ESG-Linked CRE Financing Is Profitable PR, Say Experts

Over the last month, a run of REITs—including Duke Realty, American Homes 4 Rent, Kilroy Realty and Hannon Armstrong Sustainable Infrastructure Capital—have inked sustainability-linked financing deals.

Some experts say there’s both less and more to it than meets the eye. The arrangements are largely exercises in public relations, according to sources speaking to GlobeSt.com. But it’s PR that can pay off with an edge in financing for the real estate companies, reduced risk for lenders, and happier investors for financial institutions.

Not to say that real estate companies and lenders aren’t interested in ESG topics. “Sustainability in the build environment has been going on for ages,” Etienne Cadestin, founder and global CEO of Longevity Partners, a provider of energy and sustainability advice to property funds, tells GlobalSt.com. “Given that buildings represent more than 40% of global carbon emissions, that’s where it’s coming from.”

But for a REIT, the discounts aren’t necessarily major considerations.

“Honestly, the rate reductions you’re seeing are miniscule, but it generates a lot of good public relations for these companies and that they’re practicing what they preach,” Glenn Brill, a managing director in the real estate solutions practice at business advisory firm FTI Consulting, tells GlobeSt.com.

Although some firms like Duke Realty have claimed a reduction in borrowing costs of 10 basis points, “usually it’s like five basis points or less,” Brill says.

The typical range is small—although that’s also in the context of historically low costs of capital. However, even a few basis points can be useful. “One of the differentiators [among REITs in the same class of projects] is the cost of capital,” Evan Hudson, a partner at law firm Stroock, tells GlobeSt.com. “Lower cost of capital means more accretive acquisitions, more growth, higher dividend yields, and higher stock prices. Every little bit helps.”

Also, sustainability and environmental improvements can help in leasing space. “Tenants want to be able to demonstrate they’re meeting their ESG goals,” Brill says. Taking space with a controlled carbon footprint counts as efforts the businesses make.

“Blue chip companies prefer to occupy green buildings,” Cadestin says.

Lending institutions get two benefits. One is an improvement in fiscal risk management. “Risk of default on a green-certified building has been one-third lower than on conventional building,” Samuel Adams, CEO of Vert Asset Management, tells GlobeSt.com.

The other is attracting investment. “There’s pressure coming from investors and pension funds and [limited partners (LPs)] at one end, and you’ve got pressure coming from the market,” Cadestin says. “They’re going to start divesting from certain companies that don’t meet certain criteria.”

“Larger institutional-type investors are factoring in sustainability as it relates to their investments,” Matt Payne, associate director of real estate finance at Time Equities Inc., tells GlobeSt. “The key for most investors is ensuring that the sustainability measures are accretive to value.”

“We anticipate that sustainability in investing will become more mainstream as investors continue to demand not only strong returns, but also strong environmental awareness,” Payne adds.