How Covid-19 is turning the spotlight on green finance

“Green certification is often applied to buildings that are classified as core or prime, or those being built or renovated to core,” Kavanau says. “To get to a point where there is wider use of green finance, lenders will need more help – from a general accepted standard in identifying underlying assets are truly compliant."

Change driven at a local level

While international investors, such as Singapore’s Capitaland, are securing green loans for cross-border portfolios, change is coming from local government efforts. In Germany, the drive to clean up cities by 2030 through more carbon-neutral properties will in turn create more opportunity for lenders to finance green assets, explains Helge Scheunemann, JLL head of research for Germany.

“An increase in the amount of green-certified buildings in German cities is likely,” he says, pointing to a rise in the past five years from five percent to 10 percent.

Canadian investor Ivanhoé Cambridge and Natixis Assurances jointly obtained Europe’s first green certification, through the Climate Bond Initiative, a commercial real estate loan for their DUO towers project in Paris from a consortium of French and German banks in 2018.

For major property companies investing in large volumes, green bonds, which can have a positive impact on corporate credit ratings, have been more common. Industrial & logistics specialist Prologis was the first to do so in 2018. Then last year, it raised a further €450 million for its Prologis European Logistics Fund (PELF) via a 10-year green bond issue.

Favourable margins

Momentum could also come more through incentivisation; namely the inclusion of criteria which could work in favour of borrowers and their margins.

The loan margin for French property company Gecina’s €150 million green loan, signed in 2018, from ING is dependent on ESG performance and measured by its rating on the Global Real Estate Sustainability Benchmark (GRESB). Lloyds Bank also brought green credentials into focus as key performance indicators for Unibail-Rodamco-Westfield.

However, Europe’s lending scene continues to face the challenge of how to determine standards.

“As we come out of the current Covid-19 malaise, more structures and standards will need to emerge to support green finance’s growth and appeal,” says Kavanau. “Investors seeing that green paper is priced more favourably, for example, could be a significant game-changer.”

Green assets will have a financial “edge”, he adds, whether that be higher rents, lower cap rates or lower operating costs.

“It’s considerable future-proofing that will make them more attractive to tenants, owners and therefore lenders. Above all, the underlying asset needs to comply – and we’re not quite there yet.”