Going green boosts property returns

Green properties are better financial performers, says of Maastricht University, who recently helped build a global environmental real estate index. But most property managers are either unaware of this dynamic or prefer to talk about sustainability rather than take action. However, some exceptions provide a ‘green’ benchmark for institutional investors in property. Simon Mumme reports.

It might be that more energy-efficient and sustainable buildings lure better management teams and tenants, or that advanced heating, lighting and cooling systems reduce costs in the long-run, but good environmental management of properties enhances financial returns, according to the developers of the Environmental Real Estate Index.

“We don’t know the causality. It could be that environmental performance improves financial performance, or good management [generates] good financial and environmental performance,” Eichholtz says.

“It means that green property investments or sustainable performance does not conflict with the fiduciary responsibility of institutional investors.”

The global commercial real estate sector ranks among the world’s most demanding consumers of natural resources, the heaviest emitters of greenhouse gases and producers of waste.

To better engage property managers about their environmental performance, the $44.8 billion Universities Superannuation Scheme, the $122.9 billion PGGM and the $294.8 billion APG, which collectively hold $18 billion in property investments, commissioned Eichholtz and other researchers at Maastricht University’s European Centre for Corporate Engagement to build the index by conducting a global survey of property managers.

They aimed to gather information on current environmental management practices among managers, and identify the best in the field. Without this type of data, it is difficult for institutions to assess the environmental performance of property funds and fully implement a sustainable investment program.

The survey, which drew responses from 198 managers, showed that Australian property managers are best at developing, implementing and assessing environmental policies, followed by managers in the UK and Sweden, and should be viewed as a benchmark for environmental performance among property managers.

“Australia is really the world’s benchmark when it comes to green performance, and they’re also good financial performers,” Eichholtz says.

“They don’t do it to improve the world, but because it’s good business.”

But the number of unresponsive participants – only 29 per cent of managers contacted answered the survey – indicates that many mangers do not take environmental performance seriously or were unaware of its potential, and were likely to be green underperformers.

The silver lining here, Eichholtz says, is that there is “untapped potential” for these managers to increase shareholder value by lifting their environmental standards.

The managers’ sluggish environmental performance is partially due to a “dearth of financing mechanisms and proper rent contracts,” plus a lack of awareness of the merits of energy efficiency among building owners and their financiers. Also, “a financial crisis focuses property managers on immediate survival,” he adds.

The poorest performers were managers in Asia, the US, Germany and southern Europe. They accounted for many of the 133, or 67 per cent, of managers defined by the researchers as ‘green laggards’ – those that have no environmental policy in place, and do not apply environmental metrics.

The next largest population is the ‘green talk’ managers, with 41, or 21 per cent, of respondents, who show some awareness of the benefits of investing in sustainability technologies and practices, but do not take action.

Fewer in number than the laggards and talkers, the ‘green stars’, which account for 20, 10 per cent, of managers, set ambitious environmental targets, implement measures to improve the environmental performance of their properties, and regularly assess their actions.

The survey also uncovered an alarmingly low use of environmental metrics by managers. Only 37, or 19 per cent, of managers gauged the energy consumption of their total property portfolio in 2007 or 2008, while 16 per cent measured water usage, and just 12 per cent measured waste. Only 76 respondents use ‘smart meters’, which collect information about energy consumption in order to set targets for reducing energy use.

Another finding was that listed property companies are better environmental performers than their unlisted counterparts, perhaps because they operate under greater disclosure requirements and are more prone to public scrutiny.

“The only exception was Australia, where listed and unlisted property investors really knew what they were doing. First you get to know what you’re doing, and performance will follow.”

Dedicated office funds generated the highest score, since most energy efficiency technology that first appeared on the market was designed for office buildings. But residential properties do not often qualify for incentives to improve energy efficiency, and are generally poor performers, despite their management company and market of origin.

The survey will be conducted again in the first quarter of 2011. If investors want to motivate their property managers to implement better environmental practices, Eichholtz says, they should demand that they “go to Australia and learn”.