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ANALYSIS

Study finds greenness equals performance

There is a positive correlation between the investment performance of REITs and the “greenness” of their portfolio holdings, according to a new paper by Maastricht University’s Piet Eichholtz, Nils Kok and Erkan Yonder.

The paper – Portfolio greenness and the financial performance of REITs – finds that investment performance of REITs is positively related to the adoption of Energy Star and LEED certification in REIT portfolios.

The paper investigates the effects of the energy efficiency and sustainability of commercial properties on the operating and stock performance of a sample of US REITs proving insight in the net benefits of green buildings. It calculates the proportion of green properties for each REIT over a period from 2000-2011. Via a regression model it documents that the greenness of REITs is positively related to three measure of operating performance- return on assets, return on equity and the ratio of funds from operations to total revenue.

Further, it concludes that REITs with a higher fraction of green properties display significantly lower market betas. The findings, that REITs with a greater percentage of efficient, sustainable properties display significantly lower market betas, is explained by the fact that “green” properties may be less exposed to business cycle volatility and may be less prone to occupancy risks.

Eichholtz, who is professor of real estate finance at Maastricht University and chairman of the Global Real Estate Sustainability benchmark, says the paper shows there is a relationship between greenness and performance.

“The greener the company/portfolios the better the performance, also free cashflow was higher and risk was lower, and beta was substantially lower,” he says. “This paper shows that the relationship between financial performance and sustainability is really there.”

Eichholtz says the philosophy of GRESB is that “you can make good money by improving the world”, he says.

“Members of GRESB, the pension funds, see that sustainability and investment performance go hand in hand and they talk to companies and say get your act together.”

Eichholtz says there are some companies in the real estate sector who have acknowledged this, and benefited from it. In the latest GRESB Report, he points to a company called Big Yellow in Europe, which is a self-storage company and a sustainability leader.

“The chief executive of Big Yellow, who is also the largest shareholder, is not interested in saving the planet but he’s very interested in making money. His company was the number one in sustainability – he’s totally pragmatic.”

“The leaders are not the full green niche, but it’s the mainstream property companies that are the green leaders. This is another sign that anyone can do this.”

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