The growing consensus around the value of green building design and systems is still based more on a collective gut feeling than categorical evidence. Nevertheless, that’s not to be discounted in an industry where informed intuition has had a storied history in investment decisions.
As institutional investors and managers of their real estate portfolios are increasingly pushed to expend capital on green features, it also creates a statistically valid pool of properties from which analysts can begin to examine the correlation of inputs and outcomes. The newly launched REALpac/IPD Canada Annual Green Property Index is a step toward capturing and measuring the influence of sustainability in asset value and investment performance.
“Our work is not really aimed at the area of pure sustainability. Rather, it’s looking at the differential investment return of sustainable measures,” explains Simon Fairchild, executive director of IPD North America.
This responds to a perceived gap in evaluation metrics. Many developers and investors are looking for a way to translate the quantifiable operating benefits and presumed leasing benefits of sustainability into an accepted measure of value that they can convincingly present to owners, shareholders, lenders or prospective purchasers. At the same time, the index provides data to reinforce developers’ and investors’ motives for going green and perhaps spur others to do likewise.
“More and more, investors are going to want to take a look at companies’ corporate responsibility and sustainability (CR&S) practices and this will give them another means to do that,” says Carolyn Lane, vice-president with the Real Property Association of Canada (REALpac). “From REALpac’s perspective, the green property index also fits very well with other sustainability initiatives we’ve instituted to drive the industry forward such as our energy benchmarking and water benchmarking programs.”
Performance Parameters
Initial results for Canada reveal a positive upside for designated green properties with BOMA BESt certification. The inaugural index, which was released via webinar in late November, is considered consultative and participating companies have been asked for feedback to help refine the quarterly survey in which they report results.
Approximately 400 properties in the green index outperformed the wider database of about 2,200 properties reporting to the REALpac/IPD Canada Annual Property Index. Designated green properties had a total return of 14.6 per cent for the four quarters ending June 30, 2013, compared to a 13.3 per cent total market return.
Separating out the four levels of BOMA BESt certification, the top sustainability ranking, Level 4, also delivered the highest total returns at 15.8 per cent. Level 2 buildings — which make up the predominant majority of the comprehensive database the Building Owners and Managers Association (BOMA) of Canada uses to benchmark performance — reported total returns of 15.1 per cent, followed by Level 3 buildings at 14.1 per cent.
BOMA Canada notably excludes Level 1 buildings from its own analyses since the certification is based simply on adopting various planning, monitoring and oversight practices rather than actual measured results. Perhaps not surprisingly then, these buildings delivered returns more on par with the overall index, at 13.5 per cent.
However, BOMA BESt’s generally wider application in the existing building stock may somewhat blunt common critiques related to using LEED as a gauge of value. Industry analysts are quick to note that buildings with LEED certification would likely see good or superior returns anyway.
“I flinch a little bit when someone says LEED is worth ‘x’ because what that’s really doing is comparing new buildings and old buildings,” maintains Sandy McNair, president of market research and statistical reporting firm Altus InSite. “Green buildings are typically less than 10 years old so they haven’t even come close to a lease renewal.”
Fairchild agrees that the factors in investment performance are varied and overlapping. However, the targeted focus on green properties and resulting accumulation of historical data should provide more context for the discussion.
“Performance is one of the trickier questions,” he acknowledges. “What we may be capturing is the newness, not the greenness, but over a longer period of time it will be more conclusive.”
Given that the REALpac/IPD index reflects the holdings of 38 institutional portfolios with a gross value in excess of $106 billion, it’s more of a picture of the top tiers of Canadian real estate than the overall landscape. For example, multi-residential properties account for just 5 per cent of the index. Meanwhile, the composition of the green index may be even more weighted toward Class A and AAA buildings.
“It’s about 20 per cent of the buildings (in the total property index), but it actually captures about 30 per cent of value so that that’s telling us the green buildings are tending to be bigger,” Fairchild notes.
Canada at forefront
IPD boasts a databank of 77,000 individual assets valued at US $1.9 trillion worldwide, and Canada is just the fifth country in which a green index has been launched. The United Kingdom’s Eco-Portfolio Analysis Service, or EcoPAS, was the first in 2010, and now draws results from about 2,200 properties or approximately a quarter of the total UK database. Green property indices were also introduced in Australia, New Zealand and France earlier this year.
Canada was considered well positioned to join the vanguard due to relatively widespread take-up of green certification programs, institutional investors’ CR&S agendas and the significant clout of a few large pension funds in the market.
“You have to have a degree of sophistication in terms of your policies, in terms of how you are implementing them and in how you are monitoring and reporting them,” Fairchild reflects. “Most of the pension funds do have sustainability programs and many have dedicated sustainability managers. They are well advanced in their sustainability programs so we can go to them and ask questions.”
For investors, the index provides another means to identify strengths and weaknesses within their own portfolios and to compare against other portfolios.
“When you look around the world and see what other countries are doing to encourage sustainability, this comes at a really good time for our country,” Carolyn Lane asserts. “In terms of the adage: ‘You can’t manage what you don’t measure,’ this will complement those kinds of efforts and the ability to measure that proponents in the Canadian real estate industry are looking for in the green sphere.”
