For most businesses in the real estate sector, environmental, social and governance (ESG) considerations are now a fundamental part of the business's value rather than a 'nice to have' and for businesses operating in the build to rent (BTR) and single family housing (SFH) sectors this is particularly true.
BTR and SFH businesses aim to create places to live that will attract people who want to remain in those communities for the long term, so ensuring that their developments are designed with the health and wellbeing of both prospective residents and the planet in mind makes good business sense. And in addition to making their developments more attractive places to live, by embedding ESG considerations into their business plans for particular projects, BTR and SFH business will likely make themselves more attractive to both equity and debt funders.
What are the opportunities for BTR and SFH businesses?
Most people have heard the statistic that 80% of the buildings which will be generating the emissions that we need to reduce to zero by 2050 have already been built. As a result of this and because we have clear and defined environmental metrics which can be measured and tested, many businesses in the real estate sector tend to focus on building low carbon, energy and water efficient homes. However, the bespoke nature of BTR and SFH developments means BTR and SFH companies can look beyond the real estate sector's focus on net zero and consider how they can build the low carbon, energy efficient homes that we need now whilst embedding future proofing strategies that could see developments generating their own renewable energy, delivering improvements in local biodiversity and helping to promote access to and the use of clean transport.
Outside of the focus on environmental considerations, BTR and SFH companies also have the opportunity to build properties offering high quality individual living space designed with renters in mind which sits alongside flexible amenity space that encourages residents to come together in social situations, building relationships with neighbours to foster a sense of community. That amenity space can be tailored to promote the health and wellbeing of residents providing them with everything from roof terraces, communal gardens and allotments to community cafes, workspaces, gyms, studios and onsite cinemas.
But whether its environmental or social considerations that are the focus of a particular BTR or SFH development, putting them front and centre of a business plan may make a particular property more attractive to investors who are looking to deploy capital into projects which have specific green, social or sustainable aims or to funders who are increasingly taking a business's ESG credentials into account when making credit assessments.
The growing popularity of sustainability-linked loans
Whilst use of proceeds finance with targeted environmental or social impact has now been available for well over a decade via the capital markets, in the past 5 to 10 years we have seen the development of and significant growth in, the green, social and sustainable loan market together with, more recently, the development of, and considerable growth in, sustainability-linked finance as the awareness of the changes we need to make to the way we live and do business in order not to breach key planetary boundaries has increased.
Sustainability-linked loans are the most common form of 'green' finance used in the real estate finance market. Unlike labelled 'green', 'social' or 'sustainability' loans where the monies borrowed must be used for a specific purpose - for example, in the case of a green loan to finance or refinance a project which will have or has a specific environmental impact, such as building a wind farm - the monies borrowed under a sustainability-linked loan can be used for any purpose but the costs of borrowing are tied to the achievement of specific, measurable and meaningful pre-agreed targets which, depending on the project, may have either or both of a positive environmental or social impact.
For BTR and SFH companies that are looking for debt finance, sustainability-linked loans which incorporate measurable and meaningful pre-agreed targets that may have either or both of a positive environmental or social impact may provide the flexibility needed to finance the initial development. As the property is nearing completion, development of a green or social framework which can be applied throughout the operating phase of that project by a BTR or SFH company may enable it to consider whether it would be possible to refinance the build phase loan with a specific green, social or sustainable loan that is linked to an approved green or social framework.
What's more, when it comes time for investors to invest or to exit, a company which can provide a robust green or social framework together with the data which underpins that framework and demonstrates the ESG benefits of the development and its impact on both its residents and its environment is likely to attract considerably more interest than a company which has elected not to put ESG considerations on its agenda.
