Investing In Green-Building Real-Estate Companies Becoming More Viable

17 aUG, 2010 - Not everyone who believes in the future of green buildings can build one themselves, but investing in real estate companies that share this conviction is an increasingly viable option.

Real estate companies and real estate investment trusts have been boosting the environmentally friendly credentials of their buildings, often turning to the U.S. Green Building Council's Leadership in Energy and Environmental Design rating system.

Out of 135 REITs, 52, or about 38%, have some space that they disclose as having a LEED certification of some type. This accounts for about 9% of the total space owned by public REITs, according to Uniplan Investment Counsel Inc., an investment advisory firm.

"One thing that's interesting is even despite the downturn, real estate investors have remained focused on energy efficiency" said David Wood, Director of the Initiative for Responsible Investment at Harvard University. "In part that is because it is something they can focus on. You can work on benchmarking their performance even while the market is fairly frozen."

Some REITs say that over the last few years they have constructed all-new buildings to a LEED standard and are looking to renovate existing buildings to make them greener. Since buildings are a long-term asset, these REITs say sustainability is a good long-term investment since the future looks green.

Jack Rizzo, chief sustainability officer for ProLogis (PLD), said building green increases the value of the property long-term and improves tenant retention rates. ProLogis is a REIT that owns warehouse facilities. It has 45 million square feet certified as green building out of a total portfolio of 475 million square feet worldwide.

The company made an official commitment in 2008 to build all new buildings in an environmentally friendly way. It has therefore obtained a listing on green indexes like the Dow Jones Sustainability Index, which has offered up a new set of investors, Rizzo said.

Publicly traded real estate company Thomas Properties Group Inc. (TPGI) Executive Vice President Randy Scott said green buildings mean lower operating cost and more efficient operation.

"Those savings end up being shared with the tenants who lease our building," Scott said. "It becomes a competitive advantage for us. We believe LEED-rated buildings have an advantage in the marketplace."

Thomas Properties has 15.4 million square feet under management and 13.4 million feet are buildings considered Energy Star-rated, which is an Environmental Protection Agency energy efficiency standard. Also, 4 million square feet of its portfolio is LEED-certified and another 5.3 million square feet is in the process of obtaining LEED certification. Scott also said investors have responded well to the company's green strategy.

Uniplan says that REITs that have a better Progressive Score--a rating system that the company uses that includes areas like sustainability, government relations and worker treatment--tend to have a higher return on invested capital over a complete real estate market cycle.

"This will normally result in share price outperformance relative to their lower-ranked peers," said Uniplan President Richard Imperiale.

The National Association of Real Estate Investment Trusts realized green buildings were becoming an important part of the industry and created the Leader in the Light award program in 2005 to recognize companies that had outstanding energy efficiency.

"Even in the challenging market conditions of recent years, more and more REITs have shown that a consistent focus on sustainability and energy efficiency is not only a positive for the company and the environment, but also for shareholders," said Sheldon Groner, executive vice president of finance and operations for NAREIT.

Steve Frankel, an analyst with Green Street Advisors, an independent research company that focuses on publicly traded real estate companies, said green buildings cost about 2% to 5% more to build, but the extra cost is made up through operational savings.

"Buildings in the future are going to have to have environmental elements and if you're not building a building that's environmentally friendly it might go obsolete quickly," Frankel said. "Also, you'll get a better net rent over time because it generates lower operating costs."

-By Sari Krieger, Dow Jones Venturewire; 212-416-2016; sari.krieger@dowjones.com
source: online.wsj.com