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OUE C-REIT’s adds to real estate dominance of Singapore SLLs

Singapore real estate.
Photo by Sean Pollock on Unsplash

Sustainability-linked loans(SLLs) are outpacing green loans in Singapore, as they are not secured. OUE Commercial Real Estate Investment Trust’s has just raised S$978 million in such a loan.

OUE C-REIT’s largest SLL in real estate sector in Singapore in 2021 will help to extend the average term of its debt, while more than doubling the proportion of its unsecured debt to 70.2% of the total. SLLs now account for 58% of OUE’s total debt.

The company can avail of interest rate reductions upon reaching predetermined sustainability performance targets. It aims for a 25% reduction in its energy and water intensity (per sq. metre) by 2030, based on 2017 levels.

Singapore’s 2021 SLL volumes soared to 50-times that seen in 2020, while green bonds issuance declined by 62%. A preference for the flexibility on use of funds afforded by linking loans to performance against voluntary sustainability targets rather than committing to dedicated green projects might explain this.

Unsecured sustainability-linked loans have become the financing vehicle of choice for real estate investment trusts (REITs) in Singapore, outpacing green loans. OUE Commercial Real Estate Investment Trust’s (SES:TSOU) latest S$978 million SLL adds further momentum to this trend, which has also seen the property and real estate firms cornering nearly half of the green debt raised in the country in 2021.

Despite the relatively looser commitment to sustainability that comes with SLLs, banks in Singapore see them as enhancing their own sustainability profiles.

Lenders may also be looking for additional means to boost turnover after the government introduced measures to cool the real estate market in Singapore, which has seen home prices increase rapidly in 2021.

SLL popularity soars among the Singapore real estate set

Analysis by the National University of Singapore’s Institute of Real Estate and Urban Studies (IREUS) showed a fivefold increase in SLLs in 2021 to S$64 billion from S$1.3 billion in 2020.

The rise of sustainability linked financing in real estate is being attributed to increased demand for sustainable investments, and the establishment of well-defined standards for green building certification.

OUE C-REIT’s landmark S$978 million SLL was the largest in the Singapore real estate sector in 2022, and was oversubscribed 1.3 times from 19 banks.

Each of the four banks that syndicated the loan mentioned the transaction enhancing their own sustainability profile.

An attractive feature of the SLL is the ability to reduce the interest rate paid based on achieving predetermined sustainability targets.

OUE C-REIT commercial and hospitality: similar sustainability goals, different profiles

The sustainability targets that OUE will be measured against, set in its 2021 Sustainability Report (incorporated in its Annual Report), are for a 25% reduction in the energy and water intensity by 2030, measured off a 2017 base. The energy intensity is measured in kWh per unit gross floor area in square metres, and the water intensity is measured in cubic metres of water per square metre.

However, OUE lists these targets separately for its commercial and hospitality segments, and also measures the intensity differently. For commercial properties, energy and water intensity is measured per square metre, similar to the metric set in the target, while the hospitality portfolio is measured per occupied room.

OUE’s performance against these targets shows it is already ahead of its goal in both segments on water intensity, while its energy intensity is already in-line in the commercial segment. The hospitality segment experienced a large increase in its energy intensity due to renovations.

Singapore has been identified as one of the most water-stressed countries in the world, partly due to its large population. The country’s efforts to reduce water stress are also driven by an end in 2061 to its current agreement to draw water from Malaysia.

Wider sustainability goals, but narrow set of targets linked to SLLs

OUE’s sustainability targets extend far beyond just energy and water intensity, and its disclosures extend to a range of social and governance issues. Yet it has only linked performance in two KPIs to its SLL, which provides insight into the popularity of these loans.

Sustainability-linked bonds are similar to SLLs in terms of voluntary targets and KPIs used to measure performance, with one notable difference: bond investors are less willing to accept a lower interest rate, and hence lack discounts for good performance.

The rise in Singapore’s green and sustainable financing market reflects the wider growth in the APAC region. A predominance of hard-to-abate industries will likely keep issuance of transition financing instruments high, in comparison to use-of-proceeds issuance targeted at green projects.

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