Asian real estate embraces sustainable financial solutions

Buildings and construction are an underestimated polluter, but finance could help turn the sector towards a more sustainable future.

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Carbon emissions are often associated with coal-fired power plants and heavy industries like steel or automotive. But the buildings in which we live and work are actually one of the world’s biggest sources of carbon emissions. The good news is finance can be an efficient lever to help incentivise the sector to be greener. 

The buildings sector accounted for 28% of total energy-related CO2 emissions globally in 2019, according to the World Green Building Council, and 38% of emissions from the buildings construction industry are included. In Hong Kong alone, buildings consume 90% of all electricity and generate over 60% of all carbon emissions.

Achieving the goal of the 2015 Paris Agreement – limiting global warming to well below two degrees Celsius over pre-industrial times – means that all economies and sectors will need to find a way to become carbon neutral by mid-century. Around the world, the real estate sector is rising to this challenge. Asian property developers and investors are at the forefront, putting climate-related objectives at the heart of their strategies.

Conversion to sustainability

Many Asian commercial and residential property developers have already raised capital earmarked for environmentally friendly projects in the green bond and loan markets. The market for sustainability-linked loans, which finance general corporate purposes but have borrowing terms linked to sustainability metrics, has also grown fast in the region. According to Bloomberg, borrowers from all sectors in Asia had signed 18 sustainability-linked deals worth $7.4 billion by 24 December 2020, on par with 2019 volumes even as the corporate loan market as a whole fell by 30% year-on-year, in the context of the Covid-19 pandemic.

BNP Paribas has been an early advocate and innovator for sustainable financing in the Asian property sector. In 2019, Wheelock and Company raised the first Sustainability-Linked Loan (SLL) in Hong Kong, a five-year facility in the amount of HKD2 billion, with BNP Paribas acting as Sustainability Coordinator and Facility Agent, and joint Mandated Lead Arranger and Bookrunner.

The momentum has continued in 2021, with Hong Kong’s Link Real Estate Investment Trust (REIT) raising two five-year SLLs totalling GBP200 million in January. BNP Paribas is the lender to one of these facilities. This financing stood out because Link REIT was converting conventional loans into the sustainability-linked format.

These converted loans finance Link REIT’s first investment in the UK via its acquisition of The Cabot, a grade-A office building located in Canary Wharf that is rated as “very good” by BREEAM, a globally recognised sustainability assessment for infrastructure and buildings. Under the terms of the SLL, Link REIT will receive interest rate reductions on a tiered basis, subject to the company achieving certain sustainability targets. The company is a constituent of the Hang Seng Corporate Sustainability Index, the Dow Jones Sustainability Asia Pacific Index and the FTSE4Good Index.

In March this year, Hang Lung Properties, a leading property developer and owner with a diversified portfolio of properties in Hong Kong and Mainland, signed a SLL with BNP Paribas. The three-year bilateral revolving credit facility of HKD1 billion features pre-determined sustainability performance targets. Hang Lung has pledged a set of sustainability goals and targets to be achieved by 2030, which will escalate and refine the company’s sustainability drive across the coming decade and beyond.

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“We expect sustainability-linked borrowing from the real estate sector to continue growing rapidly in Asia Pacific, driven by the sector’s own strategic commitments to sustainability,” said Noemie Peiffer, COO of Investment Banking for Asia Pacific at BNP Paribas. “Property developers and investors are eager to explore financing structures which reflect these commitments and incentivise them to deliver on climate goals.”

Real estate after Covid-19

Few industries have felt the impact of Covid-19 more acutely than the real estate and construction sector. With offices and malls forced to close, and footfall traffic greatly reduced in business districts globally, developers have had to rationalise their future projects and rethink key elements of design. On a functional level, office layouts need to ensure adequate space between workers, while residential developments built around open, community spaces will need to take into account the potential transference of viruses.

Additionally, developers will need to consider the increasing desire for health and wellness infrastructure, from air purification and water filtration devices to yoga studios and gyms.

The movement towards greener buildings post-Covid reflects both a change in individuals’ expectations of their living and working environments, and the investors’ imperative to support the transition to a lower carbon economy. “The pandemic has made investors look closely at how developers are integrating environmental, social and governance (ESG) factors into their projects,” explains Peiffer.

Beyond financing

Sustainability factors are being incorporated into financial solutions for Asian real estate firms that go beyond loans.

In July 2020, Hysan Development, a leading Hong Kong investment, management and development company, entered into an innovative, green $125 million 14.9-year sustainability-linked cross-currency swap with BNP Paribas. The Hong Kong-based developer manages a portfolio of more than four million square feet of property in the city, especially in the busy Causeway Bay district. Hysan is no stranger to green financing, having first published its green financing framework in 2018, but this was the first time it applied ESG principles to its risk management activities.

The swap helps Hysan manage its exposure to US dollar-denominated debt, but also reflects its strategic focus on sustainability. Under the terms of the deal, Hysan has set two sustainability-linked targets: remaining a constituent of the Hang Seng Corporate Sustainability Benchmark Index from 2021 to 2024, and achieving an average 20% reduction in purchased electricity by the end of 2024. If it does not meet either target, Hysan will make a meaningful, pre-agreed contribution to local impact-driven charities or projects approved by the BNP Paribas Corporate and Social Responsibility Committee in Hong Kong.

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The application of ESG incentives to risk management solutions as well as financing shows how real estate companies can integrate sustainability in all aspects of their financial arrangements, said Chaoni Huang, Head of Sustainable Capital Markets for Asia Pacific at BNP Paribas.

“Sustainable finance doesn’t just mean bonds and loans; property firms have hedging needs as well and these can also reflect their strategic commitment to sustainability,” said Huang. “Embedding financial incentives like those in the Hysan deal can help accelerate the sector’s decarbonisation in Hong Kong and around the region.”


Pushing the green and sustainable real estate agenda with financing

BNP Paribas has recently worked on landmark green and sustainable transactions, creating innovative financial solutions that incorporate financial incentives to help real estate companies deliver on their sustainability goals.

GLP, a global investment manager and business builder in logistics, real estate, infrastructure, finance and related technologies, closed a $658 million three-year multi-currency sustainability-linked club loan in January. The loan was GLP’s first in this format since obtaining an ESG rating from Sustainalytics, a leading ESG research and ratings provider. The interest margin of the sustainability-linked club loan, for which BNP Paribas acted as Sustainability Arranger and Lender, is tied to the company’s ESG rating from that provider.

In December 2020, Keppel REIT closed a AUD100 million three-year green loan facility, with BNP Paribas as lender. The SGD8 billion commercial real estate investment trust will use the proceeds to finance the acquisition of the Pinnacle Office Park, a Grade A commercial property in Sydney.

Green loans are not just financing office buildings, either. In 2019, Capital Court Limited, a wholly-owned subsidiary of Lai Sun Development, launched the first green loan used exclusively to finance a hotel property – the Ocean Park Marriott – in Hong Kong. BNP Paribas acted as a mandated lead arranger and joint green financing structuring advisor for the HKD3.6 billion financing.

In the first four weeks of 2021 alone, BNP Paribas completed six deals in APAC real estate:
– Link REIT: A five-year GBP100 million Sustainability-Linked Loan 
– Central China Real Estate Limited: $260 million green bond
– Zhenro Properties: $400 million green bond & $300 million green bond
– GLP: $658 million three-year multi-currency SLL 
– Sinic Holdings: $250 million green bond


Elsewhere, BNP Paribas has also been leading on efforts to embed social impact into finance through SLLs for housing associations, and has supported various innovative financings including:
– A 3-year £50mn SLL for Metropolitan Thames Valley, one of the UK’s largest housing associations, in December 2020.
– In January 2020, the bank helped Clarion, UK’s largest housing association, secure a new 5-year £100m SLL linked to a lower interest rate margin on the loan, if it helps an agreed number of residents into employment.
– In August 2019, BNP Paribas supported housing association Peabody in a £75m SLL in which Peabody will benefit from a lower interest rate margin on the loan if it delivers an agreed number of accredited childcare qualifications under its Childcare Training Programme. This target rises incrementally over the 5- year life of the loan.