Is there a green discount in commercial real estate lending?

Abstract

PurposeThis study examines whether green buildings enjoy more favorable financing terms compared to their non-green counterparts, exploring the presence of a green discount in commercial real estate lending. Despite the extensive research on green premiums on the equity side, lending has received limited attention in the existing literature, even as regulations have increased and ambitious net-zero targets have been set in the banking sector.Design/methodology/approachIn this study, the authors leverage a unique dataset comprising European commercial loan data spanning from 2018 to 2023, with a total loan value exceeding €30 billion. Hedonic regression analysis is used to isolate a potential green discount. Specifically, the authors rely on property assessments conducted by lenders to investigate whether green properties exhibit lower interest rate spreads and higher loan-to-value (LTV) ratios.FindingsThe findings reveal the existence of a green discount in European commercial real estate lending, with green buildings enjoying a 5.35% lower contracted loan spread and a 3.92% lower target spread compared to their non-green counterparts. However, this analysis does not indicate any distinct advantage in terms of LTV ratios for green buildings.Practical implicationsThis research contributes to a deeper understanding of the interaction between green properties and commercial real estate lending, offering valuable insights for both lenders and investors.Originality/valueThis study, to the best of the authors’ knowledge, represents the first of its kind in a European context and provides empirical evidence for the presence of a green discount.