Green Bond Market Update

In late August we reported that there was $13.5 Billion invested into the property sector to improve the energy efficiency of buildings. Since the article, Stockland Property Group listed a EUR300 Million bond to finance energy efficiency improvements to their retail, commercial, residential and retirement living projects to 4 Star Green Star. The bond was listed on the Singapore stock with a term of 7 years and annual repayment of 1.5%. It was bought by institutional investors in the UK and France which are showing a strong appetite from green bonds.

This transaction was the first property green bond of its type in Australia but quickly lead the way for a $300 Million Certified Climate Bond to be released by NAB earlier this month which will facilitate the investment into solar facilities and wind farms. Globally, over $35 billion has been raised in climate bonds that financially support the transition to low carbon future, this is compared to $10 billion in 2013.

Certification of a Climate Bond stipulates that buildings must achieve a 30 – 50% reduction in energy for retrofitting, or for newly constructed buildings, the building must be preforming in the top 15%. Australia is very well placed to facilitate this, having clear metrics on energy performance of buildings under the NABERs and Green Star methodologies.

On the purchase side investors are seeking out buildings that are preforming to higher energy standards primarily because the data indicates that stronger financial returns are aligned with higher preforming buildings. The recent example of the EPA Victoria building selling for an 11.8% premium in just 6 months points to the local demand for higher performing buildings.
Examples of the most likely green bond opportunities in the energy efficiency commercial buildings are:

  • green mortgage-backed securities (green securitisation) for building that are designed and constructed to perform at a high green star rating,
  • building portfolio owners with a mixed portfolio of NABERs rated commercial buildings seeking to improve the portfolio performance or securitise existing low carbon assets, and
  • aggregation of finance from existing schemes such as ESCO contracts and environmental upgrade agreements.

A recent example of EUA type finance was the successful issue of $6.9million bond by LA City to finance building upgrades through their PACE program. This is an excellent example of financial creativity and leadership.

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