Green Real Estate Investment Trusts (REITs) Provide An Easy Way To Invest In The Up And Coming Green Real Estate Sector

This article is contributed by UOBAM. 

Cities across Asia are being increasingly exposed to extreme effects of climate change, including rising sea-levels, typhoons, floods and heatwaves. For example, this year’s temperatures in parts of India and across Pakistan are at their highest since records began 122 years ago.

As a result of these major disasters, governments and private sector companies are now taking more urgent action to implement climate policies and meet existing commitments. One of the economic sectors that the United Nations Environment Programme believes more can and should be done is real estate.

The United Nations (UN) notes that the buildings sector contributes to 37 percent of annual greenhouse gas emissions and consumes around 36 per cent of the world’s energy. With global buildings’ floor area expected to double by 2060, there is a high chance that, unless the situation changes, this sector could become an even bigger contributor to the climate crisis.

Asian Developers Are Shifting Towards The Development Of Green Buildings

This has increased the pressure on real estate companies in Asia to move faster to reduce their carbon emissions. There is a growing realisation among these companies that making buildings greener not only contributes significantly to the battle against global warming and helps countries fulfill net-zero targets, but it also appeals to other stakeholders like tenants, consumers and investors.

The International Finance Corporation (IFC), a member of the World Bank Group, estimates that by 2030, the green buildings sector within emerging markets will see US$24.7 trillion in business investment opportunities. This is driven by the expansion of building construction and the need to reduce emissions. Over 70 percent of this opportunity lies in Asia and primarily in green homes. This is because over the next decade, more than half of the world’s urban population will be living in Asia, with a substantial portion enjoying higher levels of affluence.

The IFC report highlights the potential for green buildings to make good business sense. It expects a green building to be 12 percent more expensive to build, but subsequent operational costs would decrease by 37 percent, sales premiums would increase by up to 31 percent, occupancy rates would rise by 23 percent and rental income would be 8 percent higher.

 

Green Buildings Have Knock-On Effects For Country ESG Targets

Aside from its climate impact, green buildings bring a range of economy-wide benefits to a country. The Singapore Green Plan for instance puts a huge emphasis on sustainable infrastructure and buildings. This is not only because of real estate’s ability to help the country meet its climate goals, but also the social and environmental benefits that it brings.

The country’s aspirations to create a “City in Nature” is backed not only by green construction materials and methods, but also the adoption of green design and technologies. Singapore’s Green Mark certification scheme offers a framework for assessing the overall environmental performance of a building, including its indoor environmental quality such as access to good ventilation and natural light. Many research studies suggest that these factors enable people living and working in green buildings to be healthier, sleep better and be less stressed.

Greenness Based On Global Assessment Standards

Singapore’s Green Mark aside, one of the biggest challenges for green real estate investors is verifying the greenness of a building. The LEED (Leadership in Energy and Environmental Design) green building rating system, developed by the U.S. Green Building Council, is one commonly-used global standard. China, India, and Korea have some of the most LEED-certified projects outside the US.

Similarly, a large number of property developers use GRESB, an independent data and benchmark provider, to verify that their projects meet global assessment criteria. In 2021, GRESB assessed 1,520 real estate entities, of which 238 were Asia-based. This compares to 187 Asia-based entities in 2020 and is a sign that Asian companies are becoming more serious about going green.

An Easy Way To Invest In Green Real Estate Is Via Green REITs

There are today over 860 REITs listed globally with a market capitalization of about US$2.5 trillion. REITs are typically companies that own, run or finance a portfolio of income-producing real estate projects. By investing in a REIT, individuals can benefit from dividend payments as well as capital gains if and when the REIT price rises. Because REITs are neither stocks nor bonds, they offer diversification value and historically have performed well in rising interest rate environments, in contrast to stock and bond markets.

Given the revolution in green buildings, it is not surprising that some REITs have evolved into Green REITs. This is when a company’s portfolio of projects are wholly or substantially “green”, based on a local building certification or other recognised environmental accreditation.  A study published in the Journal of Sustainable Real Estate in 2019 noted that 34 percent of Singapore REITs (SREITs) was Green Mark-certified.

The study found that there was a good relationship between the “greenness” of a REIT portfolio and its operating performance. The means that the more sustainable a REIT is, the better it can better manage it overall energy usage and greenhouse gas emissions, while simultaneously enjoying better tenant retention and higher occupancy rates. This in turn translates to greater cost savings, higher revenues and higher profitability.

A World First: The UOBAM Green REIT ETF

The UOB APAC Green REIT ETF is the world’s first exchange traded fund (ETF) investing in Asian Green REITs. It aims to replicate the iEdge-UOB APAC Yield Focus Green REIT index that was developed by SGX and UOBAM as part of the SGX iEdge product suite.

The index selects and covers 50 higher-yielding REITs listed across the Asian region.  Each REIT is weighted according to their relative environmental performance using GRESB’s real estate data for sustainability indicators such as energy and water consumption, greenhouse gas emissions, green building certifications, and overall ESG performance.

In this way, the index aims to identify high-quality, environmentally-sound building projects with good growth potential and able to deliver high dividend yield to investors. The index’s portfolio of 50 green REITS allows for good diversification while the ETF structure offers investors a high level of liquidity.

The growth of green real estate and green REIT investments point to the increasing recognition among Asian industry players and investors alike that greenness really does pay off.

If you are interested in the UOB APAC Green REIT ETF, click here for more information about the fund.

Important Notice & Disclaimers: Past performance of the Fund and its manager is not necessarily indicative of future performance. Investment involves risk, and the value of the Fund’s units, and any income accruing, may rise or fall. You should read the Fund’s prospectus (available from uobam.com.sg) and seek advice from your financial adviser before investing. If you choose not to seek advice, you should consider the whether the Fund is suitable for you.

The Fund may use financial derivative instruments.

See uobam.com.sg/apacgreenreit for more information and full disclaimers.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

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