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New Index Could Bring New Investors to Green Building

 

By Paula Melton

Novel investment pathways known as investable green property indices could open the floodgates to new sources of capital for millions of square feet of building stock, according to the U.S. Green Building Council (USGBC), which partnered with investment analyst FTSE and the National Association of Real Estate Investment Trusts to lay the groundwork. The new indices will allow real estate investment trusts (REITs) to target specific green property types, and the same metrics will help financial analysts compare and fund REITs based on objective sustainability rankings.

Financial Performance of Green Buildings

Commercial properties with LEED or Energy Star certification outperform conventional buildings, charging higher rent and selling for higher prices.

Some studies have suggested that green commercial buildings charge more rent, have higher occupancy rates, and sell for higher prices, potentially improving their long-term financial performance (see “Non-Green Office Buildings Sacrifice 8% in Rent Revenues,” EBN Nov. 2010)—but there are other reasons investors might be interested in green buildings as well, adds Chris Pyke, vice president for research at USGBC. “Investors will have the potential to prioritize,” he explains. For example, “they can target the buildings that receive third-party certification, such as LEED or Energy Star,” or “if you just want to invest in properties that use less energy, conserve water, or have other qualities of green buildings, you can target your real estate exposure to that.”

Mutual funds specializing in social responsibility might also use the new indices, diversifying their portfolios to include environmentally sustainable properties or potentially tying their investments to more specific metrics, such as carbon footprint. USGBC and its partners are touting investments in green real estate as a way to reduce financial risk as climate-change mitigation and adaptation gain increasing economic importance.

Scott Muldavin, senior advisor at the Rocky Mountain Institute and executive director of the Green Building Finance Consortium, told EBN the indices could be a significant new source of capital for green real estate. “There‘s billions of dollars of socially responsible investment money seeking credible and transparent green investments,” he said. “Individual stock investors who could not easily access sustainable property investments can now easily invest.” By drawing investors from outside the world of REITs, the new indices could also create incentives for property owners who haven’t embraced green building, Muldavin adds. “If green real estate can access capital that’s not currently being invested in real estate, green real estate values will increase even further, a signal that any laggards in the [real estate] marketplace will not be able to ignore.”

Green Buildings in Portfolios of U.S. REITs

Most real estate investment trusts include green buildings in their portfolios. The new indices will help rate these REITs according to how green their overall portfolios really are.

But the devil’s in the details, Muldavin cautioned: “There’s not a single real estate investment trust whose board hasn’t told them they need to do something about sustainability. They understand green is important.” But, he argues, even though “the market has transformed,” things have plateaued, and “now we’re at a threshold where we’re trying to go deeper—not just changing light bulbs.”

Without knowing more about how the indices will rank properties, Muldavin couldn’t predict how transformative they might ultimately be for the green building industry, but he was optimistic, telling EBN, “The indices will make it much easier to prove up the superior [financial] performance of green properties, providing benchmarks that should move the market over time.”

Though the full methodology hasn’t been released yet, there may be room to define what makes a building green very broadly or very narrowly. “There are more sophisticated things we can do by looking at specific performance with regard to energy, water, waste, and social equity,” explained Pyke, but details were still being finalized. He added that complete information would be available to the public and investors early in January 2013.

For more information:

FTSE Group
www.ftse.com

January 1, 2013

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IMAGE CREDITS:
1. Source: Eichholtz, Kok, and Quigley
2. Source: Eichholtz, Kok, and Yƶnder
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