14 March 2013 — According to green property index provider IPD the investment market has lost none of its appetite for green property in the wake of the GFC. In fact the financial downturn has, if anything, intensified interest in the value that green performance can bring for a property asset or portfolio.
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Speaking after the release of the latest Property Council/IPD Australian Green Property Index, which showed green office buildings continued to outperform the total office property sector, Dr Anthony De Francesco brushed aside suggestions that there was a weakening interest in green buildings following the GFC, suggested by some observers.
On the contrary, he said asset management and sustainability had become more important than when the market was strong.
“Now that cap [capitalisation] rates have been steady and the focus is on asset management to create value, sustainability has become a key consideration,” he said.
“Since the GFC a lot of the focus on investment performance is on understanding the income stream and a key focus of that is related to sustainability initiatives.
“This is a really important point. We can say, wow, this area is of considerable importance as a strong area of asset management.”
Results of the index for 2012 showed total returns of 10.6 per cent for Green Star rated, and 9.9 per cent for NABERS rated office assets last year compared with composite office sector returns of 9.7 per cent.
Annual total return performance for Green Star rated property assets, returns to December 2012 were:
- Green Star 4 star, 5 star and 6 star rated office buildings stood at 10.7 per cent, 10.7 per cent and 10.2 per cent respectively. The superior investment return was due to a higher capital return component for Green Star rated buildings, Dr De Francesco said.
- Green Star rated A grade office buildings, in the two years to December 2012, delivered an annual return of 11.2 per cent versus a 10.1 per cent return for All A-grade office buildings.
- Green Star A- grade buildings had a 10 basis point discount on cap rates
- NABERS Energy rated property assets of 0 star to 3.5 star and 4 star to 6 star, stood at 8.4 per cent and 10.5 per cent respectively.
- Sydney CBD market annual returns for the 0 star to 3.5 star and 4 star to 6 star NABERS rated office buildings stood at 7.1 per cent and 8.9 per cent respectively.
- Melbourne CBD where 0 star to 3.5 star rated buildings delivered a return of 8.4 per cent versus 12.1 per cent return for 4 star to 6 star rated buildings.
Dr De Francesco said, “The latest investment return results clearly show that Green buildings deliver an enhanced investment proposition both in terms of investment return and a firmer cap [capitalisation] rate.
“The enhanced performance of green buildings is due to a higher capital return component, consistent with generally more favourable space market metrics”.
The next big ask from the capital markets, he said, was to find out the link between capex (capital expenditure) and investment returns as a building’s sustainability rating is improved.
“How does the investment translate into a different grade of sustainability rating? What is the evolution of a building as it moves from one grade [or rating] to another – the investment return? The value add?”
Individual asset owners might work out these numbers on an “ad hoc” basis but the industry had no standard metric or formula to help understand the cost benefit analysis.
First, IPD needed to have sample size of property assets large enough to stand up to statistical scrutiny. It now has that.
“We couldn’t do this before because we had to get a sample size that is quite robust,” Dr De Francesco said.
“We’ve confirmed there is a value proposition and now we want to know what is the marginal value contribution. ”
The work from IPD last year served to prove that there was an optimal threshold for ratings, of about 4.5 star NABERS energy rating.
“Cost benefit analysis will help that discussion. Quite a lot of people talk about it qualitatively but we’re the quant guys. We need to put the metrics on it.”
The results of this work will come out later this year.