Green buildings prove profitable

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By - , Build 135

A new national Building Performance Index shows Green Star-rated office buildings are outperforming non-rated buildings when it comes to return on investment and capital growth.

Figure 1: One-year returns to September 2012 on Green Star versus non-rated office buildings. (Source: NZGBC and IPD Research.)

THE GREEN PROPERTY INVESTMENT INDEX was established in 2012 and compares financial performance indicators of 12 Green Star-rated buildings with a sample of non-rated buildings. The index is produced by the Australia and New Zealand arm of the Investment Property Databank (IPD), in partnership with Property Council New Zealand.

Numbers look good

The first release of the index found office buildings with a Green Star rating averaged 8.9% net rental return compared to non-rated buildings with an average 6.4% return for the year to September 2012 (see Figure 1).

In a comparison of capital growth for the year, the 12 Green Star buildings averaged 1.6% growth while the non-rated buildings averaged 1.7% decline. Consistent with capital growth results, the index found average capitalisation rates for Green Star buildings were lower by 30 basis points than non-rated.

The sample of Green Star-rated buildings showed a stronger net income per square metre – an average of $366 per square metre compared to $358 for non-rated.

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Tenants driving demand

Peter McGuinness, Research Manager at IPD Australia and New Zealand, says Green Star-rated office buildings’ higher net income indicates strong tenant demand for Green Star stock. He suggests these buildings will typically have higher rents, higher occupancy rates and reduced timeframes to find tenants. Peter says that the stronger capital value growth is consistent with Green Star buildings’ lower capitalisation rates, which suggests they have less investment risk.

The index’s relatively small sample of 12 Green Star-rated office buildings valued at NZ$1.3 billion will grow as more buildings gain Green Star status. In Australia, IPD has been providing a Green Index since 2011, with a larger sample size valued at A$36 billion.

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High Australian returns

Australian index results to December 2010 – annualised 2-year returns – showed Green Star-rated office buildings had an average 5.8% net rental return compared to an average 1.6% return for non-rated.

Additionally, a 2011 study by the Australian Property Institute and the Property Funds Association of Australia called Building better returns found that Australian Green Star- rated buildings are delivering a 12% premium in value and a 5% premium in rent. Study co-author and real estate academic Nils Kok says these results indicate two things:

  • There is a value difference between green and non-green buildings and how tenants perceive these buildings.
  • There may be a shortage of certified green buildings.

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Cost a deterring factor

The New Zealand Green Building Council is behind the country’s Green Star rating scheme. It also has a Green Star Practitioner qualification to upskill commercial construction professionals to assess and rate a building’s Green Star status.

Warren Perry is an architect at DLA Architects in Hamilton and a Green Star Practitioner. He says that many clients like the idea of using green principles on their buildings and welcome such discussions. He agrees that Green Star-rated buildings have a greater marketplace value, yet he senses that the increased upfront costs of going green remain a significant barrier for many.

Warren says that green design principles have always been important for architects – it’s just now they are being acknowledged and quantified. ‘As designers, it has always been our responsibility to be sustainable. Considerations such as building orientation and efficient use of glazing have not changed but now they get formally assessed through Green Star ratings.

‘Energy efficient features are now being recognised in the same way that aesthetics always have been.’

Figure 1: One-year returns to September 2012 on Green Star versus non-rated office buildings. (Source: NZGBC and IPD Research.)

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Figure 1: One-year returns to September 2012 on Green Star versus non-rated office buildings. (Source: NZGBC and IPD Research.)