Global issues of green bonds by property developers have more than doubled this year as this funding source is increasingly used to finance environmentally-friendly housing or commercial buildings.
Private property companies are now issuing more green, social and sustainability bonds to support future cities than sub-sovereign bodies such as city or regional public authorities. Private issues totalled USD11.9 billion in the first nine months of 2019 compared with sub-sovereigns’ bonds, which rose 24 per cent to USD9.8 billion.
Green, social and sustainability bonds are debt instruments whose proceeds must be used for environmentally-friendly or social projects. While issues by real-estate developers focus specifically on green buildings, the sub-sovereigns also fund public transport and work to counter the effects of climate-change.
City green, social and sustainability bonds make up 10.5 per cent of the total market for these bonds. That should continue increasing because the world’s population is growing, with the proportion based in cities forecast by the UN to rise from 55 per cent to 68 per cent by 2050. That means 2.5 million more people living in cities, with up to 90 per cent of that growth centred on African and Asian cities. Significant city expenditure is required if the world is to urbanise in a sustainable fashion.
Also, while most green-thinking countries decarbonise power generation first, they then focus on cities. That means encouraging people onto public transport, plus cutting emissions from buildings, including heating. Construction and occupancy of buildings is estimated to account for over 40 per cent of primary energy consumption in most countries.
Further, we expect most spending on climate-change adaptation to be in cities because populations and wealth are concentrated there.
Property firms have to service their green bonds from rents or development profits while the public bodies have tax income, but environmental spending by both groups can help their credit strengths. Efficient buildings that lower tenants’ fuel bills may let quicker or at higher rents; sub-sovereigns that improve public transit or flood protection and lower pollution become better places to live and their tax take can rise.
Rail systems or renewable energy projects usually reduce CO2 emissions more than green buildings. But while significant investment is required for electric vehicles to replace fossil-fuel transport, retrofitting double or triple-glazing, improving insulation and installing solar panels can make a building greener and gas boilers can be replaced with electric heaters and smart meters. The next stage is likely to involve de-carbonising heating and cooking.
Firms in 12 countries have issued real-estate green bonds, including specialists in private housing, student accommodation, offices, retail and other commercial property. They focus on energy efficiency in new and existing buildings, plus renewable energy.
Even though sub-sovereign issuance – green or otherwise – is not allowed in some countries, it is rising in many others, including Australia, South Africa and Sweden. Canada has seen issues at both province and city level while in France, cities, regions and the sovereign itself have issued green bonds.
Both public and private sector green bonds have been issued in Australia, Belgium, France, Japan, New Zealand, South Africa, Sweden, Switzerland and the US but, so far, Argentina, Canada, Germany, Mexico and Spain have seen only sub-sovereign issues.
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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Michael Ridley
Fixed income: Basis for financial analysis
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Definitions for fundamental credit and covered bond recommendations from 22 April 2016
Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve over the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.
Neutral: For corporate credit, the issuer’s fundamental credit profile is expected to remain stable over the next six months. For covered bonds, the bonds issued in this country are expected to perform in line with those of the other countries in our coverage over the next six months.
Underweight: For corporate credit, the issuer’s fundamental credit profile is expected to deteriorate over the next six months.
For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over the next six months.
Prior to this date, fundamental recommendations for corporate credit were applied on the following basis:
Overweight: The credits of the issuer were expected to outperform those of other issuers in the sector over the next six months.
Neutral: The credits of the issuer were expected to perform in line with those of other issuers in the sector over the next six months.
Underweight: The credits of the issuer were expected to underperform those of other issuers in the sector over the next six months.
Distribution of fundamental credit and covered bond recommendations
As of 15 October 2019, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:
All Covered issuers Issuers to whom HSBC has provided Investment Banking in the past 12 months
Count Percentage Count Percentage
Overweight 128 23 79 62
Neutral 281 52 146 52
Underweight 134 24 52 39
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