Real estate companies may find it tough getting funding if they don’t go green: OCBC
REAL estate companies reliant on funding could be compelled to comply with sustainability practices, or face reduced funding opportunities, warned OCBC in a sector report on Friday (Jan 20).
This is because green financing for the real estate sector is becoming mainstream, with developers taking green or sustainability-linked loans or bonds, and local banks increasingly looking at environmental, social and governance (ESG) risks when financing projects.
For example, all three local banks have joined the Net-Zero Banking Alliance and are already offering green and sustainability-linked loans. The report noted that one of the banks had notched up S$34 billion in loans in its sustainable-finance portfolio as at 2021 – ahead of its target to have S$25 billion in such loans by 2025. The bank was not named.
While the authors of the report have not observed a green premium in the Singapore-dollar credit market, they said that global credit-rating agencies have begun differentiating credits; corporates scoring higher in ESG attributes potentially get higher credit ratings, which, in turn, should improve the cost of funding.
There are about S$11 billion in green, sustainability, social and sustainability-linked credit issuances outstanding in the Singapore-dollar market. Developer and housing-related entities account for S$4.1 billion of those issuances.
Beyond a potential premium in financing costs, the report also noted that green buildings are commanding a premium among buyers and tenants.
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Citing a 2016 Frost & Sullivan study, the OCBC report stated that 54 per cent of homeowners surveyed were willing to pay 3 per cent to 4 per cent more for a building that has been certified as green under the Green Mark certification scheme of the Building and Construction Authority (BCA).
The same survey found that office tenants were willing to pay an average of 3.5 per cent more for leasing an office in a Green Mark-certified building.
Tenants, including multinational companies, want to be in Green Mark-certified buildings because it burnishes their sustainability credentials. CapitaLand Investment said that institutional tenants have begun to avoid buildings that do not meet the minimum green standards.
On the regulatory front, listed real-estate companies are already required to release sustainability reports that include disclosures on material ESG factors, policies, practices, performance and targets.
But although the heat is on companies to improve their disclosures, the report noted that investor demand for sustainability-related information is still not being met.
“Existing gaps include incomplete, inconsistent and incomparable sustainability-related disclosures by companies. In turn, this leads to potential risks of information that can be misleading to investors,” said the report.
It also highlighted several regulatory moves in support of the real estate sector becoming more green, such as the BCA offering grants to property developers to encourage them to reduce emissions through retrofitting and to lower their upfront costs of doing so.
The Singapore Green Building Masterplan, introduced as part of the Singapore Green Plan 2030, set several key targets to be achieved by 2030, including greening 80 per cent of buildings, attaining super-low energy ratings for 80 per cent of new developments and improving energy efficiency for best-in-class green buildings by 80 per cent from 2005 levels.
The government will also issue S$35 billion in green bonds by 2030. The proceeds raised will be used in eight project categories, with green buildings among them.
Real estate companies have several ways to green their assets, the report said. It identified retrofitting as a “quick win” for older buildings, as it delivers positive net present value with short-term payback.
Using renewable energy sources (such as by installing roof-top solar panels) can also partly or fully offset the energy usage of buildings. However, the report stated that it was a challenge for higher-density buildings to reach net-zero emissions by using on-site renewables alone; buildings that have done so are the exception, not the norm. Off-site renewables, such as solar and wind farms, are currently a limited option in Singapore.
For carbon emissions that cannot be reduced or replaced, the report cited the purchase of renewable energy certificates and carbon offsets as another option.
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