GBCSA head of technical Georgina Smit.
Investment services and advisory company MSCI’s South Africa Green Annual Property Index for 2023 shows that green-certified prime and A-grade offices produced a total return of 5.8%, which was 150 basis points above that of non-certified office assets of a similar quality, during the year.
The index, released in conjunction with the Green Building Council of South Africa (GBCSA) and sponsored by JSE-listed real estate investment trust Growthpoint Properties, continued to support the investment case for sustainable, resource-efficient real estate.
This outperformance was driven by a higher capital growth on the back of superior net income growth and a lower discount rate, meaning that valuers view green-certified office properties as a lower-risk investment, MSCI South Africa says.
Despite higher interest rates, the discount rate of green-certified offices was unchanged during the year, while that of the non-certified subset increased by 130 basis points, which implies that valuers deemed green offices’ future cash flows a lower risk and more likely to grow at a faster rate.
Green offices’ net operating income was also 30% higher per square metre compared with non-certified office buildings, which reinforced the premium blue-chip occupiers place on green office accommodation, the index shows.
“The index continues to demonstrate that green buildings are valuable investments. It also highlights the reduced electricity and water expenses associated with these properties,” says Growthpoint offices asset management head Paul Kollenberg.
“As tenants increasingly consider their total cost of occupation and utility prices continue to rise, leasing space in an energy efficient green building becomes the sensible choice. Additionally, the cost of supplying backup power to these properties is lower owing to their reduced consumption,” he says.
“This study demonstrates the business case for going green, and importantly, this is based on local data as evidence. Given the need for economic and climate resilience for any sector in South Africa, there is a powerful green story to be told here for South African business leaders, and what it could come to mean in a more climate-conscious future,” says GBCSA head of technical Georgina Smit.
Since the index’s inception in 2016, the sample of green-certified offices outperformed the non-certified sample by a cumulative 24%. Each year, green-certified prime and A-grade offices produced a superior capital growth compared to non-certified office assets.
Over this eight-year period, the vacancy rate of green-certified offices was, on average, 1.4% lower while its net operating income grew 1% faster a year, helped along by a lower gross cost-to-income ratio and higher net operating income, MSCI South Africa says.
Driving the lower operating costs of green-certified offices were significantly lower per-square-metre usage of electricity, at 7% lower, and water, at 21% lower, compared with non-certified offices over this eight-year period. This was characterised by rapidly rising administered costs, and which could have a significant impact on investment performance and valuation over the life cycle of a property, the index report adds.
Meanwhile, the Green Annual Property Index for 2023 demonstrated the positive relationship between green-certified buildings and investment returns and also its impact on property fundamentals that could underpin future performance.
“Measuring climate risk in a quantifiable way is moving to the top of the agenda. We have to measure it, show that we are managing it and then rubber stamp it with credible accreditations. This index goes a long way in doing this,” says MSCI VP Eileen Andrew.
“As the sample size of green certified prime and A-grade offices increases, the investment value good news remains on its positive trend. The green-certified retail numbers are similar to where we started for offices in 2016; and the results show the same investment positivity,” says GBCSA CEO Lisa Reynolds.
“These results give all involved in the property sector a sense of confidence in the superior performance of green-certified buildings, including financial returns, resource efficiency and risk mitigation. These are all indicators of growth in the green economy,” she notes.
At the end of 2023, the index' sample comprised 258 prime and A-grade office properties valued at R54.2-billion, of which 163 were green-certified buildings. These were compared with 95 non-certified offices of a similar quality along several key performance metrics.