The inaugural REALpac/IPD Canada Quarterly Green Property Index released last week proved it’s good to be green.
Canadian green commercial real estate delivered a total return of 13.3% for the year ending Sept. 30, versus a 12.7% total return from the REALpac/IPD Canada Quarterly Property Index for the same period.
The 2013 “outperformance” of the index was attributed to stronger income return of 5.7% and capital appreciation of 7.2%, compared to returns and capital appreciation of 5.6% and 6.8% for the previous year.
“REALpac has tried to be a thought leader in the green building, corporate social responsibility, sustainability space,” said Michael Brooks, REALpac’s incoming CEO.
“We were the first in North America with a green lease in 2008, launched our energy management program and normalized energy consumption database in 2009. We have been doing corporate social responsibility training since 2009 as well as research and publications and participation with various international bodies.”
Brooks, who left REALpac to focus on his legal practice before rejoining the association this fall, said REALpac began the process to create the green index with IPD three years ago.
“It is great to finally have some data to share with everybody as we collectively try to find the links between green buildings and value and to substantiate the business case that we are seeing around the world as we have more and more data.”
Green means green
“There is a growing consensus in the market of sustainability in its importance of being considered a key driver in investment performance,” said Jessica Stevens, IPD’s U.K.-based head of sustainability. “The market is changing rapidly, not only in occupier preferences, but regulatory frameworks and legal requirements are driving investors to take sustainability seriously.”
With sustainability and “green” real estate now emerging trends for investors, Stevens & Co. are looking for tools and measures to adapt and respond, she added.
“Against existing (measures) of performance, it is unlikely to ever be the most important dimension; however, in order to identify the true significance of the green-brown spectrum, lots of data is required to undertake good attribution analysis and I think IPD is in a good position to do this,” she said.
In addition to the REALpac/IPD Green Property Index, IPD has launched similar Indexes for the Australian and New Zealand markets, the France Green Building Indicator as well as the Eco-PAS (Eco Portfolio Analysis Service) for the U.K. and France, which is a benchmarking service that measures environmental risks for each asset in a portfolio.
Stevens said that the Australian green property index is a good example of what IPD hopes it can achieve in Canada. The Australian version tracks the investment performance of commercial office buildings receiving a green rating. The properties in the index delivered higher investment returns and lower capitalization rates than the overall office market.
“Offices with a four-star, five-star or six-star Green Star rating experienced stronger growth in capital values, outperforming the all-office market by 74 basis points, 250 basis points and a 172 basis points, respectively (for the year ended June 2013),” Stevens said. “So I think this a really good indication and has provided the market with great transparency in terms of how green is starting to impact investment performance.”
Simon Fairchild, IPD’s executive director and head of North America, noted that REALpac members have devoted substantial resources to creating sustainability programs. The component that was missing was “a regular and consistent and independent statement of performance done each quarter that links this greening process of portfolios to the bottom line of investment return.”
The index includes 28 different properties owners, from the likes of the Canada Pension Plan Investment Board to Oxford Properties/Omers and Morguard Investments, that together own 39 portfolios and 2,200 individual assets valued at $113 billion. IPD estimates the assets in the index make up about 45% of the professionally managed real estate marketplace.
Fairchild noted that the properties in the green index with LEED certifications outperformed the broader market (13.3% versus 12.7%). The index also showed the properties in the green index are producing a higher income yield and a faster rate of capital appreciation which combine to produce about 60 basis points higher overall investment performance. Vacancy rates were lower (5.8% versus 6.2% for the overall market index) while NOI per square foot was higher for the green buildings in the index ($21.40 versus $17.10).
The cap rate on the green buildings was identical to the overall index (estimated at 5.7% for both). “This might indicate that at the moment there is still no premium associated with investing in green buildings,” said Fairchild.
The IPD data also showed that green real estate in the index outperformed the larger index regardless of product type (retail, office, industrial and residential). “The returns are pretty consistently higher across the four main forms of real estate,” he said. “This does seem to be a broader pattern of performance.”
Fairchild concluded that the process of green certification is well advanced: 25% of the assets and 50% of the capital value is in the green index. “This indicates a strong commitment by the managers and investors that we are working with but also perhaps a tendency for these managers and investors to focus their green programs on the larger properties by capital value.”
Certification levels are highest among office properties, followed by retail, the IPD head added.
He concluded that the partners will continue to publish the new green index and will seek feedback to better define green properties and make refinements in implementation, methodology and presentation.