Workspace and Citycon underscored the increasing focus of the real estate sector on sustainability on Thursday, funding in the sterling and euro bond markets, respectively, to finance green projects.
UK office property owner Workspace was issuing its first benchmark bond, providing the sterling market with much needed new supply and green assets. Several bankers also noted that it was a clear sign of how much corporate issuers are focusing on ESG issues that one would decide to sell a green bond as its first issue.
The issuer, rated BBB (negative) by S&P, opted to take £300m from a book of £800m, printing its seven-year note at a spread of 175bp versus Gilts. NatWest Markets and Santander began marketing the bond at IPTs of 190bp.
The deal also brought together several trends within the ESG market.
"What's interesting is that the deal ties into two major themes we have seen. Firstly, you have the real estate sector embracing sustainability, which is really important when you consider that the sector is responsible for around 40% of the global carbon footprint,” said Arthur Krebbers, head of sustainable finance for corporates at NatWest Markets.
“Then, on top of that, you have a growing commitment from the UK to the sustainability agenda."
The breadth of the framework, which does not just focus on investment in green buildings, was also highlighted by bankers involved in the deal.
"If you compare the framework to other real estate frameworks, what I would say is interesting is that it is a little broader than most,” said Krebbers.
“It has the usual bread-and-butter projects, such as development and refurbishment, but you also have a supply chain element, for example, sourcing more low embodied carbon concrete. You also have clean transport, which can include the creation of charging points for electric vehicles."
Eligible green projects fall under the categories of green buildings, eco-efficient or circular economy adapted products, technologies and processes, clean transportation, energy efficiency, climate change adaption, pollution prevention and control, sustainable water and waste water management.
Although the bond was well received by the market, it is also true that property companies active in office real estate have been out of favour with investors since the Covid-19 pandemic caused a widespread shift to working from home.
That shift is evident in Workspace’s activities last year. Although rent collection was 97% for the first two quarters of its financial year 2020, which began in April, the company also introduced a 50% rent discount following the announcement of the first UK lockdown. Rent collection fell to 91% in the company’s third quarter.
And, on the whole, syndicate bankers and investors have said that these types of borrowers will see reduced demand for their bonds or higher premiums required. However, the addition of a green label can reduce these impacts.
"We have seen it before, that a green label can have a market access benefit, especially for a more Covid-impacted sectors that some investors might not have otherwise looked at. However, a green label doesn't substitute for fundamental credit analysis,” said Krebbers.
Retail green
The one sub-sector possibly less popular among investors in real estate bonds is retail. However, in a sign of potentially how far a green label can go, Citycon sold a €350m seven-year green bond at a spread of 200bp over mid-swaps, upsized from the expected €300m.
This was 40bp inside where active bookrunners Danske Bank, Deutsche Bank, Nordea and OP Corporate Bank began marketing the bond and the deal was more than four times covered, with an order book over €1.3bn at guidance.
“It’s a niche trade in some respects, but clearly there is a market there and it looks like a good result to me,” said a syndicate banker.
Citycon owns and develops shopping centres in Denmark, Estonia, Finland, Norway and Sweden. The issuer is no newcomer to green euro funding. In late 2019, it issued a €350m 4.496% PNC5.25 green hybrid bond. Citycon is rated Baa3/BBB–/BBB–.