From a standing start five years ago, 2021 was the year that green bonds moved centre stage in real estate finance.
If one trend in European real estate finance really stands out this year, it is the explosion in companies issuing green bonds, and all the signs are that this is a market that is set to go on growing.
In Europe, 2021 is going to go down as a record year for corporate bond issuance by real estate issuers generally. Figures from Dealogic show that the unsecured eurobond real estate volume for all types of bonds – green and regular – leapt by 50% in 2021 compared to 2020, to an all-time high of €66 bn. Five years ago it was €21 bn. The surge took the sector to 17% of the whole European corporate bond market, making it the largest category.
According to Oliver Wagner, managing director in Morgan Stanley’s EMEA debt capital markets (DCM) unit who leads on real estate, the percentage of the overall real estate eurobond issuance with an ESG label also shot up, to almost 30%. Five years ago it was negligible at just 3%, Wagner says.
Dealogic’s real estate ESG numbers for the year to date, which include social and sustainable labelled notes as well as green bonds, are 41 tranches with a face value of €19 bn of ESG eurobonds (28.8% of total real estate issuance), and 16 tranches with a volume of €3.9 bn of ESG sterling notes (50.6%).
PropertyEU’s own tracking, of green bonds only, had logged 29 sterling and eurobond issues in the year to date by November 2021, from 22 different property companies and fund managers, and with a combined volume of more than €15 bn. In addition to the eurobond and sterling markets, in the Nordics where the average issue size is much smaller, there had been 38 ESG bonds issued in Swedish or Norwegian krona, from 15 property companies between January-October 2021, according to Pangea Partners.
Two key trends
Real estate borrowers are clearly sprinting away from traditional secured bank finance towards the debt capital markets. Two overarching trends are driving this: fixed income investors’ appetite for corporate debt in the low interest rate environment, making the capital markets cheaper for borrowers – and issuing green bonds cheapest of all – and the ongoing retrenchment by the banks which began after the global financial crisis and which has reduced bank risk appetite including for large tickets.
There are other themes in the property sector in particular, as Wagner observes: ‘There are listed companies which are growing and merging and outgrowing the local bank
market and they are coming to the unsecured bond market. There are also privately-owned companies which are going into the bond market, some of them very big, such as
Logicor, which has issued €6.5 bn since 2018, so huge.
‘And then you have funds that are going into the bond market. A recent example is the €800 mln issuance by AXA IM Alts’ AXA Logistics Europe which used to be funded with secured bank debt.’
The AXA Logistics Europe issuance was a green bond and the third issued under green finance frameworks developed by the manager for its funds. It followed two green issues this year for flagship €5 bn open-ended fund AXA Core Europe.
This fund is an example of owners of already big and growing portfolios of real estate setting up a euro medium-term note (EMTN) programme to facilitate further issuances. EMTNs are not new, but the intention of using them to issue green bonds is.
AXA IM Alts’ €1.8 bn of green issuance makes it a top three issuer in property this year, in second place, ahead of CBRE Investment Management, and behind newly-listed logistics developer/owner CTP. CTP established its EMTN programme last year along with a green framework and issued its first green bond in October 2020. It has now issued €3.5 bn in green bonds, €2.5 bn this year alone.
The company has said that it will only issue green bonds. ‘Why can we do that? Because since 2019 we have obtained BREEAM building certificates which are “Very Good” or better for our whole portfolio,’ says Jan Evert Post, CTP’s managing director. ‘For new build, our standard is BREEAM Excellent certification.’
He continues: ‘ESG has become very important and the market has embraced it. There is increased regulation and in terms of public opinion everyone understands that climate change is real. We have seen forest fires, floods, extreme heat...Investors see it as a risk or at least a potential risk.’
Being able to demonstrate a green strategy in a transparent way, as required by the publicly-traded ESG bond market, ‘helps us and it also helped us with the IPO that we did in March 2021’, he adds.
ESG strategy is vital
Morgan Stanley says having an ESG strategy has become of the utmost importance, even for companies which are not issuing bonds with a green label. Wagner’s colleague and global head of ESG structuring in DCM, Cristina Lacaci explains: ‘Increasingly, we get asked much more, not only about the features of the bond but about the issuer’s ESG strategy. Investors want to know that it’s not just by coincidence that a company has a green building, but that there’s a strategy around it and that they are going to continue to invest in their portfolio to minimise the carbon footprint.
‘We recommend that every single issuer has an ESG strategy when they come to the market. Typically, once their strategy is more advanced, they’re going to be thinking about issuing a green bond.’
One interesting trend this year is that it hasn’t been only very large entities, with balanced portfolios or with in-favour assets like logistics or residential, that have successfully accessed the green bond market. Wagner cites shopping centre owner Lar Espana with a market capitalisation of around €425 mln and a €1.47 bn portfolio. Morgan Stanley advised the Spanish company which carried out two green bond issues this year.
Investor appetite for real estate paper and especially for green bonds is incredibly strong. ‘Another trend is more investors participating in the average order book, in fact many more. I’d say 5-7 years ago, real estate was more a niche market and now it is mainstream,’ Wagner comments.
All of CTP’s issuances have been at least 3x oversubscribed. Last month VIA Outlets issued a €600 mln green bond which was 6x oversubscribed, attracting 190 orders from institutional investors. AXA IM Alts’ first bond issuance was rated A- by Fitch and had a circa 4x oversubscribed order book, with the notes placed with 136 European and international investors.
Benefitting from a ‘greenium’
The demand creates what bankers call the ‘greenium’, the relatively cheaper pricing borrowers get for issuing green notes over regular bonds. Currently, they consider the margin to be between 5 and 10 basis points tighter. Lacaci says: ‘It is always difficult to point to a specific “greenium number”. But, it’s important to understand that when you have the right ESG strategy and the right features in the bond, you will often have additional demand from both mainstream investors and ESG or sustainable investors.’
It is entirely possible that the greenium will shrink in future, if as expected, the supply of green bonds increases. A look at the large size of the EMTN programmes and green frameworks set up by investors like AXA and CTP, which are €3 bn just for Core Europe and €8 bn for CTP, are one indication of future volumes. Then there are the signs of intent from the big beasts which haven’t yet come to market with a green offer such as Blackstone’s European core+ fund, Blackstone Property Partners Europe Holdings. BPPEH, at €8.7 bn of property and growing, published its first green financing framework in June 2021 and not long afterwards increased the size of its EMTN programme to €10 bn; it has some debt due for refinancing in mid-2022.
CTP’s Evert Post believes the greenium ‘has already rather shrunk this year. But it will shift to the detriment of “brown” bonds in future. So instead of a green premium, you will have a brown discount’.
Europe leads the world in ESG debt capital markets
A Moody’s ESG Solutions report published in October shows that Europe is far ahead of other global regions in terms of ESG bond issuance.In the first nine months of 2021, European green bonds (not including social and sustainability-linked bonds) accounted for 56% of the $380 bn global total.
Moody’s ESG Solutions is predicting that annual global green, social and sustainable bonds issuance is likely to top $1 trn in 2021, a leap from $600 mln last year. Volumes in Q1-Q3 2021 totalled $775 bn, nearly double the $402 bn issued in the corresponding nine months in 2020.
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