The tangible benefits of investing in sustainable real estate will only increase as the pool of data evidence continues to deepen, according to Thomas Beyerle
Far from being a European quirk, it has become a globally acknowledged fact that sustainable property is the way of the future. A paradigm shift is underway, and it shows. Investors will eventually cease to buy conventional properties - as non-sustainable assets will soon turn into liabilities. During the transitional period, non-sustainable assets will, admittedly, continue to offer short-term investment opportunities.
But sustainable real estate has another key advantage: taking into account economic factors such as location, accessibility and property quality, it ultimately commands higher rents and prices. This is not about promises or advertising to boost sales through ‘green washing' (disingenuously spinning products and policies as environmentally friendly). The economically lucrative aspect of an environmental rating is becoming ever more transparent. Surveys by investors and scientists have scientifically quantified these positive price effects. The market is slowly but steadily catching on.
One example is an early study by the Competence Center for Sustainability in the Real Estate Business at IREBS in Regensburg. Using a sample of over 500 office properties in 57 German cities between 2002 and 2005, it analysed the effects of sustainability on rents. Even then, with the sustainability issue still in its infancy, there was a demonstrable connection between low energy consumption and a higher net rent. Similar effects have been substantiated elsewhere.
The ‘Immovalue' initiative, led by international property and sustainability experts, quantified the premium on individual property values. Using actual cases in Germany, Austria, Sweden, and Romania, it proved an added value around 5% for particularly energy-efficient and sustainable properties.
Clearer yet are the findings of studies on sustainable US real estate. In a joint survey together with Maastricht University, UC Berkeley studied 8,000 office stateside properties, including nearly 700 Energy Star- and LEED-certified buildings. They were compared with conventional office buildings in the vicinity, applying an econometric model. Reference buildings had to be located within a quarter mile of the certified buildings. The findings showed that office rents for green buildings exceed those of comparable conventional buildings by 3%. Other surveys show rent premiums for sustainable commercial properties, with hefty deviations in either direction. Premiums for sales prices also vary - sometimes considerably.
The actual premium amount depends on various factors and cannot be generalised. Countries or regions with strict construction and redevelopment legislation concerning sustainability offer lower premiums than countries where the differences, and thus the added benefits, are greater.
Data bases and data availability also differ depending on analysed area, qualifying findings. The Fürst and McAllister survey, for one, covers a universe of about 3,600 commercial units. The appraised 11.4% premium on sales prices is based on analysed transaction data for 300 Energy Star- and 30 LEED-certified buildings. An analysis by label, though, shows price effects by 10% for Energy Star, and by 31% for LEED (it makes you wonder whether this extreme rating is actually due to the LEED certificate or due to poor data mining).
The data basis is just as small for the mentioned case studies in Germany, Austria, Sweden and Romania - when set in relation to the total stock of the respective market. The survey often returned only slight premiums, sometimes by just 1%; only particularly sustainable properties commanded premiums of around 5%. Obviously, while premiums for sustainable real estate are quantifiable, the values returned by any survey depend on its data basis.
In addition to value benefits, sustainable real estate offers another quantifiable advantage: a reduced risk for the portfolio. A survey IPD conducted last year shows that investing in buildings that are sustainable from an energy perspective is less risky than the investment in conventional property. Accordingly, returns will fluctuate in proportion to the energy classification -in other words, the higher the energy classification, the safer your investment.
In 2009, investors earned good profits from residential property in the highest two energy classes, as the IPD survey suggests. The exposure associated with non-residential property was lowest in the second most efficient energy class where returns ranged from 2-12%. For either type of use, the return on investment of properties with poor energy efficiency was negative by up to -6%. The elevated risk of turning a loss was compounded by a greater tendency to yield fluctuations.
Most market players agree sustainability and energy efficiency will grow in importance. The shift in awareness of sustainability in real estate economy terms is relatively new in Germany - but keen compared to the rest of Europe.
One example is the IVG Premium Green Fund our company launched. It was the first specialised property fund for institutional investors limited to certified green buildings. During the concept stage two years ago, potential investors remained sceptical; at that time, sustainability was associated with environmentalism, not cash benefits. When the fund was launched a year ago, we could not even accommodate all prospects.
The shift in awareness is explained by various reasons: an increasing number of corporates will only rent or buy offices in green buildings on grounds of company policy; the political and public pressure has intensified; the improved measurability of economic effects has boosted the role of sustainability; the issue keeps gathering momentum; the influence of scientific research is deepening.
The data basis for econometric models improves in line with the growing importance of sustainability and the surging number of sustainable properties, and an improved basis will produce more verifiable findings, so discounts on non-sustainable real estate will become heftier than is currently imaginable.
Thomas Beyerle is head of corporate social responsibility & research at IVG Immobilien AG