Joint SPR / ULI Seminar: Green Buildings - Are There Financial Benefits?
Tuesday, 2nd April 2019, M&G, Governors House, Laurence Pountney Hill, London, EC4R 0HH
M&G Research Confirms Financial Benefits of Green Buildings
Recent research by M&G Real Estate on the green buildings in its portfolio has discovered that assets with environmental certification produce higher income for investors than other buildings they hold. This was in line with the results highlighted in the paper that won the Nick Tyrrell Research Prize in 2017, on ‘the value effects of real estate investment.’
Vanessa Muscara, Associate Director, M&G Real Estate explained that green certified buildings that they hold across six European countries – representing some 25% of their assets there – provided higher rental income than those without certification. However – again confirming the previous research by Avis Devine and Dr Erkan Yönder – operating costs were also higher for certified buildings. So while the rental income from these buildings was 53 bps higher, the income available for distribution was a more modest 19 bps higher.
Alex Lund, Senior Associate, M&G Real Estate, noted that the financial benefits of green buildings are being increasingly recognised by European lenders, a number of which now apply ‘green tagging’ and offer loan discounts to borrowers of as much as 20 bps on such assets. These lower interest rates can further enhance the distribution yield provided by a fund that uses leverage. Banks are willing to lend at lower interest rates in these situations based on a belief that green properties have less systematic risk, due to more stable occupancy rates and less variation in operating expenses, in turn leading to more stable cash flows.
Speaking in the panel discussion that followed, Dan Grandage, Head of ESG, Aberdeen Standard Investments indicated that ASI’s own analysis showed that buildings with strong ESG credentials at least matched rental benchmarks overall, even if they didn’t necessarily outperform them. Given that ESG is regarded by investors as an additional benefit, this should be good enough to justify their inclusion in a portfolio, he argued.
Lucy Winterburn, Director of Investments, Savills Investment Management, suggested that those like her who manage pension fund assets are keen to build up the green credentials of their portfolios, particularly when developing new properties or refurbishing existing ones, as most clients now want this – but she emphasised that the financials still have to stack up.
The discussion, which was moderated by Jon Lovell, Director, Hillbreak and also included Abigail Dean, Head of Sustainability, Nuveen Real Estate, considered the process of green building certification at length. It was agreed that there needs to be greater standardisation between the various certificates in operation globally. It was also stressed that just because a building receives a green certificate when constructed, it may not always go on to be operated efficiently by the occupier. This could help explain some of the higher operational costs identified by the research.