It was a cautious start: 15 million euros for a pension that uses groundwater heat pumps and hydroelectricity. In February this year, the project in the Meiller Gärten district of Munich was Hypo-Vereinsbank’s first green mortgage. Eight months later, HVB had issued green loans worth around half a billion euros, including for sustainable residential construction. “We were impressed by the dynamism of the segment,” says Christian Federspieler, Head of Real Estate Germany at HVB. “The product is very well received in the market.”
Not just at HVB. Long a niche subject, green real estate financing is in greater demand than ever. Developers use them to upgrade projects and banks to upgrade their loan portfolios. And when companies issue green bonds to renovate their holdings, investors rush to offer – a € 600 million green bond from Vonovia was oversubscribed five times in March this year. It is as if the industry is suddenly emerging.
The last quarterly barometer of the financier BF.direkt questioned a hundred real estate experts on green loans: all are of the opinion that these loans will gain in importance significantly. Steffen Sebastian, real estate finance specialist at the International Real Estate Business School (IREBS) in Regensburg, even estimates that in a few years there will only be green loans. Because banks and investors don’t want to be accused of supporting CO2 emissions – and because lawmakers are going to toughen the demands of climate policy. “We will not obtain a financing ban for brown real estate, but obligations to renovate existing buildings,” says Sébastien.
But what is green finance anyway? There are no binding guidelines. After all, the European Commission has presented a plan for the issuance of green bonds, which should ensure more transparency and anchor uniform standards. Green finance providers currently use the guidelines of the international industry association ICMA or the Association of German Pfandbrief Banks (vdp), which they supplement with their own rules. Common criteria are, for example, that a new building is certified as particularly environmentally friendly or that energy consumption is significantly reduced through the renovation.
Institutional investors such as pension funds and insurance companies drive the market
The spectrum of green credits is wide and does not only affect eco-establishments for a long time. In July, for example, Deutsche Hypo granted funding of 71.7 million euros to a shopping center: the Billstedt Center in Hamburg, certified platinum by the German Sustainable Building Council (DGNB). At Aareal Bank, active in the green lending industry since this summer, the first issue was a Holiday Inn in Sydney with low energy and water consumption. “Over the next few years, we want to steadily increase the proportion of green buildings in our loan portfolio,” says Christof Winkelmann, member of the Aareal Board of Directors.
Borrowers can hardly expect better terms than with normal financing. . “So far, most of them care about reputation by complementing green investing with green financing,” says Federspieler, HVB specialist. For some, green credit is the philosophy of the company, for others, it helps with marketing. For their part, banks are using green finance not only for marketing, but also for the future. “With green buildings, the regulatory risk is drastically reduced,” says Professor Sebastian – the risk that a property will have to be renovated at great expense due to stricter environmental regulations or, in the worst case, even become unusable.
Finally, institutional investors such as pension funds and insurance companies drive the market. In 2015, Berlin Hyp issued Germany’s first green mortgage Pfandbrief, worth over € 500 million. Today, vdp statistics list green Pfandbriefe with a current volume of almost seven billion euros. “More and more investors are asking for these products,” explains Philipp Bank, financing expert at NordLB. “At the same time, there is an increasing pressure from developers to increase the durability properties of the properties.” Unsecured green bonds are also booming. In total, Deutsche Hypo – the real estate financier of NordLB – had a capable portfolio of green bonds of 1.3 billion euros in 2017, it is today more than 3.5 billion. It has been issuing green loans since 2019, with particularly high requirements in terms of environmental compatibility. But they are up to ten basis points cheaper.
Deutsche Wohnen and Vonovia are also involved and issue bonds
Corporate green bond issues also show the openness of the capital market. Two Deutsche Wohnen green bonds totaling € 1 billion were significantly oversubscribed in March – at an annual rate of 0.9%. Vonovia only pays 0.625% interest on its first green bond. The money is intended to enable investments that will help the merging companies become climate neutral by 2050 at the latest.
Companies specializing in commercial real estate also use the tool. In 2018, VW Immobilien GmbH led the way with a green bond of more than 100 million euros. Today, there is more than that: DIC Asset AG recently underwritten 400 million euros with a green bond. The company had initially planned more modestly. However, investor demand was so strong that, as she was delighted to report, “a volume of 100 million euros more than initially was achieved”.
Will green finance help Germany meet its climate targets in the building sector? “They are a powerful lever,” says expert Sebastian. However, it should not be forgotten that even a new green building has a negative impact on the CO2 balance – after all, its building materials must also be manufactured and transported. It is important to modernize existing buildings, which pay off quickly from a climatic point of view. No bad news from the banks’ point of view: more investment means more business for them.