Greener BeeGreen TipsS&P tips real estate green bonds for rapid growth, if barriers can be overcome

Conditions are ripe for the real estate green bond market to emerge as a key growth sector, according to new research from ratings agency SP.

Commercial tenants are demanding greener buildings to help them curb costs and meet climate targets, while investor demand for green bonds continues to gather pace, the report noted. These trends are positioning the emerging real estate green bond market for future growth, as real estate companies seek to take advantage of investor demand for green bonds to fund environmental improvements to their portfolios.

The research, published yesterday, suggests although the issuance of green bonds by Real Estate Investment Trusts (REITs) has so far been limited, if greater standardisation is introduced to sector-specific bonds they could become an increasingly popular form of financing for real estate firms.

“The extent of the success of green bonds in the real estate sector will likely depend on whether the clear, broad appeal of this form of financing generates enough momentum to tackle the lack of standardization in the market,” the report said. “If this barrier can be removed, these environmentally friendly, higher-yield, and asset-enhancing instruments could start to see much wider use over the next few years.”

Higher demand for green buildings is driving an industry-wide focus on upgrading the environmental performance of commercial real estate. The majority of SP’s real estate clients now report that the majority of their office portfolio is “green” certified, and all plan to attain certification for the remainder of their assets over the next two to three years.

Meanwhile, current low interest rates are also encouraging issuers to take on the added administrative burden of a green bond issuance, in anticipation of the reputational and economic benefits green investments can yield, SP said.

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