Banking on Green:
Unpacking the MSCI South Africa Green Annual Property Index 2020
MSCI, an international company providing tools and services to support the global investment community, produces the index in conjunction with the GBCSA and with the sponsorship of Growthpoint Properties. Gareth Allison, executive director at MSCI, explains that many of the company’s global analyses include predicting possible future events to “stress test” the impact on property portfolios. Climate risks now form a large part of the potential future risks for property investment. Having tangible, measured results takes the guesswork out of investment decisions, enabling investors to understand key drivers of risk and return, and to build more effective and sustainable portfolios.
The 2020 index, which was released in April 2021, was compiled using data sourced from various property portfolios across South Africa. The data set for 2020 comprised 289 Prime and A-Grade office buildings, with a combined value of R54.5-billion.
A total of 139 buildings were Green Star certified by the GBCSA, while the remaining 150 were not. Eileen Andrew, vice president of MSCI, explains that the index was first started to help investors justify the capital expenditure required to develop and certify green buildings.
She says, “We have been tracking the returns of green certified offices for the last five years. Although we haven’t measured them through a full property cycle, what tends to happen is that the spread between property performances narrows during economic upturns and then widens through the downturn. Given the data we have seen thus far over the last five years, we can assume that this will hold in the case of certified and non-certified offices.”
This certainly seems to be the case. Green Star certified buildings have consistently outperformed their non-certified counterparts over the five-year period. However, the results for 2020, which spanned the onset of the Covid-19 pandemic in South Africa and the initial hard lockdowns, has shown that certified buildings are proving to be far more defensive, both in terms of income and capital.
Fanfare in figures
Over the index’s five years, the sample of Green Star accredited buildings has delivered an annualised outperformance of 260 basis points (bps) as its compound annual return of 7.3% exceeded the 4.7% of the non-certified sample. On a cumulative basis, this equates to a total return of 42.1%, outperforming the non-certified sample by 13.2%.
During 2020, with the property sector extremely stressed, green certified offices delivered a total return of -1.6%, while non-certified buildings stood at -3.1%. Green Star rated buildings showed a decline in net operating income of -5.8% versus the -10.1% of the non-certified offices, they showed a 40bps lower discount rate, and a much lower vacancy rate (12.7% versus 14.9%). The certified buildings showed a capital value 31% higher per square metre, and a more resilient capital growth. These results reinforced the link between quality, desirability, and Green Star accreditation.
“For investors, these results indicate that certified green buildings are attractive investment options as well as ensuring future climate resilience and delivering on mitigation interventions associated with green building design and operation,” says Andrew. Tenants in certified buildings were far less likely to give up their leases, and rental reductions and rebates were lower across the board for the certified buildings in the study.
Georgina Smit, head of technical at the GBCSA, is excited by how positive the index results have been, even amid the global pandemic and all the related economic implications. “It highlights that quality spaces that are environmentally sustainable are still valued and sought after.” Green building certification is currently voluntary in South Africa, and there are no legislated requirements for developers to pursue this route. The numbers are indicating that certified green buildings make good financial sense and hold benefits on their own, providing tangible incentives for investors and developers. “Pursuing certification sends a signal to the market that environmental impacts are being independently verified and quantified. It is a significant step-up from self-made claims of being green,” adds Smit.
The desirability of green
Even as office buildings across the country were emptying out as many businesses were downsizing amidst economic uncertainty and shifting to more remote or hybrid working models that require less office space, Green Star rated offices showed far lower vacancy rates. This seems to highlight the value that is now being placed on high performing buildings.
There are, of course, the intrinsic benefits for building occupants in terms of the comfort of working in the space and in terms of the longer-term savings on water and electricity. Many individuals and businesses are also starting to engage more with climate change and how to mitigate disaster in that arena. Andrew highlights, “We are seeing, in developed markets like Australia, for example, that as tenant demand for green certified buildings becomes the norm, developers and subsequent owners will have no choice but to provide the product that is in demand, or their product will become obsolete.” She also explains that ESG (environmental, social and governance) is becoming a driving factor behind developers, landlords and tenants wanting to build, own, and occupy certified buildings. To raise capital, companies are more and more often being required to prove that they are managing environmental risks effectively.
The actual certification becomes particularly important here. Having a recognised Green Star rating (as opposed to possibly being a high performing building without formal accreditation) is a measurable standard, providing proof of a building’s performance to investors and valuators. Importantly, re-certification is required every few years for a building to maintain its accreditation based on operational measurements.
At this stage, the index only compares office buildings as this is currently the only building typology with enough certified buildings for a meaningful sample. However, as more buildings of different types are being certified, the intention is that many more commercial property types can also be compared in a similar way.
The study does consider the use of electricity and water, which is generally much lower in certified buildings, however, there is a move towards being able to quantify CO² emissions in a more refined way to analyse actual climate risk reductions more comprehensively. “Climate risk mitigation is becoming a big consideration for investors and lenders and the ‘greening’ of properties is fundamental to this. MSCI is using climate metrics and ‘Climate Value at Risk’ to measure the warming potential of properties and the reduction thereof. This is an exciting space to watch,” adds Andrew.
“From an investor’s point of view, there is ‘doing the right thing’ and then there is ‘doing well (financially) by it’,” says Grahame Cruickshanks, head of sustainability and utilities at Growthpoint Properties. The index results support the case for investing in green-certified buildings. Green Star rated buildings are better placed to attract and retain tenants which translates to a better bottom line. Green assets are also more future proof with the shift towards more ESG awareness and compliance.