Investors should consider accepting lower returns for environmentally sustainable real estate assets, according to research by LaSalle Investment Management.
The study suggests that green buildings warrant a 65bps premium in recognition of their lower risk.
LaSalle said green buildings “benefit from substantial risk premium advantages compared to non-green buildings, or conversely non-green buildings will tend to increasingly suffer from ‘brown discounts’.”
The 65bps yield differential is made up of “an accumulation of small risk premiums covering a range of competitive advantages spanning both market risks and asset specific attributes”, it said.
Potential competitive advantages include easier and cheaper financing, greater liquidity, lower vacancy risk, ability to attract high quality tenants and outperformance over the long term.
LaSalle’s risk analysis takes into account energy conservation, carbon footprint reduction, water and waste recycling, and green building ratings that encourage sustainable building design and operations.
The company concluded that investors could use its risk-analysis approach to identify mispriced assets and opportunities to outperform the market.
“If expected returns for green and non-green buildings are similar in a given market then a strong case to acquire green buildings is present,” it said.
Conversely, if expected returns for a green building were 100bps less as a result of higher pricing, a better risk-return strategy would be to pursue non-green buildings, with the aim of improving their green credentials in the future.
LaSalle said environmental factors would contribute significantly to the financial performance of real estate portfolios over the coming years, and that investors would need to focus more on green buildings to maximise returns.
Mahdi Mokrane, European head of research and strategy, said “environment considerations” would one day “have the power to drive long-term occupier and investor demand on a vast scale” – equivalent to other secular trends, such as demographics, technology and urbanisation.
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