Environmental factors increasingly to drive demand for real estate, according to LaSalle research

Environmental factors will contribute significantly to the financial performance of real estate portfolios over the coming years, and investors will need to put increasing focus on green buildings if they are to maximize returns, according to LaSalle Investment Management.

The research finds that buildings with green attributes warrant a higher price in recognition of their lower risk, and that investors should therefore consider accepting returns that are 65 basis points lower than for non-green buildings.

The environmental attributes include energy conservation, carbon footprint reduction, water and waste recycling, and green building ratings that encourage sustainable building design and operations. The benefits to investors as a result of such factors, and which justify a lower return, include:

• Easier and less costly to finance green buildings
• Green buildings being assumed to be modestly more liquid
• Research pointing out that there is less vacancy risk for green buildings
• The lower risk of heavy capital investment requirements for systems or building re-positioning for green buildings
• Research suggesting that greener buildings tend to attract higher credit quality tenants
• Sustainably managed buildings will outperform over the longer term

The research also finds there could be an early mover advantage for those firms that are able to seize the opportunities. Investment analysis is still early in the process of recognizing the impact of these factors, hence investor payback for improving the environmental performance of buildings could become a strong contributor to financial performance.

“The rising demand for the sustainability and resilience features of a building is due to both regulatory and market forces,” said Jacques Gordon, LaSalle’s global head of research and strategy. “Such factors should be an important consideration in the investment analysis of portfolios and assets.”

The report notes that very few investors are willing to sacrifice return or to increase risk for the sake of improving their sustainability credentials. However, it notes a growing pool of investors are asking fund managers and REIT chief executives to report on their progress toward establishing and meeting environmental and sustainability goals. It says more investors are also gaining an awareness of the published evidence that shows that, in many situations, investments in sustainability improve asset-level and portfolio-level financial performance.

“Investments in sustainability need to be customized for specific markets and sectors as regulations and green building rating systems vary greatly from country to country and even within countries,” said Mahdi Mokrane, LaSalle’s European head of research and strategy. “However, we expect the demand for environmentally friendly features to grow rapidly, as both tenant and investor awareness will continue to rise.”

The research paper, titled Environmental Factors & Real Estate Demand, makes the case for adding Environmental Change to the original DTU factors under the concept of “DTU+E”. Environmental Change encompasses a number of trends, notably environmental regulations; new market standards such as environmental certification; and an increasing awareness of climate change impacts such as flood risk.

To read the full report, click here.