“It’s not just about the portfolio we have today, it’s about the future.”
Mehdi Bourassi speaks to EG hours before starting four days of calls and virtual meetings with investors to pitch Tritax Eurobox’s first bond sale – and the finance director and his colleagues are going green.
The deal is planned as a green bond, money pegged specifically to environmentally friendly projects, with a third party on hand to make sure it is spent on what investors are told it will be.
The logistics investor will use the money raised – which Bourassi hopes will be as much as €500m (£431m) – to finance or refinance buildings identified under its new Green Finance Framework. The strategy includes buying green assets and improving the sustainability credentials of existing properties.
“Most of our assets have been built in the last five years and are already very green,” Bourassi says. “But we can do a lot more.”
Tritax EuroBox is in good company heading to the green bond market. Roughly $1.2tn has been raised globally in the market, including last year’s record annual issuance of $270bn and close to $150bn raised so far this year, according to the Climate Bonds Initiative thinktank.
The real estate industry, infamous for its own environmental damage, has been busy across the bond and loan markets. As Tritax Eurobox started its roadshow, SEGRO’s European Logistics Partnership joint venture priced a €500m green bond, just days after publishing its own Green Finance Framework.
Such deals are “a statement from the company to say we take ESG very seriously”, Bourassi says. “We’d like our portfolio to be sustainable for the very long term, and we can see that in the longer term, assets which are not sustainable will not be so easily let.”
And it isn’t just buildings that run the risk of being outdated – bonds do too. Some investors will no longer buy what Bourassi calls a “classical”, old-school issuance.
“We see the green element in the bond market becoming more and more important,” Bourassi adds. “The bonds that aren’t green in the future will be a lot less appealing to investors.”
Eureka!
Green finance is a young market, and even companies that have started their journey are only a few years down the road.
Derwent London was a first mover in the UK real estate industry. In 2019, group treasurer Jay Joshi and colleagues were in discussions with bankers over refinancing a £450m credit facility, the maturity of which was looming. At a seminar on green financing, Joshi was hit with a realisation.
“I’d heard about green financing for at least four or five years, but it was a bit of a ‘eureka’ moment when they started talking about use of proceeds and the way these green finance deals are being structured,” he says now.
“I kept thinking, ‘This is the stuff that we are doing’… Our model is taking older, poorer-quality buildings and either refurbishing or developing them and producing a greener building. That’s being funded by the debt we’re raising so the funding is effectively directly applied to green projects. Looking at it like that, we have a clear use of proceeds.”
As part of the £450m refinancing with HSBC, Barclays and NatWest, Derwent struck a £300m green revolving facility, the first from a UK REIT to meet the Loan Market Association’s green loan principles, a set of guidelines for green borrowing. “One thing we had to be careful of, being a first mover, is that you open yourself up to scrutiny from other people,” Joshi says.
“There’s a lot of scepticism in the market. Something can look green but you scratch the surface and it starts looking less green or slightly brown. So it was important to have something measurable, scalable and to set a good benchmark.”
The developer has used the money to finance sustainability initiatives at three big developments: 80 Charlotte Street, W1, its first net zero carbon building; Soho Place at 1 Oxford Street, W1; and the Featherstone Building, EC1. Next up could be the proposed 19-35 Baker Street, W1.
“In a weird way, when we first started this journey, we didn’t know how deep we wanted to get into it,” Joshi says. “We said, ‘OK, £300m, it’s enough for a good start and to show you mean business. But we didn’t know how much this would develop.”
Joshi thinks the real estate industry will ultimately shun traditional bonds or loans without a link to sustainability.
“We’re maybe one or two refinancings away from most financing in our sector being green,” he says.
“It’s never been about the cost because, realistically, by the time you put in all your new policies, the extra documentation, the extra assurance work, it could end up actually costing you more [to borrow on the green market]. But the benefit comes from having that strong green agenda, showing what your business is really about. It comes through the reputation and attracting the right staff.”
The green-ium effect
Nonetheless, the initial pricing of a green bond can be notably cheaper than a non-green issuance.
“Twelve or 18 months ago, you’d get a lot of demand for a green, social or sustainable deal, but not necessarily a pricing benefit for it,” Sunil Kainth in NatWest Markets’ debt capital markets division told EG earlier this year.
“What we see now is that ‘green-ium’ effect coming through. It’s difficult to pinpoint exactly – it could be a couple of basis points, there’s no blanket number – but if we look at the implied fair value level of some of the deals that have come versus where they are priced, the pricing levels have been inside. It’s something that is becoming more common, more acceptable.”
Tritax Big Box REIT sold its first bond – a green deal – in a £250m sale last November.
“It’s slightly more tricky to know what that direct benefit is without having a comparable traditional bond sitting alongside the green bond,” says finance director Frankie Whitehead. “As we were approaching the deal, the message was that the benefit was nought to five basis points. I think that’s probably moved on slightly in terms of where we are currently – the bookrunners are talking five basis points plus.”
In a £380m private debt placement with UK and US institutional investors in March, LondonMetric Property included a £50m green tranche that priced two basis points inside a comparable non-green issue. “That doesn’t particularly set the world alight, but I’d rather have it than not have it,” says finance director Martin McGann of the cost saving.
Since striking the private placement, LondonMetric has also agreed two revolving credit facilities: one worth £175m with Wells Fargo, the other worth £225m with HSBC, NatWest, Barclays and Santander. The interest rate of both drops by two basis points if the company hits target around EPC ratings, renewable energy and BREEAM ratings. The company will use the money on schemes in Bedford and Birmingham.
“It became quite clear to us that if our ESG credentials were not in good order, then there were certain equity investors who wouldn’t be able to invest,” says McGann.
Collaboration and innovation
With a goal of developing 2m-3m sq ft a year, Tritax Big Box will have no end of opportunities to put green funding to work. “Developing buildings that are modern, fit for purpose and have high ESG credentials, we think should stand the test of time and should be more appealing to the end customer ultimately,” Whitehead says.
Buildings like those at the company’s scheme at Littlebrook, Dartford, where a 2.3m sq ft facility prelet to Amazon is nearing practical completion, with one of the UK’s largest solar panels on its roof.
“There’s a lot to shoot for here in terms of future financing,” says Whitehead of the pipeline. “We do see ourselves looking at that green financing market in the future to support those ambitions.” He adds that as well as public bonds, the company will look at the private placement market for future green deals, given that the market’s acceptance of such issuances is “maturing over time”.
Indeed, Derwent, Tritax Big Box and LondonMetric all expect to be back in the green finance market again.
“No one’s ever gone through this net zero transition journey before,” says Derwent’s Joshi. “The UK needs to be net zero by 2050. We’re all recognising this is going to take a lot of collaboration, a lot of innovation, people working together and encouraging each other. The demand is growing for green finance. And as a result of that, that pool of supply will be growing as well.”
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