The MSCI South African Green Annual Property Index for 2023 continued to support the investment case for sustainable, resource-efficient real estate.
Released annually, in partnership with the Green Building Council of South Africa (GBCSA) and sponsored by Growthpoint Properties, the index provides an independent, global view on the investment performance of green-certified and on-certified offices.
For 2023, the index showed that green-certified Prime and A-grade offices produced a total return of 5.8%, 150 basis points above non-certified office assets of a similar quality. 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 assets as a lower risk investment.
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 that green offices’ future cashflows were both lower risk and more likely to grow at a faster rate.
Green offices’ net operating income was also 30% higher per square metre compared to non-certified office buildings which reinforced the premium blue-chip occupiers place on green office accommodation.
“The MSCI index continues to demonstrate that green buildings are valuable investments. Beyond that, it highlights the reduced electricity and water expenses associated with these properties. 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 due to their reduced consumption,” comments Paul Kollenberg, Growthpoint Head of Asset Management.
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 to 95 non-certified offices of a similar quality along several key performance metrics.
“This study demonstrates the business case for going green, and importantly, this is based on local data as evidence. Given the need for both 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,” notes Georgina Smit, GBCSA Head of Technical.
Green offices outperformed by 24% since 2016
Since the index’s inception in 2016, the sample of green-certified offices outperformed the non-certified sample by a cumulative 24%. For every year since the index inception, green-certified Prime & A-grade offices produced a superior capital growth when 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 per annum – helped along by a lower gross cost-to-income ratio and higher NOI.
Driving the lower operating costs of green-certified offices were significantly lower per square metre usage of electricity (-7%) and water (-21%) when compared to non-certified offices over this eight-year period, which was characterised by rapidly rising administered costs, and which could have a significant impact on investment performance and valuation over the lifecycle of a property.
Green-certified offices better across all measures
Released in April 2024, the MSCI South Africa Green Annual Property Index for 2023 demonstrated the positive relationship between green-certified buildings and investment returns but 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 must 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 Eileen Andrew from MSCI.
“As the sample size of green certified Prime/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. These results give all involved in the property sector a sense of confidence in the superior performance of green-certified buildings – whether it be financial returns, resource efficiency or mitigation of risk. These are all indicators of growth in the green economy,” comments Lisa Reynolds, CEO of GBCSA.
