Could green loans become the norm?

By Sara Seddon Kilbinger, Senior Reporter, REFIRE

Green loans could be set to outnumber conventional loans within the next few years

More and more lenders are turning their attention to green loans as investor interest in both acquiring and leasing sustainable buildings soars.

Deutsche Hypo, Commerzbank, GLS Bank and Hypovereinsbank are some lenders wising up to the importance of green loans. Going forward, experts predict that green loans could be 10 to 15 basis points cheaper than conventional mortgage loans, giving them a massive advantage. In addition, green loans will be easier to refinance due to expected massive subsidies. Moreover, as of this year, banks have to provide detailed information on how climate-friendly their operations are, according to the EU action plan.

There were around €160 billion in green loans across Europe last year, up from almost €20 billion in 2014, including loans from the state, financial institutions and development banks, according to Germany’s Bundesbank. In Germany alone, there were around €40 billion in such loans last year, up from less than €5 billion in 2014.

A spokesman for Deutsche Hypo told REFIRE that loan sizes are typically in the region of €10 million to €100 million: “They are even higher with an average of €25 million to €30 million for new green buildings, more likely averaging €50 million,” he said.

Tenants shun non-sustainable buildings

Tenants are also increasingly only willing to rent green buildings, Mehdi Patrick Riahy, head of Capital Markets Germany Investment at consultancy Avison Young told REFIRE. “More and more tenants will pay an upside to rent a building that is green, between 3% and 7%, depending on the building,” he said. “For the younger generation, it’s really important to them. It’s like a mirror in front of your face saying “Hey, guys, it’s your turn to do the work now” and they’re right.” Riahy estimates that around 75% of buildings in Europe are not energy efficient, which means there is still a lot of work to be done.

According to the last quarterly barometer from BF.direkt, which quizzed around 100 real estate experts about green loans, all respondents said they expected green loans to increase in importance. Some in the industry believe that as climate policy tightens and sustainability gains even more traction, green loans may become the only kind available.

“In my opinion, green loans have definitely become more important,” Riahy said. “However, we still don’t have a blueprint from the government, which makes it harder for investors. There’s not a standardization yet for banks and investors, so they have to use their own criteria. The market is very opaque, it’s hard to get statistics regarding green real estate loans in Germany.”

Economic storms put dampener on market

Nonetheless, Germany’s economic woes are likely to put a dampener on the green loan market, according to Susanne Eickermann-Riepe, CEO of RICS Germany: “In the first quarter report, we saw the first slight storms coming in the German real estate market,” she told REFIRE. “They were the first warning signs. Interest rates are rising here every day, it’s difficult for business, they’re around 3.1% today (17 June). This will have an impact on the volume of loans. I have heard from several banks that if you don’t meet energy targets, you don’t get a loan.”

Energy consumption can vary massively, depending on just how efficient - or inefficient - a building is. Buildings in Germany rated ‘H’ can pay ten times more for their energy, according to Eickermann-Riepe, or around €3,600 per year, compared to just €360 for a building rated ‘A’.

Lender LBBW has already warned in a study that properties without energy refurbishment are at risk of becoming “stranded” due to a shift towards sustainable buildings, meaning that they lose value before the end of their planned useful life. As Guido Zimmermann, Senior Economist at LBBW Research puts it: “Stranded assets are no longer able to generate a return.”

Construction consultancy Arge in Kiel estimates that around 1.76 million single and two family homes in Germany are not “economically modernizable against the background of the increasing requirements for energy efficiency”, out of a total of around 16 million properties. Of the 42.8 million apartments, 4.1 million fell into this category, and among the 3.2 million smaller multi-family houses, around 285,000 buildings fell into this category.

Green Pfandbriefe gaining ground

Green Pfandbriefe are also proving popular. Deutsche Hypo’s parent company NORD/LB Norddeutsche Landesbank successfully issued its first Green Pfandbrief in September last year. The benchmark bond with a volume of €500 million had a term of 5 years and was secured by a cover pool of real estate loans.

In 2015, Berlin Hyp issued Germany's first green mortgage Pfandbrief, at over €500 million. Since then, around €7 billion in green Pfandbriefe have been issued in Germany, according to the Association of German Pfandbrief Banks (VdP).

“The market for sustainable bonds is clearly on a growth course,” said Dr. Frederik Kunze, NORD/LB Markets Strategy & Floor Research. “The sub-segment of green bonds can certainly be attributed the largest share of this dynamic at present. The growth rates in terms of the issuing volume of sustainable and especially green bonds are likely to remain high in the coming years. After all, we are not talking about a passing trend here, but rather about a further development of the international bond markets. Green Pfandbriefe are characterised above all by the fact that they combine two aspects appreciated by a large number of investors. On the one hand, there is the aforementioned aspect of the possibility to invest in green bonds. This product makes it possible, with a targeted selection of the loans to be financed or funded, to establish a concrete link to contributions to climate protection - for example in the form of saved CO2 emissions. This applies to energy-efficient construction and modernisation projects for flats and houses as well as to large-scale green commercial projects.”

The European Commission has presented a draft for the issuance of green bonds, which is intended to ensure greater transparency and establish uniform standards. At present, providers of green financing are relying on guidelines from the international industry association ICMA or the Association of German Pfandbrief Banks (VdP), which they supplement with their own rules. Common criteria are, for example, that a new building is certified as particularly environmentally friendly or that a refurbishment significantly reduces energy consumption.