Green and more secure investments are gaining ground – and providing cheaper loans

“We’re seeing more and more green investments in the real property market, and the development is headed by the big pension companies. They’re looking for more alternative investments, including properties, because bond yields are historically low. At the same time, they almost all have some kind of long-term policy on sustainable investments, and they consequently look at, for example, the energy con-sumption and CO2 emissions from the buildings they own. Overall, buildings account for about 30% of CO2 emissions in Denmark, so the potential is huge.”

Says Flemming Buhl, who is Head of Capital Markets in EDC Poul Erik Bech, and who has previously been in the financial sector for almost 35 years.

One reason for the extra focus on green investments is the pension funds’ so-called ESG (Environmental, Social, Gover-nance) policies, which are aimed at ensuring environmental considerations (E) as well as orderly social conditions (S) and corporate governance (G) in their investments.

Overall, the trade association Forsikring & Pension has undertaken – on behalf of its members – to make green and sustainable investments for DKK 350 billion by 2030. Dani-ca and several other pension companies have undertaken to reduce the climate footprint from their investments by 2025. Danica has mapped the energy consumption and carbon footprint in 85 properties and examined the possibilities for reducing the consumption through investments and renovations. At the same time, PKA aims to halve the carbon footprint from its 200 properties by 2025 for a three-digit million figure.

Two green legs

One effect of the increased interest in sustainable investments is that pension funds and other investors are walking on two green legs. Firstly, they are looking for properties with a green certificate on, for example, low energy consumption and limited CO2 emissions. The most widely used sustainability stamp in Denmark (and in Germany, among other countries) is the DGNB (Deutsche Gesellschaft für Nachhaltiges Bauen) scheme. Secondly, they buy so-called green bonds, which help promote sustainable investments.

Precisely the DGNB stamp – and in the elite variant Plati-num to boot – will be applied to a multi-user office building, which is being constructed for PFA Pension for an amount of DKK 325 million and which is expected to open in two years in Nordhavn in Copenhagen.

“The development has taken off in the past two to three years, and we’re now seeing an exponential increase in the interest in certified properties. Green buildings will be much more secure investments in future. Correspon-dingly, there’s a risk that interest in properties without a certificate will fall – we can see that institutional investors are selling off the properties that are not part of the green strategy,” says Flemming Buhl.

Profitable energy renovations

In the Investment Department of EDC Poul Erik Bech, partner Jacob Lykke Bruun – who also has a long background in the financial sector in both banking and mortgage credit – encourages investors to look at the possibilities of energy improving their properties.

“It’s worth examining whether properties with a high ener-gy consumption and a large climate footprint can be made more modern and sustainable, especially if tenants are to be relocated anyway or in case of vacancy. For example, it may be relevant to change the roof and establish solar cells. Energy renovations can often provide a better business case, due to decreasing operating costs and because the property increases its value by being made more future-proof.”

What is worthwhile?

EDC Poul Erik Bech can help with calculations of which investments are worthwhile. One of the advantages of energy renovating your property – and perhaps getting it certified – is that many,
not least foreign, companies attach importance to residing in sustainable premises. Large companies, in particular, have a policy that they only have leases on premises with minimal energy consumption and climate footprint.

“In other words, the landlord or investor is almost always in a stronger position and gains an advantage if the property has been made as sustainable as technically possible. This advantage will become greater and greater in future, becau-se more and more companies demand minimal climate and environmental impact, making properties with high energy consumption harder to let. This is equivalent to oil furnaces soon being a thing of the past in our homes and having been replaced by, for example, heat pumps,” says Jacob Lykke Bruun.

At the beginning of 2021, EDC Poul Erik Bech’s annual Expe-ctations Survey showed that 65% of the respondent inve-stors attach importance to properties having a green stamp – for offices this even applied to three in four investors.

Green loans running into billions

Concurrently with the increased investor interest in getting green properties on the books, banks and mortgage credit institutions are lending billions via green loans. An analysis from Finance Denmark, made in April 2021, showed that green loans grew by DKK 60 billion last year.

“Mortgage credit institutions are issuing green bonds for loans targeted at sustainable properties and investments. These bonds are slightly cheaper for the borrowers – the mortgage credit institution has often set the loan administration fee slightly lower than for ordinary loans, and, at the same time, the underlying bonds can be sold at
better prices, which means that the interest rate is also slightly lower,” says Flemming Buhl.

Green bond buyers are often pension funds which, for risk diversification purposes, must have a certain volume of bonds among their investments. In addition, green bonds can contribute to meeting the pension funds’ goal – and their members’ wishes – to promote a sustainable agenda.
“Pension funds are often willing to pay slightly more for bonds with a green profile. In this way, customers benefit from pension funds buying green bonds. This can, for examp-le, pave the way for energy renovations and other invest-ments, so that the properties increase their value,” Jacob Lykke Bruun points out.
Both specialists at EDC Poul Erik Bech can, not least because of their long past in banking and mortgage lending, map both the potential of green investments and the possibilities of financing the initiatives with inexpensive green loans.