Green Buildings protect against Down Markets: realism.IN expert

realism.IN expert discovers how 'green' real estate rental premium changes in favorable direction during down-markets; a study published by the Journal of Sustainable Real Estat.

Green office properties enjoy several types of premiums over comparable non-green buildings. A number of studies by researchers across the globe analytically establish the economic benefits of investing in green buildings. Several of these studies are focused at developed markets due to availability of data in these places. Yet, useful insights may be derived from these markets which could also be applied to Indian real estate markets. 
It has been found that green buildings (e.g. LEED certified buildings) enjoy around 6% to 18% higher rental rates. When comparing the sale price of real estate, green buildings outwit non-green buildings by up to 118%! Similarly, some studies have shown that the occupancy rates in green buildings are around 8% higher compared to non-green counterparts. Studies conducted by different researchers in the Netherlands, the United Kingdom, Singapore and Australia have established that the 'green' premium of buildings is not limited to the U.S. only; but is rather a universal phenomenon. On the other hand, the findings were contradictory in Japan where a study found that the buyers of green condominiums (multistory residential units for sale) capitalize the high maintenance cost of green buildings into the price. Therefore, green units sell at 6-10% lower prices. Nevertheless, the difference they found was statistically significant. In other words, green real estate has significantly different performance characteristics compared to non-green properties.

A recent study conducted by Prashant Das, the Head of R&D at realism.IN (and a research scholar at the Georgia State University, USA) along with Alan Tidwell (Columbus State University, USA) and Alan Ziobrowski (Georgia State University, USA) found that the rental premium of green commercial office spaces changes with market cycle. The paper titled "Dynamics of Green Rentals over Market Cycles..." (2011, Journal of Sustainable Real Estate published by the American Real Estate Society and supported by CoStar) asserts that green office properties were found to provide a 'hedge' against the market cycle. The study suggests that the changes in green premium 'tend to stabilize rental rates across various real estate market conditions'. The study also establishes that the 'green premium is counter-cyclical: positive and significant in down-markets, but substantially reduced in up-markets.'

This study provides some additional insights which are equally interesting. For example, quarterly changes in the rental rate of commercial office spaces is somewhat predictable; which is not true for non-green buildings. The study also suggests: '...as more green developments are constructed ... the dynamic nature of green premiums may diminish.' Green building premiums may potentially be attributed to their novelty effect and the economic premiums will shrink as more green buildings are supplied. If we read between the lines, real estate investors who would want to capitalize upon the green premiums should not wait for very long. More the competitive supply, lower the premiums!

Are these findings equally relevant to Indian real estate markets? There are very few reasons to believe that they are not!  After all, what is found in studies about the 'green premium' related to one country (U.S./Europe/Asia) has, more or less, been  corroborated by studies in other countries a well. The advent of green commercial spaces in India is almost contemporary to that in other nations. The novelty effect of green buildings is relevant to Indian buildings in similar fashion to other nations. Also, green buildings are quite distinguishable in India as in other nations. "Yet, we need concrete empirical studies about Indian buildings in order to establish the findings for India," says Prashant, "we hope that the IGBC (India Green Building Council) shall be as generous with data to our research efforts on India as the USGBC has been in the US." realism.IN has been working on empirical analysis pertaining to the Indian real estate markets for green buildings. However, data scarcity poses a major challenge.


Further readings:

• Das, P., Tidwell, A., & Ziobrowski, A. (2011). Dynamics of Green Rentals over Market Cycles: Evidence from Commercial Office Properties in San Francisco and Washington DC. Journal of Sustainable Real Estate, 3 (1).
• Dermisi, S. V. (2009). Effect of LEED rating and levels on office property assessed and market values. Journal of Sustainable Real Estate , 23-47.
• Eichholtz, P., Kok, N., & Quigley, J. M. (2009). Doing Well By Doing Good? Green. Retrieved from UC Berkeley: Center for the Study of Energy Markets: http://escholarship.org/uc/item/4bf4j0gw
• Fuesrt, F., & McAllister, P. (2009). An investigation of the effect of eco-labeling onn office occupancy rates. Journal of Sustainable Real Estate , 49-64.
• Harisson, D., & Seiler, M. (2011). The political Economy of Green Office Buildings. Journal of Property Investment and Finance , 29 (4/5), 551-565.
• Miller, N. G., Pogue, D., Gough, Q. D., & David, S. M. (2009). Green buildings and productivity. Journal of Sustainable Real Estate , 65-89.
• Wiley, J. A., Benefield, J. D., & Johnson, K. A. (2008). Green design and the market for commercial office space. Journal of Real Estate Finance and Economics .