The Impact of Sustainability Metrics on Financial Performance in Corporate Real Estate

Date: 27th January 2014

Part 5 – Banking & Financing

As mentioned previously in this series, sustainability systems and build quality of real estate usually go hand and hand. It is for this reason that several financing options and investment opportunities are more easily available or only accessible to “green” buildings. As Finlay (2011) points out, most banks only give loans for buildings above a certain EPC rating, as they assimilate it with overall quality. Furthermore, there are a number of cases where building projects with very good certification were given preferential rates for development loans and better financing conditions. The authors also points out that construction lending is considered by banks as one of the riskiest investment types, meaning that obtaining financing is usually difficult, costly and requires a good deal of time dedicated to pushing the deal through. Energy retrofits in particular are marked as highly unsure by financial institutions due to the complexity of related systems and the lack of clear guidelines on appraisal or analysis. Nevertheless, green labels are quoted as having a consistently positive effective on financing access and conditions, being viewed as valid risk mitigation features.

Lutzkendorf and Lorenz (2007) perform a study on building loans in Germanic countries, in particular of loans rating systems used by banks in these regions. They observe that financial institutions place a very high focus on elements such as rental growth, location, general state of the building and tenant quality. On the other hand, fit-outs such as IT embedded systems, security systems, vacancy rates and even ecological sustainability are mostly overlooked. However, this is only in respect to rating systems for classic building loans. The authors report that some banks (especially in Switzerland and Germany) already offer special credits for sustainable buildings with preferential rates and lending conditions, most of them in partnership with the government. Even with classic ratings however, there is a noted tendency to appreciate buildings which have been retrofitted with improvements which most commonly relate to higher rents and improved tenant quality such as very high standards of energy efficiency, air circulation and modern interior/exterior material use. Such buildings are generally placed in the premium “green” real estate circle and receive several sustainability labels to attest towards their overall quality.

IFC (2007) notes that since the great majority of companies take account of their social and environmental issues, many banks have now taken to introducing “green” credit lines and facilities for energy-efficiency investments. In fact, there is now an ever growing majority of financial institutions around the world which are now refocusing their efforts and moving into this sector, especially in light of regulatory changes in the area and rising government support. The article notes that the most widely quoted reasons for undertaking the financing of sustainability projects are:

1.            Increased credibility – there is now a wider spread movement in the area, and an increasing number of studies and papers in the area allowing banks to more easily and accurately assess the risks involved with such studies;

2.            Investor demand – there is a growing demand in global markets for sustainability real estate projects, riding on the wave of new regulatory changes and an increased focus on CSR by major corporations

3.            Increased value to stakeholders – the “green” real estate financing sector of the business is still in its incipient form, meaning that not only is the market not yet fully formed, but the leaders have not yet been established, meaning that banks acting quick and smart can make a name for themselves and considerably improve future prospects;

4.            Lowered risks – with government support, many real estate development loans focusing on sustainability features are considerably less risky than normal credit lines; this means that not only are banks able to move the spare funds otherwise tied in backing up those loans, but there is a diminished need for payment insurance in such transactions

The authors state that banks are also entering the market due to the positive light it sheds on them indirectly. Sustainability projects most often are tied to health and safety improvements, so they are viewed in a very positive light by the general population, the government and even other companies. This means that financial institutions can indirectly benefit from this aspect by simple partaking in the project as funds providers, while also reeling in considerable profits. Take into consideration the fact that the energy efficiency investments sector is still a fairly “raw” market in most countries, especially underdeveloped ones, and financial institutions seem to have found a perfect area in which to expand their businesses.

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