Aster’s Chris Benn: ‘Does ESG wrapping make pricing tighter for us? Yes, it does’

Mr Benn, who joined Aster in 2014 following several years in commercial finance, describes the £1bn programme as “the next step in Aster’s evolution”, reflective of the now 32,000-home landlord reaching “critical mass”.

“Since I’ve been here, Aster’s grown by about 5,000 units, and you need to be a certain size to do some of these more exciting treasury structures and to enable us to take advantage of those. We feel that we have tipped to the right side of the scale in order to do that – because of course it comes with a whole host of other things that we need to do.”

Additional requirements include the introduction of half-year trading updates to the markets – the most recent showing unaudited surplus for the six months to 30 September 2020 of £25.8m, on turnover of £109.3m.

“We have a need of about £100m a year in terms of new finance, sometimes a bit more…so EMTN debt really suits us,” Mr Benn says.

The bond’s shorter, 15-year tenor was designed to attract a wider pool of investors. The decision to adopt the ‘sustainability’ label was also seen as key. The strategy looks to have paid off, with the bond delivering 19 new investors.

During the book-build phase, around a third were investors based in Europe, Aster’s assistant director of treasury Paul Jeffries reveals.

“We did see some European take-up and we had discussions with people in north America and Canada as well.” Mr Jeffries says. “We were also talking to UK investors but specifically from their ESG funds. So that opening [of] the door to slightly different pools of liquidity is important.”

Aster’s route to securing a sustainability label differs to Clarion’s. The UK’s largest association adopted the pan-European label awarded by consultancy Ritterwald, with second-party opinion (SPO) accreditation from agency Imug.

Aster, meanwhile, created an ESG report and sustainable finance framework aligned to the criteria of the ‘Sustainability Reporting Standard for Social Housing’. The framework then received an SPO from Sustainalytics. Aster will report annually on the use of proceeds from the bond through an allocation report, and will capture impact reporting through its annual ESG report.

So how do the additional costs of administering these aspects compare with the assumed reduction on the price of the bond?

Mr Jeffries answers: “Although it is difficult to work out the actual benefit of doing a sustainable bond, you could describe it as 5bps, which depending on the length of the bond is quite a lot of money. I would say that [having the label] is more of a resource point than an actual cost or external cost, and the cost of absorbing that into your business-as-usual activities is far outstripped by the benefit that you get on the other side.”

Much of the data required for reporting was already available in the business, Mr Jeffries says, while in terms of the “measurable cost” of obtaining the SPO, he adds: “There is some ongoing maintenance thereof – but relatively low in the context of the benefit.”

In trumpeting its green credentials, Aster is supported by being a few steps ahead of some providers. The group has set an objective of achieving an Energy Performance Certificate of Band C or above on all its homes by 2025, five years ahead of the government’s target.

This has included bringing 800 of its older homes up to this standard through £1m of grant from the government’s Warm Homes Fund.

Alongside this, the group’s special purpose vehicle, Aster Solar, has financed the installation of around 750 domestic photovoltaic (PV) systems onto homes. Aster is considering a pilot to explore whether solar energy produced on homes can be exported to the grid to offset expenditure, and it has commissioned a review into developing a solar farm on land it owns.

However, the group is unlikely to fit out all of its roofs with PV in the near future. Referring to the decision to launch Aster Solar in 2015, Mr Benn reflects: “It’s a difficult investment decision to make. When we looked [at the 750 homes] over a 25-year period, it was NPV [net present value] positive… so you look at it as a bespoke, discrete project and it was approved on that basis.

“The challenge that we have is that investing money into solar panels takes money away from our development programme.”

He adds: “At the moment we’ve decided that we want to spend our money building new homes.”

Aster has committed to a minimum EPC rating of B on its new build, achieving this on 99 per cent of homes delivered in 2019/20.

In addition, it has imposed an Environmental Impact Rating (EIR) of B or above as a consideration during planning appraisal.

The EIR rating brings the twin advantages of being “slightly more environmentally focussed and a bit more widely recognised, for example under the climate bonds initiative,” Mr Jeffries adds.

As to the longer-term costs of reaching net zero in 2050, Aster is working with consultancy Savills to map these out.

While caveating that these costs remain to be seen, Mr Benn does not share the concerns of some in the sector regarding the potential barrier of interest cover covenants on existing loan agreements. The group is “well within its headroom”, he says, adding: “Are those covenants stopping us investing in repairs and maintenance and lifting our stock to appropriate energy levels? No. Do we expect that to be a problem in the future? No, we don’t.”