Bodo Winkler-Viti outlines how the commercial real estate bank has navigated a challenging year in the bond and commercial real estate markets whilst remaining committed to decarbonising its lending portfolio.
Environmental Finance: How has your green and social lending business evolved in the past year?
Bodo Winkler-Viti: 2023 was not the easiest year in European commercial real estate markets. With interest rate increases and inflationary pressure, the market slowed down significantly across all asset classes. Prices also suffered. Despite this, we are very pleased with what we managed to achieve with our sustainable financing in 2023: we were still able to grow both our social and green finance portfolios.
The green finance portfolio passed the €10 billion ($10.8 billion) mark for the first time. That is significant given that our total portfolio is approximately €30 billion – more than one-third is now green. That is an amazing development, and we are very proud of that.
We have been able to increase the green finance portfolio for two reasons. While we strengthened our eligibility criteria at the beginning of 2023, we were also able to underwrite substantial projects eligible for the green finance portfolio.
Another contributor was enhanced transparency in the existing portfolio. We had a target in place that by the end of 2023, energy performance certificate (EPC) data must be recorded for all the buildings that we finance so that we can ensure accurate data for our loan monitoring system, rather than using proxies. We are very happy to announce that we achieved this target with only a few exceptions, e.g. cases where buildings have not yet been finished or there is not an EPC for the building.
Among those customers who provided their EPCs, several fulfilled the eligibility criteria for our green finance portfolio and therefore some parts of our existing business were reclassified as green.
We now have a database that I think is quite unparalleled with other banks.
We already had a target in place that 40% of Berlin Hyp's refinancing should come from ESG bonds by 2025, be it green, social or sustainability-linked. By the end of 2023, we stand at more than 37%. Meanwhile, we have more benchmark-sized ESG bonds outstanding than conventional ones.
EF: What were the main highlights from your ESG issuances last year?
BWV: It was a busy year – in the end, we achieved close to €5 billion of new issuance in senior and covered formats. Among these were seven syndicated transactions: five covered and two senior preferred. We were very happy that six of the seven benchmark transactions were in ESG format. We only issued one conventional bond last year.
"We're extremely happy that the bank is able to generate enough social or green assets to print the vast majority of its syndicated bonds in the form of ESG bonds. Use-of-proceeds bonds today represent the biggest part of our annual issuance"
You could say that ESG bonds have become the new normal for Berlin Hyp. We're extremely happy that the bank is able to generate enough social or green assets to print the vast majority
A particular highlight was that we issued the first dual tranche bond that combined a social bond with a green bond, each with different maturities. We had a three-year social covered bond 35 combined with a 10-year green covered bond. They were so well received in the market that we felt even more encouraged to further increase ESG bonds issuance in the future.
Most recently, in January 2024, we issued another green covered bond. The long 3-year €500 millon will-not-grow bond emerged to be a real blockbuster. Orderbooks peaked at more than €4 billion allowing us to tighten the re-offer spread by seven basis points (bp) from mid swaps +21bp to mid swaps +14bp, representing a new issue premium of zero bp and the lowest re-offer spread of any covered bond in 2024 so far. The new issuance brought our outstanding benchmark-sized green bonds to 20 different International Securities Identification Numbers (ISINs).
Figure 1: Berlin Hyp's decarbonisation path
EF: How have your conversations with investors evolved over the past year?
BWV: The topics have become more serious, partly because of the stressed economic environment. Last year, investors wanted to know how our portfolio was performing credit-wise and to understand the future of commercial real estate, including sustainability developments. This year, while the sustainable aspects were not as dominant as they have been in the years before, it is still of interest – especially in the office space.
Sustainable, energy-efficient buildings appear to fare much better in this stressed environment than conventional spaces do. When you look at vacancy rates, for instance, it is clear there are two different markets now. The strategy of Berlin Hyp to focus on green and energy-efficient buildings now pays off much more than it did before.
Additionally, everyone is thinking about disclosure. Investors are eager to understand how much of our portfolio is EU taxonomy aligned. The disclosure requirements of issuers and banks have increased dramatically and investors are trying to understand how to cope with all that data, especially in anticipation of everything that will be disclosed under the Corporate Sustainability Reporting Directive.
EF: You also updated your decarbonisation pathway in 2023. What has changed and how will that impact new business?
BWV: We have had a decarbonisation pathway in place since 2021. That was necessary for the issuance of our sustainability-linked bond (SLB). The pathway was based on the defined pathways within the German Climate Protection Act. We have a commitment to reach net zero by 2050 but the defined pathway only looked at the first 10 years, from 2020 to 2030.
In August 2023, we published a complete decarbonisation pathway through to 2050 (see figure 1). It is stricter than the first version and it will also feed through to the targets for our SLB. The new decarbonisation pathway is based on the Carbon Risk Real Estate Monitor (CRREM) tool and uses a Partnership for Carbon Accounting Financials (PCAF) methodology.
"Sustainable, energy-efficient buildings appear to fare much better in this stressed environment than conventional spaces do"
The updated pathway reflects the current situation of our borrowers as well. Many of them are thinking about the decarbonisation of their portfolios and so it makes sense for us to speak the same language as them.
We also identified that there is not only one unified route to decarbonisation. For each asset class in each country, we have a single sub-pathway. For example, residential real estate in Germany has a different decarbonisation pathway to offices in Poland.
Looking ahead we hope to tie those pathways to pricing. In effect, if we finance a building or a development that helps us achieve the pathway for a particular market then the loan for that would have more favourable pricing compared with a loan that prevents us from achieving a target. The more a project helps us, the more we aim to incentivise it.
EF: What improvements have you made ahead of announcing the 2024 versions of Berlin Hyp's green and social bond frameworks?
BWV: We announce updated frameworks every year and monitor market developments throughout the year to see whether we should implement changes that will make the frameworks even more robust. In 2024, we don't expect too many changes to our Social Bond Framework. We have made some clarifications to make aspects of the framework clearer and more understandable. We have also expanded our categories so that spaces in an affordable housing building which are used for other social purposes, such as a GP practice or a kindergarten, are eligible for our social finance portfolio, too.
"Many of [our borrowers] are thinking about the decarbonisation of their portfolios and so it makes sense for us to speak the same language as them"
With the Green Bond Framework, it has always been our aim to align it with the EU taxonomy as much as possible. For now, we have two different sets of eligibility criteria in there. The first are those that are fully aligned with EU taxonomy, including the Do No Significant Harm criteria, minimum social safeguards, and the technical screening criteria. The other set of criteria describes green energy-efficient buildings. Historically, we used our own energy efficiency thresholds to assess eligibility. Last year we introduced 'Top-15%' thresholds for building asset classes in Germany assessed by the consultancy Drees & Sommer and used across member institutions of the Association of German Pfandbrief Banks. This year we introduced Top- 15% thresholds for the other markets that we operate in.
EF: What are your plans for 2024?
BWV: On the social bond side, the biggest challenge that we have is the economic environment. Our single project is affordable housing. In an economic environment where everything has become more expensive, including building new houses, the projects that you can finance are simply lacking. That is a huge challenge. We hope that the development of new affordable housing buildings speeds up in the near future, not only in Germany but also other countries we operate in. With the inflation that has occurred over the last two years, people are struggling to pay their rent. Affordable and social housing is needed more than ever, but not enough is currently being planned for.
On the funding side, we don't have much large refinancing needs in 2024. We only have a few maturities over the year, and we expect we will issue three benchmark-sized bonds only. However, I'm very positive that we will be able to issue all three as ESG bonds.
EF: Any plans for another SLB?
BWV: That would be amazing! Especially now that we have the new decarbonisation pathway in place.
Bodo Winkler-Viti is head of funding & investor relations at Berlin Hyp. Email: bodo.winkler@berlinhyp.de
For more information, see: www.berlinhyp.de/en/sustainability/mission
