Do ‘Green’ REITs Outperform ‘Non-Green’ REITs?

The study of real estate investment trusts (REITs) has been a subject of much interest among investors. Some scholars find that returns from REITs mirrored that of the equities market with no strong evidence of co-movement with direct real estates. Others claim that REITs are able to replicate the performance of direct real estates and are therefore suitable candidates for diversification in investment portfolios. Given the growing movement of the socially responsible investment (SRI) market which stresses on the need to integrate ‘green’ criteria into investment decision making, it would be interesting to explore whether the ‘green premium’ does exist for REITs. This is important as an overwhelming number of studies are currently focused on equities and the evidence base on the benefits of investing in ‘green’ REITs is scarce. ‘Green’ criteria include among others a range of issues including the management of carbon emissions, water, waste, biodiversity and land use among many others.

Furthermore, a range of sustainability reporting tools (SRTs) such as LEED, Green Star and BREEAM have recently emerged to help evaluate the ‘greenness’ of commercial buildings. These SRTs typically issue certifications of varying levels to buildings that have achieved a level of performance. Many claims have been made on the benefits of ‘green’- certified buildings such as energy savings, higher rental rate differentials, higher productivity better health and well-being and improves organisational performance. According to Eichholtz et al. (2012), REITs is the eventual outcome of the interplay between costs and benefits from investment in ‘green’ properties. Since there are claims that ‘greener’ buildings have revealed higher rents for owners and have lower operating costs (Sah et al., 2013), scholars have argued that ‘green’ REITs would also yield better returns.

Using Markov chain, I tested the behaviour of ‘green’ REITs by using samples from the Australian market. The findings showed that price movement among ‘green’ REITs is non-homogeneous. This means that the price movement of ‘green’ REITs cannot be generalised and instead each REIT must be analysed individually to derive any significant conclusions about price movement. These findings confirm to both analyst and institutional investors that investing in REITs is potentially a viable option for portfolio diversification as they are not necessarily affected by trend movements. As well, the effect of heterogeneity in the price movement of REITs may be amplified as information concerning different property companies becomes available at various times. The ‘short-termism’ approach of investors could also exacerbate the situation. That is to say that investors are expected to react momentarily (buy or sell REITs) due to the effects of information asymmetry (exposure to company news is different among investors at different points in time). In turn, this contributes to the non-homogeneous behaviour among REITs.

However, no evidence was found demonstrating superiority of ‘green’ REITs over ‘non-green’ REITs. One reason advanced is that there may be different interpretations of ‘green’ performance among investors. This could be attributed to the range of terminology and standards used to assess ‘green’ performance relating to the construction and real estate industry. The term ‘sustainable construction’ is poorly defined in many aspects of the literature, often with ambiguous words, leading to much confusion, large inconsistencies and multiple interpretations. Discourse associated with sustainable development becomes challenging with the involvement of parties with varying backgrounds working in the real estate industry. There is ongoing debate about what is to be sustained, at what scale (boundary conditions) and how this is to be done. Due to the lack of agreed definition, there is difficulty in providing guidance for best practices based on well accepted and understood concepts and ideas. The findings of this study has been published as ‘Predicting the Behaviour of Australian ESG REITs’ in the Journal of Financial Management of Property and Construction.

Editor’s Note: India approved creation of real estate investment trusts in August 2014. Indian REITs will help individual investors enjoy the benefits of owning an interest in the securitised real estate market. The government and Securities and Exchange Board of India (SEBI) is in the process of making it easier to invest in real estate in India directly and indirectly through foreign direct investment, through listed real estate companies and mutual funds- through various notifications.

Dr Renard Siew is a researcher based at the Centre for Energy and Environmental Markets (CEEM). His research interest lies in sustainability/ integrated reporting, ESG research, socially responsible investment (across different asset classes: equities, infrastructure and property/real estate), climate change, sustainability strategy and green construction for the building/infrastructure sector. Renard did his PhD at UNSW with the support of the Australian Postgraduate Award (APA) Scholarship. He has published in international refereed journals on various sustainability issues in Asia.