Mr Zumkley, Mr Gregor, why did the municipal housing association Gewobag issue a social bond?
Sven Zumkley: Many people are familiar with bank loans from their private lives. However, with bonds a company turns to the capital market, a stock exchange, to raise money. In our case, the social bond allows us to address as many investors as possible who were previously unfamiliar with us and who might want to invest their money with Gewobag. In doing so, Gewobag is liable with its good name and promises to pay back its interest throughout the term of the bond and the investment amount after six years. The interest is then the investors’ return.
How do social bonds differ from other bonds?
Ronny Gregor: As the name suggests, the money raised must serve a social purpose. The social purpose of our bond is that of our main business: providing the people of Berlin with affordable housing.
Is Gewobag’s rental income not enough to create affordable housing?
Sven Zumkley: In a word: no. We at Gewobag have made a lot of plans; we are investing in modernising our apartments and houses, and we are building around 10,000 new apartments over the next few years. If a square metre including land and all the frills costs maybe 4,000 euros, sums arise that even Gewobag, despite its financial strength, does not have tucked away.
Why not a loan?
Ronny Gregor: Thanks to the bond, we have raised 500 million euros in borrowed capital in one step and within a very short space of time. This would not have been possible via conventional loans, but it would have been more small-sized, more time-consuming, more inefficient, and more expensive for us overall. Ultimately, profitability is the decisive factor, which Gewobag, as a municipal company, is bound to. We were able to get better conditions overall on the capital market than with bank loans.
Sven Zumkley: Investors receive 0.125 percent interest per year as a return for term until mid-2027. That is a very attractive interest rate for us. Among other things, the bond has meant that we have been able to repay individual loans for which we would have paid more interest. This in turn reduces our interest costs, gives us more room to manoeuvre, and, hopefully, we can build a few more apartments.”
Social bonds seem to have undergone a real boom, especially since Covid hit.
Sven Zumkley: The market for bonds with ESG criteria – environmental, social and governmental – has undoubtedly grown significantly, even before Covid hit. In the last two years, the volume has more or less quadrupled. This trend is going to continue in a big way, also there is a young generation saying: “I’m consciously giving up a better return on investment, but I know my money is going towards something that I think is worthwhile.” Starting in 2022, bonds will also be rated by the EU according to their sustainability. That will further strengthen this market.
Why is Gewobag still the exception among municipal companies?
Sven Zumkley: Gewobag has simply dealt with the issue earlier. In the past, we bought lots of apartments and financed them with loans. This makes further loans rather more expensive for us. Therefore, we looked for a more favourable alternative to be able to continue to invest in the portfolio and new construction using borrowed capital.
Ronny Gregor: The decision to raise money on the capital market dates back several years. The first step was to not only meet the German requirements in accordance with the German Commercial Code with our annual balance sheets, but also the international standards, IFRS for short. Companies do this so that they can address international investors. To this day, many municipal housing companies still do not do this.
A proactive decision, then?
Ronny Gregor: Yes, definitely. The second step then was to undergo the rigorous processes of the rating agencies Moody’s and Standard & Poor’s. The rating indicates how risky or how safe it is to invest in a Gewobag bond. This was the basis for the next logical step in 2015: raising borrowed capital by issuing bonds. In the next step, Gewobag created its own securities prospectus, which is one of the requirements for having its own bonds, which was then placed in the form of the social bond in June. It all builds upon each other, and each step involves in-depth preparatory work and corresponding lead times.
How much interest was there in the bond?
Sven Zumkley: Our social bond was oversubscribed by a factor of 2.8 – demand was almost three times higher than what was on offer. This put us in a good position with respect to potential investors – notably insurance companies, funds, banks and asset managers – to negotiate a low interest rate. We can be very satisfied with the result.
Will there be just the one social bond?
Ronny Gregor: No. The bond is part of what is known as a “debt issuance programme” with a volume of 5 billion euros. This is a kind of framework within which we can issue any amount of bonds without having to completely redraft the securities prospectus or other documents each time. We will probably start another bond in the next two or three years. Whether it will be a social bond or a green bond is still undecided. For example, we might meet the criteria for a green bond with our energy subsidiary, Gewobag ED, or the investment programme in modernisation and maintenance.
Gewobag’s shareholder is the state of Berlin. Does the Senate have any concerns?
Sven Zumkley: Gewobag’s financial guidelines explicitly mention the capital market as a financial resource. Nevertheless, with a magnitude such as this, we regularly speak and report to the supervisory board. We were the first German company in the housing industry to issue a social bond. There was great praise for this from the financial authorities.
Thank you for talking with us.
Photos © Maren Schulz