More transformation loans as ESG compliance now a must

ESG-compliance is cutting across all sectors as an absolute requirement, experts agreed at Real Asset Media’s Global Outlook 2023 – Key Trends briefing, which took place recently at Nuveen’s headquarters in London.

“The war on climate change will be fought in existing buildings, so transformation loans will be a growing part of the business,” said Assem El Alami, head of international real estate finance, Berlin Hyp. “We actively try to help transformation happen and support clients who have a plan to turn their assets from brown to green.”

Berlin Hyp would not finance the acquisition of a brown asset if there is no transformation strategy in place, El Alami said: “We wouldn’t touch it.”

It is a position taken by more and more financial institutions.

“There will be a hard stop rather than a slow decline,” said Megan Walters, global head of research, Allianz Real Estate. “At some point, you won’t be able to get financing and that’s it. The valuers get together and move the market. It all flows from the fact that climate change is seen as a stability risk by financial authorities.”

Regulations are getting tougher and not just at EU level. In many cities, from Amsterdam to New York, there are penalties for buildings that do not meet the required standards and brown offices cannot be let.

“In Germany some are betting on a softening of the legislation, but this kind of speculation is very misguided,” El Alami said. “People underestimate the pressure we’re under to reduce carbon emissions. ESG is the way to add value to assets now.”

It is not just regulators or banks driving the change now, but also investors and tenants.

“We’re getting to a tipping point, because fewer and fewer people want to rent or buy non-compliant assets,” said Stefan Wundrak, head of European research, real estate, Nuveen. “Our advice is not to leave it too late to take action and protect the value of your assets.”

The direction of travel is clear, so it is better to take the long-term view. “Looking ahead it’s irrelevant if it’s a brown discount or a green premium now,” said Wundrak. “What matters is what will happen in two or three years’ time when you want to sell the asset.”