Green bonds, an asset used in sustainable investment, are supporting environmentally beneficial strategies in the real estate sector, but face challenges due to higher costs for issuers, according to S&P Global Ratings.
The bonds help real estate companies raise finance while allowing tenants to rent office space and buildings that are energy efficient.
A number of industry studies, such as that by Global Real Estate Sustainability Benchmark, claim the financial performance of real estate companies is generally stronger when environmental, social, and governance, or ESG, factors are incorporated in strategies.
S&P says that current low interest rates prevailing in Europe have also played a part in the market’s development by encouraging issuers to pay the extra documentation and reporting costs.
However, while investors' demand for corporate green bonds is growing, issuance by real estate investment trusts (Reits) is currently limited, standing at around €2 billion in Europe.
There are valid reasons for the reticence shown by Reits for green bonds, S&P said, due to the extra costs for issuers, which could be a barrier to the expansion of the market in the long run.
Also, despite low interest rates, green bonds could conceivably be less attractive to issuers if interest rates rise, making finance more expensive. The extra costs associated with issuing a green bond could also discourage an issuer paying a higher funding cost than peers, for example, because of its weaker credit quality, said S&P.
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