Measuring the value of sustainable real estate investment

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While the current U.S. federal administration may be downplaying the benefits of sustainability, a new international study finds evidence that publicly-traded green real estate is more profitable to investors than non-green.

The award-winning study entitled “Decomposing the Value Effects of Sustainable Real Estate Investment: International Evidence” measured the impact of sustainable investment on the value and performance of listed real estate investment firms (REITs) by comparing countries with and without mandatory environmental reporting on investment properties. The study’s findings suggest that environmental reporting requirements may help improve the environmental performance of properties and enhance transparency.

In the U.S., a country that does not legislate green reporting, REITs that have green portfolios were found to achieve higher rental incomes, lower interest expenses and increasing cash flow, which benefits shareholders. They also carry lower systematic risk, are subject to more informed trading, and attract higher premiums to net asset value than firms with a non-green portfolio.

By contrast, in the United Kingdom (U.K.), where reporting on environmental performance is mandatory, the difference in the earnings of green buildings compared to less green buildings is less significant. This could signify that in countries where all buildings must achieve a certain threshold, the difference between a very green building and an average one is less marked. While U.K. firms with a larger “Green Share” certainly do experience advantageous market valuation outcomes relative to net asset value, as well as a positive corporate reputation, the study found minimal advantage in terms of systematic risk or liquidity.

In countries that do not have mandatory reporting, portfolios can demonstrate their level of sustainability through certifications, which help to convey information about the environmental performance of properties, improve transparency and reduce uninformed trading. In the U.S., portfolios can demonstrate and measure sustainability through LEED certification and energy benchmarking programs such as ENERGY STAR Portfolio Manager.

The study also found green buildings had higher operating costs. The study surmises that this is due to the implementation of sophisticated technologies in new green buildings and higher electricity consumption to achieve greater ambient control. The study found that the rental revenue premium compensates for the increase in operating expenses, resulting in stable net operating income.

The study raises several interesting ideas:

  • Green buildings are more profitable. Even though they may have higher operational costs, these are more than off-set by higher revenues.
  • The higher operational costs of green buildings indicate that there is potential for better building management; for example, through the application of ongoing commissioning possible with smart building monitoring and analytics.
  • Mandatory environmental disclosure, such as occurs in many countries in Europe, produces a baseline level of information that improves transparency in the market.
  • Mandatory disclosure results in a gradual improvement of the overall environmental quality of all investment properties.

About the author:

Jiri Skopek is a Managing Director of Energy & Sustainability Services at JLL. Skopek provides advice to owners and managers of large portfolios on sustainable development in the fields of design, asset and facility management, emergency preparedness, business continuity and smart building intelligence. Skopek is best known for developing Green Globes environmental assessment tools, which include modules for Design of New Buildings, Sustainable Interiors and Operation and Management of Existing Buildings (BOMA Canada/ GBI US), University Campuses (APPA) and Building Intelligence Quotient (BIQ).

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