Green loans could comprise around 20% of Australia’s annual commercial property debt refinancing by 2025 as the focus on environmental, social and governance (ESG) continues its ascendancy within property decision making.
While big business around the world, green loans represent a small part of the market compared to places like North America. New research by CBRE around the multibillion-dollar potential for green financing in Australia’s commercial property sector reveals green loans represent just 3% of the country’s commercial real estate debt.
However up to $15 billion of the approximately $75 billion in debt refinanced annually could be linked to energy efficient assets, CBRE analysts say.
Reaching targets
“While green loans currently account for just $10 billion of Australia’s commercial real estate debt, refinancing presents significant opportunities given the country’s high volume of NABERS rated property stock,” said CBRE’s Asia Pacific Head of ESG Research Sameer Chopra.
“In 2021, green bonds accounted for 16% of the capital raised by US real estate firms. So, if we were to match those levels in Australia this would provide an opportunity for $10 billion to $15 billion of green refinancing.” Commercial real estate loans in total grew 65% in the past decade, reaching $330 billion in 2021, CBRE data shows.
Research body ClimateWorks Climate change solutions | net zero emissions | Climateworks Centre calculates that the CRE industry must cut its energy usage 28% by 2030 to meet current targets. The industry’s operations currently account for 8% of energy usage with another 2.5% taken up by the construction of commercial buildings according to the CBRE report Creating Resilience – Green Finance. (Creating Resilience in Business & Real Estate | CBRE Australia | CBRE Australia).
As for new investments, Mr Chopra said there was a smaller opportunity to fund these and tap into the green finance commitments made by Australia’s “big four” banks, which combined totals some $200 billion. For instance, the Commonwealth Bank launched the Property Sustainability Upgrade Loan last September. Available to new and existing business customers the aim of the loan is to “enable more Australian businesses to reduce the environmental impact of commercial properties, while significantly reducing operating costs”.
So what exactly is a green loan?
The World Bank Group’s International Finance Corporation defines a green loan as “a form of financing that enables borrowers to use the proceeds to exclusively fund projects that make a substantial contribution to an environmental objective. Green Loans help borrowers communicate the greening of their operations and supply chain.”
According to the IFC, the estimated $33 billion in outstanding green loans worldwide is growing rapidly and outpacing the growth of the green-bond market in the near term.
Opportunities to improve
Some of the greatest opportunity to grow the number of green loans in Australia’s commercial real estate industry are presented by renovating or retrofitting commercial properties, especially industrial buildings, in ways that improved their energy efficiency. A further $500 million to $600 million in debt could be applied each year in this way, Mr Chopra said.
Industry leaders already forging ahead in the green finance arena include Investa, Charter Hall, Ingenia, GPT, Lendlease Mirvac, Quintessential and Stockland. All have completed green finance transactions in Australia, such as the $700 million secured by Investa for its Parkline Place development and the $130 million acquired for Indi Sydney City.
CBRE’s Pacific Managing Director of Debt and Structured Finance, Andrew McCasker said investor willingness to pay a premium for green bonds, which had typically commanded higher prices and lower yields, had been a key market driver, as had a shift towards socially conscious investment strategies.
“A desire to future proof investment portfolios and develop reputational and competitive advantage through ESG initiatives is also underpinning rising interest in green finance,” he said.
CBRE’s report highlights that the office sector has accounted for half the green finance transactions in Australia, followed by the industrial and retail sectors at around 18%-19% each.
But the appeal of “being green” in the finance department lies not only in reputational benefits but also cost: Charter Halls’ head of treasury and group planning, Phil Schretzmeyer, told media that using a green loan afforded cost advantages that could be five to 10 basis points cheaper than a traditional debt facility.
“Generally speaking it is cheaper to finance as a green facility,” Mr Schretzmeyer said.