In focus

How we are engaging on ESG in Asian real estate credit


Asian real estate attracts a lot of attention and interest, as an essential part of the remarkable economic growth in the region over recent decades. Just as this growth has been eye-catching, some risks and excesses seem to have built up.

In China, urbanisation, development and construction has been key to the ruling Chinese Communist Party’s ambition to lift millions of its citizens out of poverty. From 2005 to 2018, the value of homeowner mortgages increased from RMB5 trillion to RMB25 trillion, or about 10% of GDP to near 30%, according to the People’s Bank of China.

Through the process of property development, the link between the real estate sector and government policy, via credit conditions, has been firmly established. In the course of this large scale expansion in property development, real estate companies have taken on more debt, raising concerns over balance sheets, and what many see as opaque lending standards.

Real estate a major component of Asian credit market

Real estate companies now account for a large part of the region’s credit markets, particularly at the riskier end of the spectrum. In Asian investment grade (US dollar-denominated), real estate has risen from just under 3% of the index, back in August 2000, to almost 9% currently. In high yield, however, real estate accounts for over 50% of the index, having not even featured in 2000.

Companies rated high yield, BB or lower – investment grade being BBB or higher – are quite often smaller, have higher levels of debt and sometimes lower standards of governance.

The current high profile case of property developer China Evergrande underlines the issue. The company has amassed substantial debt and appears to have suffered a cash crunch in the past year, selling assets to stay solvent.

China’s authorities last year implemented a “three red lines” policy, effectively capping the level of indebtedness permitted for property companies. 

Asian corporate bond investors can’t ignore this sector, but it requires a careful approach. We routinely integrate environmental, social and governance (ESG) in our investment analysis. In real estate, we have found, broadly, a lack of transparency and standardisation in ESG reporting and information.

This is something we felt needed to be addressed to ensure we are able to conduct thorough and effective analysis, and make better informed investment decisions.

Initiating engagement

There are numerous material ESG factors for the sector. Improved energy efficiency of buildings has quickly emerged as a trend in the move toward greener economies. Safety is a crucial factor to monitor and measure, given the risks to construction workers and also in terms of building regulations and standards.

ESG reports from many real estate companies do not include details that are quantitative and where they do, the scope of what’s reported varies. For example, one firm might report on 80% of its properties within certain regions for safety factors, but only 30% when it comes to the environment. It is perhaps unsurprising given the lack of requirements.

Where there are requirements, for Hong Kong SAR-listed firms, or those claiming to comply with the Global Reporting Initiative (GRI), reporting is not always particularly meaningful. Some companies for instance do not acknowledge safety as a material issue. A general tendency is for ESG reports to be skewed toward rhetoric and quotes rather than data.

What we did

We compiled and sent a questionnaire to 50 real estate companies covering ESG issues with the aim of obtaining more standardised quantitative data. This is also a way of working with the companies to help them develop a process. Some of these companies are smaller and have struggled to devote the resources needed for ESG reporting.

To put this in context, during 2020, Schroders conducted more than 430 engagements with 360 companies across Asia, 20% of Schroders’ total engagements for the year.

Questions we asked:

  • How many affordable housing units have you built and do you plan to build over the years?
  • What percentage of the population does your utility and public transportation service cover in your local area?
  • Please introduce the local government financing vehicles (LGFVs) in the region. What are the differences between these LGFVs in terms of government positioning? 
  • Please introduce the local government financing vehicles (LGFVs) in the region. What are the differences between these LGFVs in terms of government positioning? In China, local government financing vehicles (LGFVs) are established by local governments to undertake financing for government investment projects for urban redevelopment, social housing and municipal social functions like metro transport, waste water treatment and utilities. Such entities are typically unlisted and may not have comprehensive information disclosures.
  • Do you have any green buildings, green utilities, or green projects in your portfolio?
  • Please can you provide statistics on health and safety?

What we found and what we plan to do next

At the beginning only about 5-10 companies responded. That rose to about 20 after we followed up with a one-to-one approach, using our established and frequent company engagements to elaborate on the purpose of the survey.

In these conversations, one clear positive outcome was that we were able to provide information about green bonds and encourage the companies to consider them. Green bonds are a type of bond issued by companies or countries whereby the funds raised are used specifically for green projects or purposes.

Green bond issuance has increased from China property developers from about $3 billion to $6 billion. The number of issuers has risen from seven in 2020 to 16 so far in 2021.

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Post-survey, we checked that almost all the companies have or plan to publish an annual Sustainable Report and are working towards developing an ESG framework / targets.

From the replies, we found that for safety data, all but one company collect this data. For the environmental data, all but two companies indicated they collect environmental data but notably, we find that the quality of reported survey data is weak for most companies.

We plan to conduct the survey at least once or twice a year to track companies’ progress.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.