Property-linked finance could enable billions of pounds worth of investment into improving the energy efficiency of the UK’s homes and commercial buildings, a new report claims.
The Green Finance Institute report argues that property-linked finance, where loans are linked to the asset rather than the owner, could contribute to the estimated £360 billion ($455 billion) of investment required to upgrade the UK’s inefficient buildings by 2050.
An asset owner using property-linked finance would be able to fully fund energy efficiency upgrades and then transfer payment obligation to a new owner if the property is sold.
The Green Finance Institute said the US Property Assessed Clean Energy (PACE) model of property-linked finance has enabled the investment of over $13 billion in making homes and commercial buildings greener and more resilient.
Emma Harvey-Smith, programme director, Green Finance Institute, said: “Introducing property-linked finance to the UK market could channel billions into improving the energy efficiency of the UK’s homes and buildings. The GFI first identified PLF as a solution in 2020 and looks forward to working with the finance and retrofit sectors to bring forward a scalable and customer-centric model for PLF that will support the UK’s net-zero ambitions.”
ESG bond issuance has plateaued in recent years, with real estate market troubles one of the factors, says ING.
The Dutch bank expects €820 billion ($890 billion) of ESG bonds to be issued in 2024, marginally ahead of this year’s estimated €815 billion and the €800 billion seen in 2022. This follows rapid growth to a peak of €1,005 billion of issuance in 2021.
ING blames the lack of growth on a slower lending growth and a slower green projects pipeline in a higher interest rate environment as well as lower capital expenditure, especially in real estate “which has concentrated its efforts on balance sheet management in an environment where asset valuations were negatively impacted”.
Sustainable finance is set to become the norm in real estate lending, says Cromwell Property Group.
The Australian-listed group, which has A$11.5 billion ($7.25 billion) of real estate assets under management in Europe, Australia and New Zealand, says sustainability credentials will increasingly be necessary to secure debt finance.
Cromwell recently launched a Sustainable Finance Framework, part of its ambitious sustainability goals, which include a commitment to hit net zero for Scope 1,2 and 3 emissions including embodied carbon by 2045 and 100% use of renewable energy by 2030.
Group head of ESG Lara Young (l) says: “Our long-term targets need interim steps. Cromwell covers such a broad range of jurisdictions and asset types; we needed a structure to ensure consistency and transparency in our financing of assets. Obviously, it has flexibility built in, but we want to align our financing with achieving those long term goals.”
The framework covers green bonds and loans, where the proceeds must be allocated towards eligible sustainability projects, and sustainability-linked loans, where the proceeds can be used for general corporate purposes, but cost of borrowing is linked to sustainability-related key performance indicators. Each loan or bond will be reviewed by a second party.
Suitable uses of proceeds for a green loan include energy-efficiency upgrades or installation of solar PV, while KPIs for a sustainability-linked loan might include reducing emissions or use of renewable energy.
Head of treasury for Europe Afraz Ahmed (l) adds: “The framework supports Cromwell’s commitment to create low carbon resilient buildings and enables us to further our ESG ambitions by using sustainable debt instruments. Additionally, this sort of framework supports the ambitions of banks with regard to financing.”
The perception that sustainable finance means cheaper debt is fading, he says. “Go back a year or 18 months and I would say: yes, we would get a discount for sustainable loans. Now, particularly with the European banks, it is not about discounts, but access to capital.
“Banks have their own internal capital requirements for ESG lending and are getting pressure from the ECB to only back sustainable real estate. So, I don't see many discounts anymore and in the very near future, I think they will disappear.”
For Cromwell, the motivation for the framework is for it to drive real change in the portfolio, says Young. “A big focus is on making sure the framework delivers tangible benefits, beyond certification and disclosure,” she says. “We want to drive impacts on electricity and water consumption, or waste generation for example.”
The first loan under the framework was the transitioning an existing A$130 million ($89 million) bilateral loan with Commonwealth Bank of Australia to a green loan certified by the Climate Bonds Initiative. The debt facility is for the Cromwell Riverpark Trust, which owns Energex House, a 6-star NABERS Energy rated office building in Brisbane.
The second loan was a €66 million ($70 million) green loan from HSBC for the 61,000 sq m Janki shopping centre in Warsaw, Poland. Under the terms of the agreement, Cromwell will need to report on a number of sustainability measures, including renewable energy usage, annual greenhouse gas emissions and ensure that in any given reporting year at least 50% of new leases include green clauses which cover Scope 3 emissions.
Alongside Cromwell’s Sustainable Finance Framework, the Cromwell European REIT, a Singapore-listed real estate investment trust with assets across Europe, has its own Green Finance Framework, under which it secured a €157.5 million ($166 million) sustainability-linked loan in August. The REIT may also elect to use the group framework for new bonds and loans.
The manager's ultimate goal is to move towards entirely green financing. Ahmed says: “Our ambition is that, when loans are up for refinancing, where possible they will be refinanced sustainably.”
Moving to sustainable construction could help substantially reduce global carbon emissions from the built environment, a new report from the International Finance Corporation claims.
The report, Building Green: Sustainable Construction in Emerging Markets, argues that green construction could reduce the emissions due to the “construction value chain”, which includes the construction and operation of buildings as well as production of materials such as steel and cement, by around 23% by 2035, compared with 2035 emissions if nothing is done. Emerging markets would account for about 55% of this projected reduction.
The IFC estimates that continuing with current practice will lead to a 13% hike in emissions from the sector by 2035, from 2022. Moving to green construction methods and materials on the other hand, will cut emissions by 13% from today’s levels.
The construction and operation of buildings and the manufacture of materials such as cement and steel account for approximately 40% of global energy and industrial CO2 emissions. A large share of these emissions is generated in emerging markets, where growing populations and rising wealth drives new construction. Today, these markets often rely on more carbon-intensive methods and materials.
Markets need to introduce green construction practices, materials, and technologies, such as energy-efficient building codes and standards, greening government buildings and procurement, and carbon pricing policies, among other measures.
The cost of this transformation will be $3.5 trillion globally by 2035, $1.5 trillion of which will fall on emerging markets over the next decade, the report says.
"The green construction revolution is picking up speed," said IFC managing director Makhtar Diop. "With the right enabling measures, we could see a surge of private sector financing that will capitalize on the enormous opportunity and huge necessity to transition to sustainable construction in emerging markets."
For building operations, which account for half of all construction-related emissions, renewable energies and new materials such as reflective painting for rooftops and film coating for windows can reduce emissions significantly and generate significant cost savings over time, the report says.
For new buildings, greener materials, energy-efficient and resilient designs, rainwater collection and district cooling represent “attractive options”. For construction materials, improving energy efficiency, and switching to greener processes, raw materials, and non-fossil fuels can also significantly reduce carbon emissions.
The IFC calls for policymakers “to take decisive steps toward establishing the appropriate business, policy, and regulatory frameworks that will facilitate the green construction transition”.
Learn more about the report here.
Blackstone has secured A$1.45 billion ($930 million) for a sustainability-linked loan for its Australian industrial portfolio.
The investment manager said this loan was the largest of its kind to date in Australia’s industrial sector.
MUFG Bank acted as sole sustainability coordinator and joined Morgan Stanley, National Australia Bank and United Overseas Bank as mandated lead arrangers, underwriters and bookrunners.
Chris Tynan, head of real estate Australia at Blackstone, said: “We’re proud to be at the forefront of the industrial sector in Australia, where we’ve built a high-quality portfolio of more than 140 logistics assets and executed some of the country’s largest transactions in the sector. Blackstone has been a committed investor in Australia for the past decade, supporting local businesses, communities, and economy. This is an important step towards supporting Blackstone’s belief in sustainability as a value creator.”
Eric Duchon, global head of ESG, Blackstone Real Estate, said: “BWe’re thrilled to secure our first third-party verified SLL in the region, which we believe will improve the performance of our assets, the overall experience for our occupiers, and drive long-term value for our investors.”
CTP has secured €200 million ($213 million) in financing from the European Investment Bank (EIB) to install solar panels across its European portfolio.
The listed European developer and manager has a 10.9 million sq m portfolio of industrial and logistics properties in Central & Eastern Europe, Germany, Austria and The Netherlands.
The 10-year unsecured loan will contribute to boosting solar PV capacity across the portfolio to 400MWp by 2026, from 38MWp at the end of 2022.
Peter Ceresnik, chief operating officer, CTP, said: “The European Investment Bank’s financing will accelerate our plans to maximize the solar potential of our portfolio and help us meet our medium-term goal of installing 400MWp by 2026.
“It will also help us achieve our longer-term vision for our parks to become energy positive, meaning they can produce and share excess renewable energy, benefitting not only our clients and the local communities where we operate, but also the planet.”
Keppel Corporation and DBS Bank have signed a memorandum of understanding (MOU) to develop sustainable urbanisation and digitalisation solutions in Asia, with a focus on India.
The collaboration aims to accelerate energy optimisation across energy-intensive segments in the region, including real estate, healthcare and hospitality, the companies said.
Under the MOU, businesses can access Keppel’s suite of energy-as-a-service solutions, including high-efficiency cooling, sustainable energy and storage, and electric vehicle charging infrastructure, while DBS provides financing solutions to help them overcome potential cost barriers.
Loh Chin Hua, CEO of Keppel Corporation, said: “The MOU provides a platform for Keppel and DBS to deepen collaboration and develop solutions to help companies be more sustainable, digitalised and ultimately, more competitive in an increasingly complex operating environment.”
AirTrunk has doubled the size of its sustainability-linked loan (SLL) facilities, which now stand at $2.96 billion.
The Australian data centre company, which owns and operates data centres around the Asia Pacific region, said this was the largest SLL by a data centre operator. The expanded credit facility will be used to refinance AirTrunk’s existing debt facilities and support the company’s expansion across the region.
It has refinanced its corporate sustainability linked loan (SLL) to AU$4.6 billion (US$2.96bn), more than doubling the initial AU$2.1 billion (US$1.35bn) SLL which closed in September 2021. If the company hits certain ESG goals, its interest payments will be reduced.
AirTrunk’s SLL links the company’s financing to KPIs including carbon usage effectiveness (CUE), operating power usage effectiveness (PUE), operating water usage effectiveness (WUE), gender diversity and gender pay equity. The company said it is the first SLL to use a CUE metric.
AirTrunk chief financial and commercial officer, Prashant Murthy, said: “In the last two years, we have announced the development of more than half a gigawatt of new capacity in APJ. This landmark SLL ensures that as we scale across the region, we do so as sustainably as possible, driving the industry forward by redefining sustainable financing standards.”
Murthy continued: “With an innovative combination of KPIs linked to the key environmental focus areas in the industry across carbon emissions, energy and water efficiency as well as gender diversity and equity, we are demonstrating our commitment to responsible and sustainable growth.”
The latest SLL facility excludes AirTrunk’s existing US$774m of sustainable financing in Japan, which include a green loan for the development of its TOK2 data centre campus in Tokyo and a separate SLL.
AirTrunk said it plans to invest all margin incentives from the SLL into social impact initiatives aligned to its four focus areas: equal digital access, STEM education, biodiversity and conservation and innovation and R&D.
Measurabl has secured a partnership to provide sustainability due diligence on all commercial real estate loans issued by Voya Investment Management.
The San Diego-based real estate ESG platform will provide energy use intensity and carbon estimates, green building certification look ups, and regulatory ordinances on buildings, to help Voya better understand the ESG implications of its lending activity.
Voya has $15.4 billion of commercial real estate debt under management and lends across the US.
"We look forward to working with Measurabl and incorporating their advanced sustainability due diligence into our operations to the benefit of our clients,” said Gregory Michaud, head of real estate finance at Voya. “Their platform will enhance our underwriting process and bolster our impact investing initiatives"
Sime Darby Property has raised $43 million through the issuance of a sustainability sukuk.
The sustainability sukuk was part of a $130 million sukuk issuance by the Malaysian real estate developer. A sukuk is a Shariah-compliant structure which provides bond-like returns. The issuance was oversubscribed by more than eight times, Sime Darby said.
Managing director Datuk Azmir Merican said the sukuk would “underpin our transformation from a focused property developer to a holistic real estate enterprise, in tandem with our 2030 Sustainability Goals.”