KB
Hello and welcome to Talking Property with CBRE
A podcast in which our team of experts, clients and industry specialists share insights into the way we live, work and invest through the lens of commercial real estate.
My name is Kate Bailey, I’m a Director of Research here in the Pacific and I'm your host for today's episode.
Today we're talking about Green Finance, what is it? What are the driving forces behind it and what opportunities exist in Australia's commercial property sector?
To help me unpack this discussion, I'm joined by Sameer Chopra, CBRE’s Head of Research in the Pacific and Head of ESG Research across Asia Pacific and Andrew McCasker, Managing Director of CBRE’s Debt and Structured Finance business here in the Pacific.
Gentlemen, thank you for joining me.
SC
Thanks Kate.
AMC
Thanks Kate, pleasure to be here.
KB
Well, ESG is the acronym on everybody's lips at the moment, and it's an issue that the corporate sector is heavily focused on with many companies really striving to achieve a net zero emissions by 2030 but ‘green finance’ is probably a pretty new term. So, Andrew, can you share with our listeners what exactly is green finance, and how does it differ from traditional forms of financing?
AMC
Thanks, Kate and certainly you are right. The term green finances a new coined phrase in the finance and property industry. Interestingly, we have had green financing around for a number of years. We've had green bonds issued for the last several years, which have allowed groups that qualify for NABERS ratings or energy efficiencies to access funding via green bonds.
The Green Finance is an extension of that availability of finance and has been participated in through not only the domestic banks but also offshore banks and funds that participate in the direct debt market. Ultimately, the benefit in accessing a green bond, certainly from the borrower's side of things, is there's a marginal financial benefit, usually with a reduction in interest costs. But for the greater good, we're seeing that it's encouraging borrowers, developers and owners to take the initiatives to convert their assets into assets which are compliant to ESG and allow them to access green financing or green bonds.
KB
Interesting. So while green loans represent about 3% of Australia's commercial real estate debt, CBRE’s latest ‘Green Finance’ report estimates that as much as $15 billion of the circa $75 billion in debt refinanced annually could be linked to energy efficient assets. Sameer, what does this mean for the commercial real estate sector and how can investors capitalise on this?
SC
Yeah, Kate, Look, there's circa $330 billion of lending out to the real estate sector, and about $75 billion is then refinanced each year. We also know that Australian real estate companies have been on this ESG improvement journey that Andrew was talking about for a number of years. So, for instance about 74% of the office stock in Australia has a NABERs rating and the commercial banks, the Big Four banks in Australia have made a commitment of $200 billion towards sustainable finance. So I see all three of these factors coming together to power the green finance sector in real estate. That's the volume of refinance, current ESG rated stocks and the bank commitments, and that gives us that circa $15 billion type opportunity for green finance each year.
KB
That seems like a huge opportunity and building on that potential opportunity, Andrew green finance, we think about it in terms of new investment but what about investors that are looking to retrofit or renovate their properties, can they also benefit from this?
AMC
Yeah, great question Kate and the simple answer is yes. We're seeing a number of developers and value add groups looking to convert their assets from the current standard that it is to achieve the highest Green Star ESG rating that they can and by doing that, they can not only access green financing through the banking market but the federal government have the Clean Energy Finance Corporation, which does everything from loans to retrofit lighting in buildings through to full scale solar plants across the top of large industrial development. So absolutely, it's available for retrofitting existing buildings.
KB
That's super interesting as well. They're just that breadth of availability of that finance and Andrew, I'd love you to build on that. What are some of the driving forces behind Green Finance? And potentially, if you want to discuss some of the considerations that might go into securing a green loan?
AMC
Absolutely Kate. So, interestingly, the driving force is community pressure, so the expectation that the Australian public have in relation to the assets that are being delivered in the type of work environment that they're working in, is asking the owners of the assets to be able to deliver and contribute to something which is going to be positive into the environment, social and governance community in which they are looking to participate in. As far as being able to access the green loans of course, there's a whole other industry that's been created out of this and along the lines of testing compliance in relation to ESG and ensuring that once the loans being awarded, nominated as the green loan that the owner of that asset has a responsibility to ensure that they remain compliant throughout the not only the term of the loan, but also the term of owning the asset but it's going to remain being ESG compliant, and also it's not just a line in the sand, it's constant improvement. So as technology improves or opportunities to develop things differently, the expectation is that the owners of those assets will also continue to improve the environmental, social and governance of the asset that they currently have.
KB
So what are Institutional Investment Committee is looking for when they are reviewing the opportunity to purchase an asset?
AMC (6.32 – 6:50)
Interestingly, Kate, we've had feedback from a number of large institutional groups that have talked about their investment committee, and obviously they're looking for the fundamentals so return, quality of asset and so on. But one of the key questions which is being asked up front now is what's the ESG impact on the asset they're looking to buy? And it's become quite clear that it's either compliant with ESG and the ratings they need to be able to be satisfied with the style of asset they're buying or it can be made compliant in a really short period of time. So some groups we've spoken to have said if they can't convert an asset from its current status to being compliant with the ratings and ESG within two years, then potentially they won't purchase the asset.
SC
Andrew, maybe also I’d add there's an angle here with you know, what the landlords looking to do in terms of ESG ambition and what the occupiers are looking to do from an ESG ambition, perspective. I'd probably say that becomes more and more important in the industrial and retail sector, where we do have some global groups that are very interested in ensuring that they have the right ESG credentials for their assets.
KB
Finally, Sameer, what sectors are leading the way with green finance transactions and what do you think is driving demand in one sector over another?
SC
Kate, the office sector accounts half of all the green finance transactions in Australia right now. That's then, followed by industrial and retail, which make up sort of 18-19% each of the green finance transactions. I think a lot of this is because of historical forces. A lot of the office stock in Australia has been retrofitted. In fact, you know, we find almost a quarter of the older Australian office stock has now been upgraded to be sort of NABERS 5.5 or 6 star rated. So that's going to let that big chunk of office stock. Industrial and retail, I think is we're the more interesting and exciting opportunities lie going forward.
KB
Fantastic. Thank you so much for your time Sameer and Andrew. I've really enjoyed today's discussion. It's definitely such a growth sector and there are some really big opportunities coming up in that space. So I really appreciate your time.
Thanks for listening to talking property with CBRE. If you like the show and want to check out more, visit cbre.com.au/talking-property or subscribe through Spotify and Apple Podcasts.
You can also read our full Green Finance report by clicking on the link in our show notes.
Until next time.
