Change – a constant for the real estate sector

After some challenging times, the real estate sector is getting ready to continue the push towards a future where sustainability efforts will be a key factor. Björn Nyman, Head of Real Estate Coverage at SEB, shares his thoughts on the matter and discusses different options for financing such endeavors.

We all know the story by now: the pandemic, the Russian invasion of Ukraine, the disruption in international supply chains, the spike in inflation and the hike in interest rates to battle the surge in prices. As a capital-intensive sector, real estate has experienced some hard-felt consequences. But according to Björn Nyman, things are starting to look up.

“It’s been a bit of a bumpy ride, but with interest rates coming down again and the access to capital markets improving, the outlook is getting much brighter,” he says.

The Real Estate Coverage team, which Björn Nyman heads, serves large real estate companies, real estate funds, and private real estate investors in the Nordics and Germany. Big players, in other words. But has Björn Nyman noticed any difference in the various clients’ financial needs?

”Yes, with severe hick-ups in financing through the capital markets, many companies in the sector have turned to their banks. We have monitored the situation closely and supported through both capital and advice, when relevant.”

As for the future, Björn Nyman says energy efficiency and other sustainability-related investments will need to increase greatly within the sector. SEB’s customers have already taken significant steps and come a long way, but more will be needed.

An EU directive with loose ends

Around 40% of the energy consumed in the EU is used in buildings. By 2030, the union aims to reduce the emissions in the sector by 60%, compared to 2015 figures, as stated in the Energy Performance of Buildings Directive.

“It’s a tight timeline, and several factors remain unknown. For example, the EU has left it up to the individual member states to decide the consequences for real estate companies that do not meet the target.”

Björn Nyman continues:

“Our clients are generally very motivated to work with sustainability-related issues. They have sustainable frameworks in place, as well as strategies and outlines of their goals within energy consumption, greenhouse gas emissions, social aspects, etcetera. Still, if you have a big property portfolio, meeting the reduction demands may require investing billions of kronor. It’s a huge undertaking.”

This brings us to the question of financing the transition within the real estate sector.

Loans and bonds linked to pre-defined sustainability targets

Björn Nyman explains that SEB can help finance sustainability-related undertakings through two main approaches. Firstly, there are loans.

“We provide green loans, where clients with a highly energy-efficient real estate portfolio get an interest-rate discount. We also provide sustainability-linked loans, which have grown significantly recently. With these, the client and the bank agree on a set of targets beforehand, and the client gets a discount if able to achieve said targets.”

Secondly, there are sustainability-linked bonds. These work similarly to sustainability-linked loans, with targets and Key Performance Indicators (KPIs) set beforehand. But instead of borrowing from the bank, the bonds are offered to third-party investors – such as pension funds and insurance companies – who thereby become the actual lenders.

“The bank’s role here is to help with the bond issuance. This includes providing guidance in selecting the KPIs and calibrating the targets, which can be both environmental and social, as well as helping the issuer and the investors connect.”

What’s your prediction, then, will the real estate sector be able to transform?  

“Yes, I believe most of the big players will find a way. Not only are the incentives in place, but the will is there. They see the value in the change and the reason and rationale behind it,” Björn Nyman concludes.