REITs get better returns by including green buildings in the portfolio

New research into the investment of REITs – Real Estate Investment Trusts – indicates that those with portfolios of ‘green’ commercial properties are likely to show better financial returns. “We document that the greenness of REITs is positively related to three measures of operating performance – return on assets, return on equity and the ratio of funds from operations to total revenue,” say Prof. Piet Eichholtz, Prof. Nils Kok and Ph.D. candidate Erkan Yönder (all from Maastricht University, the Netherlands) in their latest research paper ‘Portfolio Greenness and the Financial Performance of REITs’.

This paper represents a new angle in the body of research on green real estate investments. “While there is a growing body of evidence on the financial performance of ‘green’ commercial properties, not much is known about the implications of investments in such buildings for property companies,” says the authors in the abstract of the paper.

They examine evidence derived from the U.S. regarding LEED- and Energy Star-certified ‘green’ commercial properties. While there is still a low average percentage of green certified properties in REIT property portfolios (2 percent for LEED and 5-7 percent for Energy Star), this is due to the fact that “REITs are in the early phase of investing in the greenness of the properties in their portfolios, a notion that is supported by the large number of buildings that are already registered, but not yet certified by LEED. This indicates strong growth in green building certification in years to come,” say the authors.

So REIT investment in green-certified properties is likely to continue growing, and that is good for both the environment and REIT investors. “Given our key findings that portfolio greenness is positively related to operating performance and negatively related to risk, these market developments provide a positive outlook for the return on equity and the return on assets of REIT investors, and are likely to make REIT returns less responsive to the business cycle,” say the authors.

Funding for this research was provided by ECCE (European Centre for Corporate Engagement), METEOR (the graduate school of Maastricht University’s School of Business and Economics), and a VENI grant to Prof. Nils Kok (provided by NWO, the Dutch Science Foundation).

Related video: Piet Eichholtz discusses this reseach further: “REITs and the rewards of green property investing”.

References

This article may be reproduced according to our terms of use with attribution (and link, if online) to fsinsight.org. To be cited as: “REITs get better returns by including green buildings in the portfolio”, Piet Eichholtz, Nils Kok, Erkan Yönder, fsinsight.org, January 23, 2012.