CRE Capital Markets Agree: Green Pays

WASHINGTON, DC—Both Fannie Mae and Freddie Mac are either contemplating offering investors options to buy green-tagged or green-rated multifamily securities, or have been quietly doing so. Now Skanska is targeting this same investor constituency-that is, institutions and individuals that recognize the bottom-line benefits of sustainable and energy-efficient buildings-with its own foray into the market.

The company is launching its first green corporate bond: it is a five-year year, $129 million vehicle and the invested capital is slated to be exclusively allocated towards investments in green commercial property development.

To developers and real estate owners and tenants, this likely will not come as much of a surprise. Skanska is behind many notable green developments, such as 1776 Wilson Blvd., in Rosslyn, VA-Arlington's first LEED Platinum commercial building.

To be sure, the company and its investors are no doubt pleased with the benefits sustainability bring the environment. But as the company emphasizes with its announcement, such advantages are not mutually exclusive with investor returns. "There is an increasing interest in the investor market for not only earning a return on investment, but also contributing to a better environment," says Peter Wallin, CFO of Skanska AB.

Over the years, though, it has become clear within the commercial real estate investor community that green not only means good investor returns but also enhanced investor returns. REITs and their investors are highly aware that commercial property is one of the few asset classes that can make such claims, according to Ari Frankel, head of ESG strategy, real estate, at Deutsche Asset & Wealth Management. He recently told NAREIT that 100% of studies that have investigated the connection between sustainability performance and financial performance have found a positive correlation.

Issuers are responding in kind. Another example is Bank of America's three-year, fixed-rate $500 million green bond for which it planned to use the proceeds to finance renewable-energy and energy-efficiency projects. Investors such as BlackRock and California State Teachers' Retirement System participated in the offering late last year.

Now the appeal of green bonds-which are defined as instruments in which the proceeds are applied exclusively toward projects and activities that promote climate or other environmental sustainability initiatives-is spreading to other industries.

Last month, for example, Toyota Financial Services' inaugural asset-backed green bond issuance closed. The $1.75 billion offering was the first green bond from an auto finance company in the asset-backed securities market, according to Citi, which served as the structuring lead underwriter. Toyota will use the proceeds to acquire retail installment sale contracts and lease contracts to finance new Toyota and Lexus gas-electric hybrid or alternative fuel powertrain vehicles.

Toyota's offering, it must be noted, was oversubscribed-the company upsized it from $1.25 billion. This, too, is a point that commercial real estate companies have absorbed, as Skanska itself acknowledges.

The new offering is helping the company diversify its investor base, Pär Lageryd, head of Treasury, Skanska Financial Services AB, says in a prepared statement. "The successful issuance confirms the capital market's confidence in Skanska's financial strength and continued long term commitment to a sustainable business model."