Since 2007, when the European Investment Bank (EIB) issued the world’s first Climate Bond (CAB), green bonds have evolved from a marketing tool into one of the world’s fastest-growing investment tools. This trend is also visible on the real estate market and it can only be expected to grow further.
According to the Climate Bond Initiative (CBI) report, at the end of 2020, so-called sustainable debt reached the value of USD 1.7 billion. 2020 was a record year in terms of the value of issued instruments, which reached USD 700 billion, which is almost twice as much as the year before. While Green Bonds remain the dominant asset, investments in Social Bonds and Sustainability Bonds are growing rapidly, reaching volumes higher than in all previous years combined. As a result, in 2020 total issuance was more evenly spread across Green, Social and Sustainability Bonds compared to previous periods.
Towards “greener buildings”
Investments in the commercial real estate sector are motivated, on the one hand, by the growing awareness of climate hazards, and on the other hand, by the desire to reduce investment risk and increase attention to innovative buildings that care for the natural environment and employee comfort. The growing role of social, environmental and economic responsibility (ESG) in companies is also important. ESG, understood as a business strategy that takes into account environmental and social aspects in the organization’s operational activities, has an increasing impact on decisions regarding the lease of space in buildings, as it contributes to the increase of the company’s competitiveness and shaping the conditions for sustainable development.
– For several years, we have been observing an increased demand for space in buildings certified in such standards as BREEAM or LEED on the market. This is due to the fact that for ex. companies are caring more fore the natural environment, as well as for the wellbeing of their employees. A responsible approach to business on the part of both tenants and developers is not just an image-building measure today, but a real desire for sustainable development, which is reflected in the increasing number of certifications issued in Poland – says Mariusz Mroczek, Director in the Corporate Finance department at Colliers.
According to the latest PSBE report “Certification of Green Buildings in Numbers 2021”, as in 2019, in 2020 the number of certified buildings increased by 30% (255 new certifications). Having green certificates may result in increased interest on the part of tenants and investors.
In Poland, actions in accordance with ESG criteria are undertaken by investors present in all sectors of commercial real estate. The process started mainly among investors who invest their capital in office buildings, but now the dynamically developing logistics sector is equally committed to this aspect.
Green financing only for the best
Funds that own real estate and at their core are responsible for maintaining the value of their portfolio, are increasingly publishing so-called non-financial reports to show the environmental impact of their buildings. This trend is visible primarily among large players who trade significant assets. For now, it is less visible among domestic investors, but all indications hint that it will soon become the norm also in Poland.
– I think that the vast majority of companies will publish non-financial reports soon. This will make it much easier for investors to compare investments and their impact on the environment, which will translate into the market price of the property. So far, however, there are not many such reports on the market. One of our clients is a real estate fund that has decided to prepare and publish an environmental report. Its portfolio includes older commercial buildings that do not require modernization at the moment. However, the company decided that showing their potential in a non-financial context would be a big benefit for both landlords and potential investors, says Mariusz Mroczek.
Banks and financing institutions also implement their ESG strategies, adapting them to operating activities. In April 2021, 43 banks from 23 countries with assets above $ 28.5 became founding members of the United Nations New Net-Zero Banking Alliance, committing to align their credit and investment portfolios with net zero CO2 emissions by 2050 and to set mid-term targets for 2030 The activities of banks are particularly visible on the Green Bonds market – they operate there both as issuers and investors.
Among the commercial banks operating in the real estate industry, Berlin Hyp stands out. The bank has been issuing green bonds for several years, and in April 2021, it was the first financial institution in the world to issue a Sustainability-Linked Bond (SLB), worth EUR 500 million. It is the first instrument that directly links the cost of acquired debt with the issuer’s achievement of the ESG target, namely the reduction of the carbon footprint in the loan portfolio by 40% by 2030 compared to 2020.
– Since 2015, when we issued the first Green Bond, we are still the largest commercial institution issuing theses types of bonds. Balanced debt instruments continue to be of great interest to buyers. This is related to the ever-growing role of sustainable policy among institutional investors, as well as to regulatory requirements introduced at the European Union level – says Justyna Kędzierska-Klukowska, Director of the Berlin Hyp Representation in Warsaw.
The growing importance of modernization
Berlin Hyp is a mortgage bank focused on financing commercial real estate. One of the goals of the bank’s strategy is to increase the share of green buildings in the loan portfolio to one-third by the end of 2025. For such projects, the bank offers more favorable levels of margins, while the criteria qualifying buildings as “a green building” take into account the actual levels of energy demand, and not only having been certified.
Compared to Western European countries, the Polish real estate market is very young and the vast majority of buildings that have been put into use in recent years have been equipped with modern and energy-saving technical solutions. Therefore, in Poland, the modernization of already existing spaces is not a leading topic. Nevertheless, investors must be ready for the fact that this will change in a few years, when the interest in their buildings, and thus their value, will start to decline.
– Owners must take care of the modernization of their buildings, because it may turn out that commercial buildings that do not meet EU requirements regarding, for example, energy consumption, may significantly lose their value or be completely ignored in the process of making investment decisions by key players on the market – says Justyna Kędzierska-Klukowska.
The requirements will only increase. The action plan for a sustainable economy adopted by the European Union (the so-called European Green Deal) is to allow the Union to become a climate neutral area by 2050. This is one of the 6 EU priorities included in the strategy for the period 2019-2024. The European Green Deal includes an action plan to use resources more efficiently through the transition to a clean and circular economy and to combat biodiversity loss and reduce pollution levels. One of its elements is to ensure greater energy efficiency of buildings. As a result of the tightening of EU standards, investors will have to invest in existing buildings to make them competitive on the market.
Both Colliers and Berlin Hyp experts point out that investing in increasing the energy efficiency of buildings makes sense.
– First of all, it has an impact on the reduction of operating costs. Tenants pay attention to this, especially in situations such as a pandemic, where costs are of great importance. It may happen that old buildings that do not meet a certain minimum market requirement may remain empty – says Mariusz Mroczek.
The second important aspect is sustainable investing.
– Investors operating exclusively on the local market do not always see the need to invest in social and environmental responsibility. However, all those who want to enter the international arena must take these aspects into account, because they will be questioned about them – says Justyna Kędzierska-Klukowska and adds: – It also seems that more and more players on the real estate market are taking action for sustainable development not only out of necessity, but out of an inner conviction of the importance of these aspects. This is really a significant advance.
publication date: 20 July 2021
