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2017 Nick Tyrrell Research Prize Presentation, 8 March 2018, Simmons & Simmons LLP, London
Dr Avis Devine
Dr Erkan Yönder, who won the 2017 Nick Tyrrell Research Prize with their paper ‘Decomposing the Value Effects of Sustainable Real Estate Investment: International Evidence,’ presented their work at the meeting.
Recent research has confirmed the property-level benefits of sustainable buildings in terms of asset value premiums and tenant satisfaction. But so far the portfolio benefits have not been as clear. There has been some work on the corporate benefit to REITs of owning energy efficient buildings, but as yet there is little evidence of the mechanisms underlying these benefits, or how they differ from country to country. Devine and Yönder’s research aimed to bridge this gap.
The research looked at both the operational and value effects on US and UK REITs from owning sustainable buildings. The buildings were defined by energy-use certifications including LEED and BREEAM, while the ‘greenness’ of the portfolio was measured using a ‘green-share’ methodology.
Devine and Yönder concluded that a higher green share had benefits both at the operational and value level, though this was clearer from the US data than for the UK. On the operational side, there were higher cash flows and lower corporate-level expenses, in particular interest payments. And from a valuation perspective, green REITs were seen to trade at a higher relative value (price/NAV) while their risk (market beta) was substantially lower.
One other notable – and perhaps counter-intuitive – finding was that REITs with a high green share had larger operating expenses as well as higher cash flows. Clearly sustainable buildings tend to have more sophisticated operating systems, so perhaps this shouldn’t really be a surprise.
Mathieu Elshout of PGGM joined Devine and Yönder for a panel discussion after their presentation. He commended the research for its evidence on transmission mechanisms for sustainability, saying that many investors, including PGGM, believe in making sustainable investments, but this work provides strong empirical evidence on the corporate benefits, which should prove valuable in backing up investment decisions.
Paul McNamara, who chaired the meeting, declared that the quality of the 22 entries for this year’s prize was very strong, perhaps even exceeding the high bar set in previous years. Entrants not only came from the UK, but also elsewhere in Europe (as in this case) and from Asia – and from industry research departments as well as from academia.