Green buildings, also referred to as eco-friendly buildings, have gained popularity over the past few decades among individuals who are environmentally conscious. This is due to growing concerns about high energy and water consumption levels as well as greenhouse gas emissions that are typically associated with traditional buildings. These buildings are responsible for approximately 39% of CO2 emissions, 40% of energy consumption, and 13% of water consumption in the United States (Sah et al., 2013).
Compared to conventional buildings, green buildings typically have more environmentally friendly features, such as the use of renewable energy sources, higher energy efficiency, and sustainable building materials. As a result, they are often considered a more attractive investment option for real estate investors who prioritize environmental sustainability.
There are two ways to invest in green buildings: 1) by making a direct purchase of a green building, or 2) by investing in green REITs.
REITs, which stands for real estate investment trusts, are companies that own and manage income-producing properties across various property sectors with the aim of generating returns for their investors. Similar to stocks, most REITs are publicly traded. They enable investors to invest in real estate without the hassle of owning or managing physical properties.
What Qualifies as a Green REIT?
REITs are considered “green” if they own
- Buildings that are ENERGY STAR certified, or
- Buildings certified by the Leadership in Energy and Environmental Design (LEED) program.
ENERGY STAR, a joint program of the Environmental Protection Agency (EPA) and the Department of Energy (DOE), focuses on the energy efficiency of buildings. A building is eligible for ENERGY STAR certification if its ENERGY STAR score is 75 or higher on EPA’s 1 – 100 scale, indicating that it outperforms at least 75% of similar buildings across the country.
The LEED certification system, developed by the U.S. Green Building Council (USGBC), focuses on multiple domains of sustainability, including carbon, energy, water, waste, transportation, materials, health, and indoor environmental quality. Construction projects go through a verification and review process by USGBC’s Green Business Certification Inc. (GBCI) and are awarded points that correspond to a level of LEED certification:
There are many ways to determine whether a specific REIT is green. The most straightforward one that does not require coding is as follows:
- First, investigate the annual reports (10-K) of the REIT to find the names of the buildings in its portfolio.
- Then search the building names one by one in the database of LEED or ENERGY STAR:
https://www.usgbc.org/projects
https://www.energystar.gov/partner_resources/partner_list
A building included in either of these databases is certified green.
The above-described method is free but can be rather time-consuming. Some fee-based commercial databases provide easy-to-use information about buildings including their LEEDS and ENERGY STAR certifications. One example is the CoStar database.
Performance of Green REITs
Academic studies have generally found that green REITs tend to outperform their non-green counterparts in terms of operational and/or financial performance. Below are some examples of such studies:
- Eichholtz (2012): The greenness of REITs is positively associated with three measures of operating performance – return on assets (ROA), return on equity (ROE), and the ratio of funds from operations to total revenue. However, there is no significant relationship between the greenness of REITs and abnormal stock returns.
- Sah et al. (2013): Green REITs have higher ROA and better stock performance than their non-green peers.
- Ooi and Dung (2019): REITs with more green assets registered higher ROA and operating margin.
In summary, green REITs represent a promising investment option for those interested in aligning their financial goals with their environmental values. By investing in eco-friendly buildings through a green REIT, investors can potentially earn financial returns while also contributing to a more sustainable future. As the world continues to prioritize environmental sustainability, green REITs are likely to become an increasingly popular investment option. Ultimately, the decision to invest in green REITs should be made after careful consideration of one’s financial situation and investment objectives.
References:
Sah, V., Miller, N. G., & Ghosh, B. (2013). Are Green REITs Valued More? Journal of Real Estate Portfolio Management, 19(2), 169–177.
Ooi, J. T.L. & Dung, D. D.Q. (2019). Finding Superior Returns in Green Portfolios: Evidence from Singapore REITs, Journal of Sustainable Real Estate, 11 (1), 191-215.
Eichholtz, P., Kok, N., & Yonder, E. (2012). Portfolio greenness and the financial performance of REITs. Journal of International Money & Finance, 31(7), 1911–1929.
Disclaimer: The Content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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