New Index: Green properties as investments
For many years the property industry in Australia has declared that green buildings, particularly offices, are better investments than non-rated buildings. Now, for the first time, a new Property Investment Index offers evidence to support these claims.
The new PCA/IPD Green Property Investment Index suggests that office buildings with an environmental rating outperform non-rated buildings.
Information analyst firm IPD has developed a green property index to track investment performance of commercial office buildings that have been awarded an environmental performance rating from Green Star, NABERS Energy and NABERS Water.
The PCA/IPD Green Property Investment Index currently represents about $36 billion of office buildings, reflecting 71 percent of the office assets in the IPD database. Indices will be updated and released on a quarterly basis, segmented according to total return, capital growth, income return, pricing and other diagnostics.
The inaugural Index shows that property assets with a Green Star Office Design or Office As Built rating outperformed non-rated assets over the two years to December, 2010. Outperformance is seen across each Star rating, with the strongest returns observed in 4 Star-rated assets. Assets with a NABERS Energy rating (base building, no green power) of 4 Star or above delivered significantly higher returns than buildings with a rating of 3.5 Star or below.
Cap rates are lower for rated assets as opposed to non-rated assets over the two years to Dec 2010.
Dr Anthony De Francesco, managing director of IPD in Australia and New Zealand, says, “It is clear that over the two years to December 2010 rated properties performed significantly better than non-rated properties. The return spread between rated and non-rated buildings is around 400 basis points. In addition, rated office buildings have a lower capitalisation rate than non-rated buildings, in the order of 40 basis points. The outperformance in returns is consistent across various market segmentations.
“As a whole, the pool of rated NABERS Energy assets outperformed the unrated assets. Interestingly, the 4-5 Star-rated properties outperformed the non-rated assets while the 0.5-3.5 Sta-rated properties underperformed the non-rated assets. Also, these NABERS-rated properties delivered lower capitalisation rates than the non-rated properties, although only marginally.”
Property assets with a NABERS Water rating marginally outperformed the non-rated assets. However, the 4-5 Star-rated assets outperformed more significantly.
KEY BENEFITS OF THE INDEX
- Provides a tool to adequately measure the investment performance of property assets with a Green Star, NABERS Energy or NABERS Water rating.
- The index details income, capital and total return, capitalisation and discount rates and various space market diagnostics.
- Provides the property industry with a tool to undertake benchmarking analysis between environmental performance rated and non-rated buildings.
- Improves transparency in the market and across the property industry.