The Impact of Sustainability Metrics on Financial Performance in Corporate Real Estate

Date: 8th January 2014

 

Introduction

Happy New Year readers, this year promises to be an exciting for both CO2 Estates and the commercial property sector as industry continues to reach new heights with sustainable performance and innovation.  As we look to gain greater insight into this area we have commissioned research into this area and will be publishing our findings in a serialised blog over the coming months.

An established correlation between sustainable performance and financial performance in commercial real estate is still at an embryonic stage – in terms of research, so we collaborated with the University of Strathclyde Accounting and Finance department to produce a body of work that examines existing literature focusing on the risk and return appraisal for “green” building projects.

The work was written by Business Analyst Vlad Rosca who has had experience in investment and finance having previously worked with Adobe and UniCredit Tiriac Bank. Vlad recently completed his Masters in Investment and Finance and is now a business analyst with Royal Mail. We would like to thank him for work on this topic and hope this adds further insight into this area.

Part 1 – Overview

Sustainability issues seem to have recently been appearing more frequently in media and appear to have gained considerable public support, in part due to modern economic concerns such as the ever rising price of oil, and in part to several social and health related concerns. The Kyoto Protocol, signed in 1997 and effective since 2005, has gained considerable global backing and has had significant impact on global businesses given its widespread implications, which will be discussed in later editions.

In light of these changes, investors have been looking to capitalize on the growing trend of ecologically friendly investments, such as “green” buildings. As noted in RICS (2010) there is no clear definition of such buildings, however we examine the most widely spread definition: any building which has been outfitted with certain systems or upgrades that are meant to lower energy consumption, improve air quality and other health-relating issues, lower waste and decrease overall consumption of resources. Under this large definition, this insight will mostly dwell on energy efficiency as a main feature, without completely disregarding other benefits which may arise from investments in this area, particularly health-related. This series looks to give an overview of market particularities and modern market conditions, as well as provide insight into several issues relating to building risk and return valuations and macroeconomic tie-ins.

Initially we will be looking at the various elements that have spurred the sustainable movement in this market, and the move on to presenting the pieces of legislation that have recently been passed or are currently in discussion that affect the way the sector moves. Moving on we will examine the benefits of investing in sustainable buildings, from a variety of viewpoints and highlight salient points from academic papers and industry publications on this issue. Since investments in real estate, especially sustainability centered, are highly expensive, we believe it necessary to point out some of the differences in the way market participants do their banking and obtain their financing, including specialized products and services.

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Tags: Corporate Real Estate, Financial Performance, Investment Performance, Real Estate Investment, Sustainability