The offering documents for last week's
Fitch believes as long as the supply of green bonds remains muted across corporates, REITs should have a sufficient number of green-eligible properties and projects to take advantage of the more favorable pricing. Even if green bonds were to become commonplace for REITs, they would likely become a catalyst to support the sector pricing closer to industrials, contingent upon green bonds remaining rare in corporates. While Fitch does not comment on bond pricing from a valuation perspective, structural changes in the cost and availability of capital are of critical importance to unsecured bondholders.
The "greenification of REITs" has been fast paced since it has been only 20 years since the
Going green for real estate owners has gone from indifference (i.e. expectation that tenants would not pay premium rents for green buildings) to opportunity (e.g.
Altruistic behavior by issuers is commendable, but only relevant to stakeholders when it affects recurring free cash flows. To date, we have seen issuers improve top-line growth and reduce operating expenses by going green. For example, Empire State Realty Trust (not rated) highlights the tangible benefits to prospective tenants when comparing headline rents with net occupancy costs.
Over the longer term, environmental inefficiencies have the potential to become a contingent liability for real estate owners similar to compliance with the Americans with Disabilities Act or asbestos removal. Being environmentally-friendly is voluntary currently, but that could change, much like how car fuel efficiency went from a selling point to a state and federal requirement for car manufacturers.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Corporate Finance - U.S. REITs
Source: Fitch Ratings
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