According to p.41 of the ‘Financial Sector Science-based Targets Guidance (2022)’, ‘Real estate (commercial & residential)’ is considered as one of the asset classes. Also, p.125-126 says that the scope of the asset class ‘SDA for Commercial Real Estate’ is Real estate loans and investments (including REITs). Also, Real estate loans and investments are defined as the allocation of capital to finance the purchase of a property with a commercial purpose, including real estate investment trust (REIT), etc. However, on p.55-57, there is no such asset class that is relevant to real estate loan itself, but only ‘corporate loan: commercial real estate’ and ‘Investments in real estate investment trusts (REITs), listed real estate companies, and real estate mutual funds’.
It seems that the asset class ‘Commercial real estate’ and ‘Corporate loan: commercial real estate’ are different: ‘Commercial real estate’ loans and investments is defined as the allocation of capital to finance the purchase of a property with a commercial purpose, while ‘Corporate loan: commercial real estate’ is loans to real estate companies and this corporate loan itself is not relevant to a purchase of a property with a commercial purpose.
For the asset class “commercial real estate”, can we set the SBT target that is relevant to commercial real estate loans that is differentiated from the ‘corporate loan: commercial real estate’?
The unit of minimum coverage is “m2” for “corporate loan: commercial real estate”. I have a question on this because the CRE corporate loan is for the company itself, where we do not need to know about its properties.
Can we set SBT targets of “corporate loan: commercial real estate” using the unit “loan value”? If so, what will be the minimum coverage? Or does this mean the area (m2) of the properties the CRE company manage?
Table 5.2 of the Near-Term Financial Sector SBT Guidance, which provides minimum coverage requirements, has been updated in the draft Version 2 with more granular specifications for each asset class. For example, a separate real estate asset class has been explicitly added to make requirements there clearer. Commercial real estate asset loans would refer to all loans for the purchase, refinance, construction, or rehabilitation of real estate assets (i.e., residential and service buildings) that are not provided to consumers (which would be considered consumer loans - residential mortgages) while general purpose loans to REITs or real estate companies can be included under “all other sectors” of corporate loans.
The proposed changes are up for public consultation so we welcome your feedback/questions on this document, and two other new documents, through the survey by Aug 14.
Hi @HowardS, I have a 2 follow up questions which are not found in the version 2 of the guidance :
If the loan for commercial real estate is unsecured loan, can that be classified as corporate loan? And if the borrower is not listed company is it outside the scope of target setting?
How do you define “general purpose loans to RETIs or real estate companies”? - are these the loans where use of proceeds are not known?
The proceeds of general purpose loans can be used for general purposes so indeed the use of proceeds is not usually known. A general purpose loan to REITs or real estate companies would be considered a corporate loan. If the expressed use of a loan is for real estate, then it would be considered a commercial real estate asset loan, rather than a corporate loan.
The V2 guidance also says 100% of the scope must be covered for investments in real estate funds. Most of these investments for us is on labelled green bonds issued by listed real estate companies. The challenge here is we do not know the exact real estate assets these investments will be used for. Can these investments be classed as corporate bonds and we set the target at entity level (which makes the most sense for us) ?
To be more exact, the minimum coverage requirement proposed in the V2 draft guidance is 100% for investments in real estate funds that invest in listed REITs and real estate companies (which is different than for private companies or real estate assets). And the target-setting methods available are SDA, Portfolio Coverage, and Temperature Rating, which means targets can be set at the entity level with the latter two methods.
Thank you @HowardS. I interpret this to be - even if we invest in labelled bonds for financing real estate assets, since the use of proceeds and the underlying assets is not known, target setting can be at entity level
