The lending industry is shifting towards rewarding a ‘green premium’ when financing ESG-led real estate projects, said Savills at its 32nd annual Financing Property presentation.
To date, with insufficient evidence to support ESG assets outperforming the rest of the market, the lending industry has largely erred towards imposing stricter borrowing terms on those projects which clearly display few ESG benefits, rather than rewarding those that do with better lending terms. This ‘brown discount’ approach is now changing, says Savills, with many lenders demonstrating an embedding of the Loan Market Association’s (LMA) Green and Sustainability-linked Lending Principles in their lending policies, and some taking this further to develop specific green products, enabling them to directly offer better financing options to borrowers whose assets meet ESG principles – a ‘green premium’.
Ian Malden, Head of Valuations at Savills, comments: “We’ve been very encouraged during our lender interviews this year that despite Covid-19 many say pursuing a ESG-led lending strategy is still their priority. Lenders are now at the stage of being able to make the shift to rewarding exemplary projects with better terms, rather than just penalising those that clearly don’t follow sustainability principles. This sends a clear message to those still dragging their heels on ESG: the gulf between the financing available to projects at either end of the ESG scale is set to rapidly widen. Those that fail to take heed will at some point face issues accessing finance, resulting in limited options and punitive borrowing terms.”
According to Savills, ESG lending is also going to expand from a mindset of financing assets that mitigate their impact on the environment to encompass measurement of how resilient that same property is to the environment, as the effects of climate change are increasingly being felt by real estate around the world and need to be accounted for during the lending process.
Savills highlighted the progress made in ESG-lending in the past 12 months through the examples of Derwent London, which was the first UK REIT to secure a green revolving credit facility (RCF) which also met the LMA’s Green Lending Principles, and Great Portland Estates, which secured a £450 million ESG-linked RCF in January 2020 for the decarbonisation of its existing estate by reducing portfolio energy intensity by 40% over the next decade and the embodied carbon of all new developments and major refurbishments.
In terms of ESG-led lending opportunities in light of the Covid-19 pandemic, Savills said that the need for housing has become even more acute, and that with residential construction methods often being some of the most sustainable, this can often fulfil lenders’ environmental and social criteria. A swing back towards neighbourhood shopping and the need to fill vacant units, meanwhile, offers significant opportunity for lending to socially-led regeneration projects in the commercial property sector.
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