ASX-Listed Office Trusts: Does "Green" Pay?

Highlights

Drivers for "green" buildings are moves to reduce carbon emissions and energy use, improve resource efficiency and improve employees' working conditions. The five ASX-listed REITs studied here (Commonwealth Office (CPA); Dexus (DXS); GPT; Macquarie Office (MOF); and Stockland (SGP)) are all focused on improving "green" attributes, partly as "risk management". We haven't found major differences among this group, though GPT and MOF may lead, and DXS slightly lag its peers. We await hard data that substantiates our expectation that "green pays" for Australian office buildings, due to lower energy costs, higher rentals and lower vacancies.

Tenants Increasingly Seek "Green" attributes - Government occupies ~1/3 of Australian offices, and seeks NABERS Energy 4.5-star by 2011. Large corporates seek green attributes, perhaps as part of broader "sustainability" programs. Focus on indoor environment may grow, as companies seek to be "employers of choice". 5-star Green Star is becoming the "norm" for new buildings (perhaps without extra capex). 6-star technologies are more innovative and may be riskier.

Avoiding Obsolescence Risk - Buildings not meeting tenant criteria face higher vacancies, lower rentals and value deterioration, so meeting the market's green requirements (most urgently 4.5-star energy) manages this risk. "At risk" may be lower performing government-occupied buildings. CPA, DXS & MOF appear more exposed than GPT & SGP, but all are actively addressing the issue. Intensive building management rather than substantial capital can yield big gains - MOF may be a leader here. A 1-star gain would save energy costs of ~$2-4/m2 pa.

Data Yet to Prove that "Green Pays" - Despite detailed analysis of comprehensive building-by-building data, hard financials (net income, passing rent & valuation) for Australian offices so far shows only tenuous correlation with green attributes. Any correlations may reflect various attributes including building age.

ASX-Listed Office Trusts: Does "Green" Pay?: "Green" Demand Looks Convincing; Awaiting Financial Proof" was published in January 2010 by Citi Investment Research analyst Elaine Prior, for Citi's fund manager clients.