Future forward: Green Real Estate

Released annually since 2016, in conjunction with the Green Building Council South Africa (GBCSA) and sponsored by Growthpoint Properties (JSE: GRT), the index provides an independent, globally consistent view on the investment performance of green-certified and non-certified offices.

The index showed that green-certified Prime & A-grade offices produced an improved total return in 2022 and outperformed non-certified office assets of a similar quality by 50 basis points (bps) during the year.

According to Growthpoint Head of Asset Management: Offices, Paul Kollenberg, “The MSCI index once again shows that green buildings are good investments. But more than that, it reflects lower power and water costs in these properties. At a time when tenants are looking at ‘total cost of occupation’, and utility prices keep escalating, it makes sense to rent space in a green efficient building. Added to that, the cost of providing backup power to these properties will be reduced because consumption is lower.”

At the end of 2022, the index sample comprised 303 prime and A grade office properties valued at R58.2 billion, of which 164 were green-certified buildings. These were compared to 112 non-certified offices of a similar quality.

“These results confirm that there are long-term benefits associated with pursuing green building certification. With some tough market conditions at play, green-certified buildings are demonstrating their resilience and value,” says Georgina Smit, GBCSA Head of Technical.

Green offices have outperformed by 20.9% since 2016

For the year ended December 2022, the green-certified office sample delivered a total return of 6.1%, 50bps above the non-certified sample’s return of 5.6%. Since the index’s inception in 2016, the sample of green-certified offices outperformed the non-certified sample by a cumulative 20.9%.

Over this seven-year period, green-certified offices had a 2.1% lower vacancy rate and 1.0% higher net operating income (NOI) growth. This robust NOI growth underpinned green offices’ income return, which was in line with that of non-certified offices despite a 25% higher capital value per square metre. A 30% higher NOI per square metre compared to non-certified office buildings reinforced the premium that blue-chip occupiers are placing on green office accommodation.

Green office cash flows are deemed lower risk

Green-certified offices boasted significantly lower per square metre usage of electricity (-4.5%) and water (-14.3%) compared to non-certified offices. With administered costs rising at rates higher than inflation, these costs can have a significant impact on performance over the lifecycle of a property. In 2022, the green-certified office sample’s gross cost-to-income ratio was 39.7%, substantially lower than the 43.0% of the non-certified subset. As a result, green offices had a 20bps lower capitalisation rate and a higher forward income growth, implying that its future cash flows were deemed both lower risk and likely to grow at a faster rate.

A striking glass facade across two interlinked towers characterises Growthpoint’s premium-grade office development at 144 Oxford.

Green-certified offices are better across all measures

Released in April 2023, the MSCI South Africa Green Annual Property Index demonstrated the positive relationship between green-certified buildings and investment returns but also of its impact on property fundamentals that could underpin future performance.

“The highlight of these results lies in the reduced cost-to-income ratios. It shows that through certification, owners can manage costs better because they have future-proofed their assets. In the current market, where rentals are difficult to increase, managing costs – especially water and electricity – is more important than ever, so efficiency is paramount,” says MSCI Vice President Eileen Andrew.

CEO of GBCSA Lisa Reynolds stated that “In the past few years, the conversation has shifted. Green-certified buildings always made business sense due to the financial savings in the utility bills. Currently, we add the concepts of risk into the conversations – the risks due to the impact of climate change, the risks due to the lack of resource security and, most importantly, the risk of stranded assets. Certified green buildings play a huge role in mitigating these risks. I believe that this is confirmed by the MSCI results.”

As a leader in environmentally conscious commercial property development, Growthpoint owns and manages the largest portfolio of green-certified buildings in Africa. Its green buildings contribute to greater climate change resilience and reduce its carbon footprint as it continues to strive for excellent environmental, social and governance (ESG) performance. Growthpoint’s sustainability strategy is to certify its entire portfolio of buildings as carbon neutral by 2050.

Growthpoint Head of Sustainability and Utilities Grahame Cruickshanks says, “In addition to the financial, operational and risk-mitigating advantages demonstrated by the MSCI index, green buildings are essential for organisations – both landlords and tenants – to meet their ESG commitments. Growthpoint invests in green buildings because it is the right thing to do for environmental sustainability and South Africa’s green economy growth.”

To view the MSCI SA Green Property Index fact sheet, visit www.msci.com/www/ipd-factsheets/msci-south-africa-green-annual/0163242457