the loan portfolio’s assets.
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.
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.
Cbus Property has launched a sustainable finance framework and secured two green loans.
The loans, the value of which was not disclosed, will fund the Australian developer’s construction of 83 Pirie Street (pictured above), an office tower in Adelaide, and the redevelopment of 111 and 121 Castlereagh Street in Sydney’s CBD.
As office projects, 83 Pirie and 121 Castlereagh are targeting 6 Star Green Star and 5.5 star NABERS Energy design ratings, while 111 Castlereagh, the residential element of the Sydney project, is targeting a 7.6 Star average NatHERS rating across its residences.
CEO Adrian Pozzo said the sustainable finance framework criteria aligned with Cbus Property’s strategic sustainability targets, as outlined in its 2021 Sustainability Report.
“Sustainable finance is another important layer to our comprehensive sustainability strategy and will help facilitate our goal to become a world leader in the sustainable development and management of commercial and residential property,” he said.
The framework has been independently verified by EY, to ensure alignment with best practice standards, including the voluntary guidelines issued by the International Capital Market Association (ICMA), Loan Markets Association (LMA), Asia-Pacific Loan Market Association (APLMA) and the Climate Bonds Initiative (CBI).
Commonwealth Bank (CBA) funded the green development loan for 83 Pirie in Adelaide, which is currently nearing completion; while ANZ funded the loan for 111 and 121 Castlereagh in Sydney, which is midway through construction.
Sustainable real estate lender Impact Lending has made three new appointments.
Wes Friedel (above, l) joins as head of credit, alongside Matthew Lawrence (r) and Holly Dormer (c) as business development managers.
Friedel has more than sixteen years’ real estate lending experience and joins from Acre Lane Capital where he was head of underwriting. Prior to Acre Lane, he held senior roles at PropFin, Masthaven Bank, and Mercantile Trust.
Lawrence joins from Castle Trust Bank and Dormer from PropFin.
UK-based Impact Lending was established in 2019, as a sustainability-focused real estate lender. It is part of the Impact Capital Group, founded by property entrepreneur Robert Whitton and finance professional David Travers as “an umbrella of companies underpinned by ESG values”.
Travers said: “Wes, Matthew and Holly are just the right people to take Impact Lending to the next level and will encourage all of our clients to consider building using sustainable construction methods on their future developments, and contribute to the green recovery initiative.”
Ascott Residence Trust has issued its first sustainability-linked bond.
The Singapore real estate investment trust, which owns hotels in 15 countries around the world, said it was the first hospitality REIT to issue a sustainability-linked bond.
Proceeds from the S$200 million ($146 million) five year bond, which was 2.2 times oversubscribed, will be used to refinance existing borrowings. The bonds have a fixed coupon of 3.63% per annum.
The trust has committed to a sustainability performance target having 50% of its total portfolio achieving a regional, national or internationally recognised green building standard or certification by a recognised third-party by the end of 2025.
Beh Siew Kim, chief executive of the REIT’s external manager, said: “Aligning our financing needs with our sustainability efforts to build a greener portfolio demonstrates ART’s focus on responsible growth. As of 31 December 2021, 33% of ART’s portfolio is green-certified and we target to green the rest of our portfolio by 2030.”
Vukile Property Fund has agreed its first green financing with a South African bank.
The South African real estate investment trust, which owns retail assets in South Africa and Spain, will use the ZAR200 million ($13 million) five year facility from Nedbank CIB to fund 19 solar energy projects and energy-efficiency initiatives across South Africa.
The loan will fund seven recently installed solar energy projects at its malls, as well as eight which are underway and four future projects, all scheduled to be completed with 36 months.
Laurence Rapp, CEO of Vukile Property Fund, said: “We are pleased to extend our relationship with Nedbank CIB through our first green loan, which marks a significant milestone in our sustainability journey. This funding will be dedicated to new on-site solar farms at retail property assets, supporting their energy-efficient and cost-efficient operations, and helping to meet the needs of our retailer tenants and shopping centres’ customers, while reducing climate impact.”
To date, Vukile has installed 14.2 MWp in solar photovoltaic power systems through 21 different projects, providing 10% of the electricity consumed across the portfolio and decreasing its carbon footprint by about 20,500 tons of CO2. The REIT plans to install another 7.4 MWp of solar by next March, covering an additional 5% of the portfolio’s electricity consumption.
