Green Star: returns for office market, annualised two year returns to December 2010

By Tina Perinotto

1 March 2011 –In what could signal a major breakthrough, property investment analyst IPD on Monday launched its long awaited green property index at Green Cities 2011 and the results vindicate the industry’s commitment to a more sustainable product:  Green Star and NABERS-rated buildings outperform non-rated buildings on a financial basis by a significant margin, especially at the upper end of ratings performance.

The new Property Council of Australia/IPD Green Property Investment Index, flagged in The Fifth Estate in November last year, will be welcomed by the sustainable property industry because it finally places in the Australian public domain credible investment data that will convince sceptical capital markets that there are financial rewards to add to the environmental, social and ethical benefits of more sustainable product.

(In the US work by academic Nils Kok has been tracking in similar directions to IPD.(See our list of  articles on Kok’s work and that of others in the same field.)

The index will track investment performance of $36 billion of commercial office buildings rated with Green Star, NABERS Energy and NABERS Water – about 71 per cent of the office assets in the IPD database.

Better but by how much?

The PCA/IPD Green Property Investment Index shows that property assets with a Green Star “office design” or “office as built” rating outperform non-rated assets over the two years to Dec 2010 with outperformance seen across each star rating, and strongest returns in four star rated assets.

Managing director of IPD in Australia and New Zealand Anthony De Francesco said the PCA/IPD Green Property Investment Index clearly showed outperformance.

“It is clear that over the two years to December 2010 rated properties performed significantly better than non rated properties,” Dr De Francesco said.

“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.”

NABERS: returns for office marketannualised twp year returns to December 20

Dr De Francesco said that as a whole the pool of rated NABERS Energy assets outperformed the unrated assets.

However, he added: “Interestingly, the four star to five star rated properties outperformed the non-rated assets while the half-star to three-and-a-half star rated properties underperformed the non-rated assets.

“Also, these NABERS rated properties delivered lower capitalisation rates than the non-rated properties, although only marginally.”

Dr De Francesco said property assets with a NABERS Water rating marginally outperformed the non-rated assets. However, the four to five star rated assets outperformed more significantly.

The index will track investment performance of $36 billion of commercial office buildings rated with Green Star, NABERS Energy and NABERS Water – about 71 per cent of the office assets in the IPD database.

Dr De Francesco said that through the Green Index, “for the first time in Australia  we have a tool to adequately measure the effect of Green Star and NABERS Energy ratings on investment performance.”

He said benefits included that the index:

  • detailed income, capital and total return, capitalisation and discount rates and various space market diagnostics
  • provided the property industry with a tool to undertake benchmarking analysis between environmental performance rated and non-rated buildings
  • improved transparency in the market and across the property industry