Interest in green real estate loans – and bonds - soars

Green real estate loans – and bonds – are soaring in popularity in Germany as investors clamour to get their hands on more green assets.

Fresh from the issuance of its second green Pfandbrief last year, German lender Deutsche Hypo has introduced green real estate loans, it announced this month.

‘We don’t have a direct target in terms of the volume of green loans but we’ve promised our investors that we will issue at least one green Pfandbrief a year of €500m or above, so €500m could be an estimate of the minimum volume of green loans a year,’ Jürgen Klebe, head of funding and investor relations at Deutsche Hypo, told REFIRE.

In addition, Deutsche Hypo is incentivizing would-be borrowers by offering preferential rates for green real estate loans, according to Klebe’s colleague in the funding and investor relations group, Philipp Bank: ‘Interest is likely to come from all loan customers because if a property meets our criteria for a green loan, we offer a discount on the loan of up to 10 bps. Sustainability is becoming more important when it comes to financing properties,’ he said.

At the end of 2017, Deutsche Hypo held €1.5bn in green assets, which it grew to €2bn by the end of last year, according to Klebe.

The suitability of a project for a green loan is determined using Deutsche Hypo’s in-house scoring model. The criteria include: energy consumption, certification, proximity to public transport, the materials used and the extent of surface sealing. The tenant mix is also analysed. Properties with ‘controversial primary tenants’, including those associated with weaponry, are excluded. In order to qualify for a green loan, the underlying property must be modern, forward-looking and energy efficient. It must also create an incentive to conserve resources and build in a sustainable, environmentally friendly way.

‘We have seen increased demand for green financial products from our customers and investors, and are very pleased to meet that demand,’ said Sabine Barthauer, member of the board of managing directors of Deutsche Hypo. ‘Our experience issuing green Pfandbriefe has been very positive. The introduction of the green loan reflects the consistent implementation of our sustainability strategy on the asset side, and therefore in our core business.’

While Deutsche Hypo has financed green buildings in the past, the green loan initiative is the first time it has financed and incentivised green buildings in the scope of a defined process. According to Bank, the goal is to increase their green asset pool: ‘To reach this target, we are collecting more energy performance certificates and sustainability certificates from our commercial real estate customers, which will enable us to issue more green Pfandbriefe,’ he said.

For Anke Herz, team leader of debt advisory at JLL in Germany, ‘the environmental status of property non recs are being reduced which, in turn, is improving the cashflow, thereby supporting either higher LTVs or lower margins’.

In January, fellow lender LBBW issued a green corporate loan to technology group Voith for an undisclosed sum, having issued its first corporate green loan last year: ‘The two green loans so far were a pilot idea,’ a spokesman for LBBW told REFIRE. ‘Green loans are a new business,’ he added. When financing a building, its sustainability is taken into account at the point of financing, which can have ‘a positive effect on the terms and conditions overall’, he added, declining to give further details.

LBBW launches first dollar-denominated green mortgage Pfandbrief

Last week (21st May), LBBW issued the firstgreen mortgage Pfandbrief denominated in US dollars, placing a green mortgage Pfandbrief with a volume of $750m and a term of three years. Alongside LBBW, the transaction’s joint lead managers were Citi, Goldman Sachs International, Nomura, RBC Capital Markets and TD Securities. With an order volume of around $2bn, the transaction was quickly oversubscribed. Also, earlier this month, LBBW placed its first unsecuredgreen senior non-preferred bond with a volume of €750m, a term of five years and a spread of 53 basis points above EUR mid-swap. Together with LBBW and ING, the other joint lead managers were DZ Bank, JP Morgan, Natixis and Société Générale. More than 35% of the investment volume came from green investors.

‘These two transactions have again demonstrated our product expertise and our ability to place instruments on the ‘green’ capital market,’ said Dr. Christen Ricken, member of the LBBW board of managing directors responsible for capital market activities.As sustainability is firmly embedded in LBBW’s business model, both strategically and in terms of operations, we also want to further expand and keep on proving our expertise in the market segment of sustainable investments with successful innovations.’

As part of its preparations for these two issues, LBBW updated the framework it set up at the end of 2017 for issuing green bonds. By adding ‘green credit’ from the field of renewable

energies (such as financing for solar or wind farms) and for further energy-efficient commercial properties, LBBW has now more than doubled its portfolio, assets in which can now be refinanced with issue proceeds, to a volume of €5.9bn.

Berlin Hyp has become a trailblazer for green bonds

Berlin Hyp became a trailblazer for green bonds when it became the first lender globally to issue a green covered bond in the form of a €500m Pfandbrief in April 2015. A year later, it issued its first green senior unsecured bond.

‘Green bonds have become one of the big topics in capital markets,’ Bodo Winkler, head of financing and investor relations at Berlin Hyp told REFIRE. ‘But you can’t issue a green bond without having green assets, which is why interest in those has grown a lot, too. In 2017, we set ourselves the ambitious strategic goal of increasing the share of green finance in the bank's total loan book to 20% by the end of 2020. To encourage Investors to invest in green buildings we incentivise on the loan with a discount of 10 bps.’

By incentivising loans for green buildings – Berlin Hyp prefers not to call them ‘green loans’ - the lender has grown its green finance portfolio by €2.9b since 2015.

‘To achieve our goal of 20% green buildings of our overall loan portfolio by 2020, we need to finance around €800m in the next 18 months,’ Winkler said. 'We are optimistic we can do this.’

To date, Berlin Hyp has issued a total of six green bonds in a benchmark format. ‘Our goal is to issue a green bond at least once a year,’ Winkler said. ‘We haven’t issued one yet this year but we intend to do so.’

However, not all lenders are jumping on the bandwagon just yet. Despite its strong commitment to sustainability, Union Investment does not offer green loans, it told REFIRE.

Green loans and bonds are also gaining traction in other European markets.Last week (21 May), the Netherlands followed Poland, France, Belgium and Ireland in selling green bonds and the first by a triple-A rated sovereign borrower. The Dutch debt agency gave preference to investors who were able to prove their ‘green’ credentials. Thirty-two investors registered as ‘green’ before the 20-year bond’s auction, in which the Netherlands raised close to €6bn.

In March,lender Realkredit Danmark issued its first green bond in the Danish market. In the same month, Denmark’s Danske Bank Group announced a new framework for issuing green loans and bonds. According to the group’s head of societal impact & sustainability, Jeanette Fangel Løgstrup, Danske Bank wants to increase its share of green loans and bond issues considerably in coming years. As such, the green mortgage bonds are the first step within the group’s new so-called ‘Green Bond Framework’, which lays down the criteria for the group’s issuance of green loans and bonds.

For now, the only way is up. As Winkler puts it: ‘I think the green bond market developed with great speed and will grow massively over the next couple of years.’ (ssk)