FTSE Group, the National Association of Real Estate Investment Trusts and the U.S. Green Building Council announced last week that they have jointly developed the first investable green property indexes.
The indexes, for both institutional and retail investors, will track the value of LEED-certified and Energy Star-rated buildings and quantify the value the green ratings add to the assets.
The indexes should be available in January, Kevin Bourne, managing director at FTSE, told Real Estate Weekly.
But it will be up to the market how it uses the data.
Gordon Morrison, also a FTSE managing director, said the developers of the indexes are expecting two responses to the new information. Firstly, it may make green assets more popular with investors. “Institutions and the retail clients will be inspired by the superior performance and will adjust their portfolios to higher exposure” to green real estate, he said.
Secondly, he said, “given the highly competitive nature of your [Exchange Traded Funds] products,” green investment funds benchmarked to the index are likely to hit the market.
The decision to develop the index came in response to demand from investors, Bourne said, particularly pension funds and sovereign wealth funds from the Middle East and Asia — both groups which invest heavily in U.S. REITs.
Tenant preference, savings in energy costs and even the U.S. regulatory environment are all factors that are likely to influence the index. But the people behind the metric think they know what direction it will trend — up. “We believe that given a choice between green property and brown property, over time, the index will show a positive differential,” Bourne said.
The index could potentially be the basis for any kind of financial product, Bourne said, though he does not expect the more mind-bending tradables, such as swaps and derivatives, are on the short-term horizon.
The indexes would not be possible were it not for the existence of Energy Star and LEED ratings, Bourne said, noting that there are very few industries that have done as much as the building industry to quantify environmental impacts.
Those with experience investing in green building practices attest to their value.
The Durst Corporation has developed a number of environmentally minded buildings in Manhattan, including the country’s first LEED-platinum certified skyscraper.
A lot of research went into selecting the best technologies to use in the company’s developments, Douglas Durst said, but it’s paid off.
“Even in the short term they’ve proved to be very successful,ˮ he said.
The U.S. Green Building Council, which sets the standards for LEED certification, is currently revising those standards. The new rating criteria were scheduled to be launched this year, but that has been delayed.