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May 23, 2018

Real estate finance is going green, with the use of new bonds linked to the sustainability of a project.

A number of developers around the world starting to look towards green bonds – fixed income instruments which raise capital for projects with environmental benefits. Funds can be used to finance green projects such as renewable energy, energy efficiency, clean transportation and of course green buildings.

While a total of US$155.5 billion of green bonds were issued in 2017, the amount is tiny in the context of the global fixed income market, where US$6 trillion of bonds were issued last year.

Of that total, 29 percent of the proceeds were used to fund green building projects, according to the Climate Bonds Initiative. Total real estate green bond issuance more than doubled to US$45 billion from US$19 billion in 2016. One of the largest green bond issuers was the U.S. state mortgage lender Fannie Mae, which issued US$24.9 million of green mortgage bonds – more than half of the global total.

Earlier this year, Swire Properties became one of the first major Asian developers to issue a green bond, raising US$500 million at a coupon of 3.5 percent. The bond gained a rating from rating agency Sustainalytics and was also the first bond issue to be certified under the Hong Kong Quality Assurance Agency’s Green Finance Certification.

Fanny Lung, Finance Director, Swire Properties, says the bond offered a number of positives for Swire. “The green bond issue attracted different investors to Swire Properties’ other bond issues: over half of the $500 million was allocated to dedicated green investors or those with a strong commitment to green bond investment or broader sustainable financing initiatives,” she says.

“The intangible benefits of the green bond issue have been significant. The Hong Kong government is happy to have its green finance initiatives supported by large companies and it has sparked a dialogue over other green initiatives.”

However, from a financial point of view, green bonds do not lead to much cheaper debt, especially not for a blue-chip company such as Swire, which can borrow at low cost.

Lung says: “The “green bond saving” is not very significant for Swire Properties, amounting roughly to a five basis point difference between yields on the green bonds, compared with conventional bond issues.”

In February, National Australia Bank launched the country’s first green mortgage bond, raising A$112.5 million for low carbon buildings. However, the bond pricing was close to the bank’s “conventional” mortgage bonds, indicating that pricing is not a major factor in the market.

Australia’s ANZ was the first bank to launch a green buildings bond in 2015; raising A$600 million, of which 40 percent was used for loans backed by green buildings.

While green bonds are unlikely to ever significantly impact the real estate finance environment, they will “play a material part”, says Fergal Harris, head of debt capital, Asia Pacific at JLL.

“For issuers, the benefit is more about being seen to be a good corporate citizen, rather than cheaper finance,” he said.

Additionally, green bonds open up a new pool of capital for developers, which Harris believes can only be beneficial.

“It is also important, especially in developing markets, for industry players to be rewarded for good sustainability practice and so we hope to see more green bond issues.”

Click to read more about how investors are seeing returns in healthy buildings. 

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Fergal Harris

Head of Debt Capital, Asia Pacific at JLL

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