Portfolio Greenness and the Financial Performance of REITs

with Erkan Yonder and Piet Eichholtz, Journal of International Money and Finance, 2012

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This paper investigates the effects of the energy efficiency and sustainability of commercial properties on the operating and stock performance of a sample of US REITs, providing insight into the net benefits of green buildings. We match data on LEED and Energy Star certified buildings with detailed information on REIT portfolios and calculate the share of green properties for each REIT over the 2000-2011 period. We estimate a two-stage regression model and document that the greenness of REITs is positively related to three measures of operating performance – return on assets, return on equity and the ratio of funds from operations to total revenue. We also document that there is no significant relationship between the greenness of property portfolios and abnormal stock returns, suggesting that stock prices already reflect the higher cash flows deriving from investments in more efficient properties. However, REITs with a higher fraction of green properties display significantly lower market betas.   Slideshow "Portfolio Greenness and the Financial Performance of REITs" View more presentations from nilskok

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[Esgarchitect]

Presentation at #ARCS2012 leads to questions on accuracy of #LEED relying on location and points for public transport, and the "why" what is driving it. Portfolio greenness decreases market risk, due to sustainable returns of green properties, properties less exposes to energy costs. No effect of greenness on abnormal returns indicating market corrects for portfolio greenness, enhances ROA, ROE, and FFO/total revenue. On average 1-6% of REIT properties are green-certified.

Keep up the good work.
Time to build a green property index for REITs?
GS
@esgarchitect
@SinCOESG