Sustainability-linked loans trump other green finance for local property firms
PROPERTY firms and real estate investment trusts (Reits) bagged nearly half of the green debt raised by Singapore companies last year, with sustainability-linked loans making up the lion’s share, according to an analysis by the Institute of Real Estate and Urban Studies (IREUS).
Lee Nai Jia, deputy director of IREUS at the National University of Singapore, said the real estate sector is likely to be among the leaders in sustainable financing in the immediate future, as there are well-established standards for green building certification.
He expects both green and sustainability-linked financing to increase their market share among the available debt instruments. “Higher oil prices and the imposition of carbon taxes, together with greater investment appetite for sustainable investments, should continue to drive sustainable financing,” Dr Lee added.
The research institute's analysis of data from financial markets data and infrastructure provider Refinitiv showed that the market for green and sustainability-linked financing in Singapore started to pick up in 2019.
The amount of such debt obtained by firms domiciled in the city-state also reached a new high in 2021, charting the "meteoric rise" of a debt market that did not exist just a decade ago, IREUS noted.
Green and sustainability-linked debt clinched by Singapore companies across all sectors in 2021 surged to S$163.2 billion, which is almost 5 times the S$32.9 billion a year ago.
Proceeds from green loans or bonds can only be used to finance or refinance eligible green equipment and projects. These projects may include buildings that use renewable energy, reduce emissions or are energy-efficient, for instance.
Sustainability-linked loans and bonds do not restrict the use of proceeds; instead, borrowers commit to certain environmental, social and governance (ESG) performance metrics. Typically, if the predetermined ESG targets are achieved, the company will pay a reduced interest rate on the loan or a lower coupon to bondholders.
IREUS highlighted that a substantial portion of green or sustainability-linked debt raised in the previous 2 years by Singapore companies went to the property sector. About 46 per cent of such financing obtained by firms domiciled in the Republic in 2021 went to real estate companies and Reits.
These property names also raised significantly more green and sustainability-linked financing over the course of the last 2 years. They issued some S$75 billion in 2021, up from a modest S$300 million in 2018.
Meanwhile, the real estate sector’s preferred type of sustainable debt appears to have changed, with green loans previously being the most popular.
In 2019, green loans made up about S$4 billion of the total S$5.4 billion raised by property firms and Reits. Likewise, out of the S$26.5 billion in sustainable debt raised in 2020, green loans accounted for 91 per cent.
However, 2021 saw a spike in sustainability-linked or ESG-linked loans to almost S$64 billion, from just S$1.3 billion a year ago.
On the other hand, green loans in the real estate sector shrank to S$9.1 billion last year, down from S$24.2 billion in 2020.
Dr Lee sees sustainability-linked loans as a better option for property developers and Reits with assets that have yet to obtain green ratings. This is because sustainability-linked loans do not need to be allocated exclusively to green projects, and can give the borrower more flexibility as to how they wish to use the additional cash flow, he said.
Separately, firms may prefer to obtain green or sustainability-linked loans instead of issuing green bonds, given that the latter could incur higher transaction costs, Dr Lee noted.
The market for sustainable financing grew tremendously in 2020 and 2021. A Refinitiv report noted that issuances of sustainable bonds reached US$1 trillion in 2021, up 45 per cent from the year before. They are now more than 20 times the size of 2015’s levels, and account for a tenth of global debt capital markets, Refinitiv added.
In Singapore, the nationwide Green Plan 2030 includes efforts to accelerate green finance in the city-state. The Monetary Authority of Singapore’s Green Finance Action Plan also aims to grow the Republic as a leading centre for green finance in Asia and globally.
