The Value of Green BuildingsNew Evidence from the United Kingdom

Andrea ChegutMaastricht University Finance Department

a.chegut@maastrichtuniversity.nl

Presented June 23, 2010 for the

2010 International ERES Meeting

http://www.unimaas.nl/

The United Kingdom Towards a Sustainable Built Environment

Corporate Social Responsibility and Environmental Sustainability Financial, legal and government service sectors, Main contribution to environmental sustainability is in the building they occupy.

Regulations and IncentivesEnergy Performance Buildings Directives U.K. & EPCs

Economic preferences of commercial occupants Occupants of commercial space have shifted from “owners” to “renters”. Demand Shift

Third Party CertificationBREEAM UKLEED

Measuring the Financial Performance of Green Real Estate

Empirical performance:

Find a certification premium for rents 2%, effective rents 6% and transactions 16%.

Eichholtz, Kok and Quigley (2010a)

Results hold over the course of the financial crisis and the stock of green space expands.

Eichholtz, Kok and Quigley (2010b)

Green Real Estate Performance in the UK

Limited studies on the financial performance of environmentally certified buildings outside of the U.S. market.

Interesting Developments within the UK lead to a testable environment – Is the financial performance of UK environmentally certified real estate statistically different from zero?

Fill this gap in the literature by evaluating the financial performance of environmentally certified buildings in the U.K commercial real estate market.

Geographic Distribution: BRE Certified Real Estate

• 500 Buildings before 2000

• 1,618 buildings in 2010

• Geographically diverse• Knowledge of

certification and BREEAM rating achieved : Excellent, Very Good, Good and Pass

Black Points – BRE Certified

Data Resources and Sample Size

• 1, 219 Total Transactions • 78 BRE Certified

Transactions• 1, 141 Control

Transactions

• Real Capital Analytics – Commercial Real Estate Sales Transaction Database• CoStar Focus U.K. – Commercial Real Estate Rental Transaction

Database• Estates Gazette International – London Offices Data Set

• 26,114 Total Transactions • 1,016 BRE Certified

Transactions• 25,098 Control

Transactions

Rental Letting SampleSales Sample

Transaction Information and Hedonics

Sample Geographic Characterisitics

Sales Sample Rental Sample

White Points – BRE CertifiedBlack Points – Control Buildings

Certified Buildings are … Larger, Taller and Younger

0

5

10

15

4 6 8 10 4 6 8 10

Control Certified

Per

cent

£/Square Meter

Sales Transaction Sample

Sales Price Per Square Meter

Sample Size Green Sample Control Sample 78 1,141 Sales Price 102,000,000 63,617,006 (GBP) (163,000,000) (94,116,742) Sales Price 5,214 5,028 (GBP/sq. meter) (2,690) (3,493) Building Size 17.16 12.53 (sq. meters) (19.25) (15.46) Stories 10.32 8.11 (number) (0.31) (0.37) Age 27.97 40.58 (Years) (63.16) (55.10) Renovated Building 0.18 0.16 (1=Yes) (0.39) (0.36) London 0.01 0.01 (1=Yes) (0.11) (0.10) Central Business District

0.81 0.76

(1=Yes) (0.40) (0.43) Number of Airports* 7.05 6.83 (2.14) (2.42) Distance to Nearest Airport

11,700 11,800

(meters) (4,993) (5,361) Number of Trains** 1.99 1.78 (1.81) (1.71) Distance to Nearest Train

630 621

(meters) (307) (318)

Certified Lettings are … Larger and Newer

Rents Per Square Meter

0

20

40

60

1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10

Control Certified

Per

cent

£/Square Meter

Rental Transaction SampleColumn1 Certified Sample Control Sample Sample Size 1,016 25,098 Achieved Rent 245,000 80,979 (GBP) (944,000) (280,256) Achieved Rent 220 232 (GBP/sq. meter) (173) (927) Letting Size 723 312 (Sq. meter) (1,864) (758) New or Refurbished 0.42 0.36 (percent) (0.49) (0.48) Second Hand 0.58 0.64 (percent) (0.49) (0.48) Amenities 0.04 0.06 (percent) (0.19) (0.23) Distance to Nearest Airport 14,100 14,896 (meters) (10,400) (9,298) Number of Airports* 5 6 (3) (3) Distance to Nearest Train Stations 613 769 (meters) (305) (280) Number of Train Stations** 0.68 0.93 (1.01) (1.18) * Number of airports within 50 kilometers of the building ** Number of train stations within 1 kilometer of the building

Method (1): Traditional Specification

• The Model

• Hedonic Characteristics• Age, Size, Stories, ect.

• Neighborhood Controls• Sales Sample: Major Cities and Central Business Districts• Rental Sample: City Fixed Effects

• Transportation Networks• Distance to Airports and Train Stations• Number of Airports and Train Stations

where, is a vector of hedonic characteristics of building i. is a vector of neighborhood and transportation network controls for building i. is a dummy variable with a value of 1 if building i is rated by BRE and zero otherwise. and are estimated coefficients and is an error term.

VARIABLES Certified 0.087* [0.046] BREEAM Rating:

Excellent 0.20** [0.095]

Very Good 0.063 [0.055]

Good -0.039 [0.16] Size -0.019 -0.019 (Log) [0.021] [0.021] Story -0.0083*** -0.0085*** [0.0031] [0.0031] Age -0.0013*** -0.0012*** [0.00030] [0.00030] Renovated 0.15*** 0.16*** [0.040] [0.040] London 0.21*** 0.21*** [0.066] [0.067] Central Business District 0.26*** 0.26*** [0.054] [0.054] London*CBD 0.56*** 0.56*** [0.071] [0.071] Distance to Train 0.00012* 0.00012* [0.000064] [0.000064] Number of Trains -0.011 -0.010 [0.014] [0.014] Distance to Airport 2.25e-06 2.29e-06 [3.22e-06] [3.24e-06] 0.015* 0.015* Number of Airports [0.0088] [0.0088] Constant 7.41*** 7.41*** [0.11] [0.11] Observations 1,198 1,198 R-squared 0.449 0.449 Adj R2 0.44 0.44

Results: Traditional Specification

Sales Transaction Results Rent Transaction ResultsVARIABLES Certification 0.17*** [0.019] BREEAM Rating:

Excellent 0.22*** [0.035]

Very Good 0.18*** [0.024]

Good 0.079** [0.038]

Pass 0.17** [0.079] Letting Size -0.052*** -0.052*** (log) [0.0049] [0.0049] Amenities 0.12*** 0.12*** [0.015] [0.015] New or Refurbished 0.18*** 0.18*** [0.0085] [0.0085] Distance to Nearest Airport 9.63e-06*** 9.60e-06*** [1.11e-06] [1.11e-06] Number of Airports -0.027*** -0.027*** [0.0049] [0.0049] Distance to Nearest Train Station 0.00014*** 0.00014*** [0.000028] [0.000028] Number of Train Stations -0.0052 -0.0044 [0.0057] [0.0057] Constant 4.11*** 2.59*** [0.078] [0.079] Observations 17,314 17,314 R-squared 0.544 0.545 Adj R2 0.51 0.51

Method (2): GIS Specification

• The Model

• Hedonic Characteristics• Age, Size, Stories, ect.

• Adjacency Based Neighborhoods• 500 meter radi neighborhood boundaries• Weight Matrix of 1 for buildings in the neighborhood and 0 otherwise

where, is a vector of hedonic characteristics of building i. is a dummy variable with a value of 1 if building i is located in cluster n and zero otherwise. is a dummy variable with a value of 1 if building i is rated by BRE and zero otherwise. and are estimated coefficients and is an error term.

Results: GIS Specification

Sales Transaction Results Rent Transaction ResultsVARIABLES Certified 0.016 [0.054] BREEAM Rating:

Excellent 0.0054 [0.14]

Very Good 0.020 [0.055]

Good -0.0083 [0.11] Size 0.044 0.044 (Log) [0.029] [0.029] Story -0.0094** -0.0094** [0.0043] [0.0044] Age -0.0017*** -0.0017*** [0.00036] [0.00036] Renovated 0.084 0.084 [0.053] [0.053] Constant 7.82*** 6.89*** [0.100] [0.17] Observations 656 656 R-squared 0.602 0.602 Adj R2 0.54 0.53

VARIABLES

Certified 0.16***

[0.027]

BREEAM Rating:

Excellent 0.26***

[0.060]

Very Good 0.19***

[0.034]

Good -0.069

[0.065]

Pass 0.072

[0.052]

Letting Size 0.064*** 0.064***

(log) [0.0060] [0.0060]

Amenities -0.012 -0.010

[0.015] [0.015]

New or Refurbished 0.14*** 0.14***

[0.011] [0.011]

Constant 4.56*** 3.33***

[0.042] [0.070]

Observations 5,511 5,511

R-squared 0.604 0.605

Adj R2 0.59 0.59

Method (3): Propensity Score Matching

• The Model

• Hedonic Characteristics• Age, Size, Stories, ect.

• Neighborhood Controls• Sales Sample: Major Cities and Central Business Districts• Rental Sample: City Fixed Effects

• Transportation Networks• Distance to Airports and Train Stations• Number of Airports and Train Stations

where, is a vector of hedonic characteristics of building i. is a vector of neighborhood and transportation network controls for building i. is a dummy variable with a value of 1 if building i is rated by BRE and zero otherwise. and are estimated coefficients and is an error term.

Results: Propensity Score Matching

Sales Transaction Results Rent Transaction ResultsVARIABLES Certified 0.040 [0.061] BREEAM Rating:

Excellent 0.21 [0.14]

Very Good -0.012 [0.065]

Good -0.14 [0.19] Size -0.032 -0.032 (Log) [0.028] [0.028] Story -0.0069* -0.0075** [0.0038] [0.0037] Age -0.0030*** -0.0030*** [0.00048] [0.00048] Renovated 0.16*** 0.17*** [0.044] [0.044] London 0.20*** 0.21*** [0.072] [0.072] Central Business District 0.27*** 0.27*** [0.062] [0.062] London*CBD 0.56*** 0.56*** [0.078] [0.078] Distance to Airport 2.77e-06 3.01e-06 [3.51e-06] [3.53e-06] Number of Airports 0.018* 0.018* [0.010] [0.010] Distance to Train 0.00010 0.00011 [0.000067] [0.000067] Number of Trains -0.0042 -0.0028 [0.014] [0.013] Constant 7.42*** 7.41*** [0.11] [0.11] Observations 1,198 1,198 R-squared 0.452 0.454 Adj R2 0.44 0.44

VARIABLES Certified 0.20*** [0.021] BREEAM Rating:

Excellent 0.27*** [0.036]

Very Good 0.19*** [0.027]

Good 0.11*** [0.039]

Pass 0.18*** [0.056] Letting Size -0.032*** -0.032*** (log) [0.0065] [0.0065] Amenities 0.10*** 0.10*** [0.015] [0.016] New or Refurbished 0.19*** 0.19*** [0.010] [0.010] Distance to Nearest Airport 7.52e-

06*** 7.53e-06***

[9.57e-07] [9.50e-07] Number of Airports -0.024*** -0.024*** [0.0045] [0.0045] Distance to Nearest Train Station

0.00013*** 0.00014***

[0.000039] [0.000039] Number of Train Stations -0.0012 -0.00014 [0.0070] [0.0070] Constant 3.77*** 3.76*** [0.050] [0.050] Observations 17,314 17,314 R-squared 0.558 0.558 Adj R2 0.53 0.53

The Bottom Line

• Certified Green Building Premium• Transacts for 8.7 percent more per square meter than the control sample, but not

robust to other specificaitons• Rents for 16 to 20 percent more, dependent upon the specification

• Translated to the bottom line• The average selling price for the 1,141 control buildings in the sample is £63.6

million

• The premium paid on a green certified building relative to a comparable building is £5.47million, ceteris paribus.

• The average rent per square meter is £232 and the premium for a certified building is £35 per square meter

• The average size of a BREEAM-certified rental transaction is about 723 square meters, and the annual rent increment on a certified space at this average size is some £193,000, ceteris paribus.

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