Constructing investment performance sustainability indices for commercial office buildings in Australia

The property sector and broader investment community is constrained by a lack of adequate data surrounding the investment performance of sustainable property. In response, this paper details the construction of a green building index to track the investment performance of commercial property assets that have been awarded an environmental performance rating. In Australia, two prominent tools for awarding environmental ratings to commercial property have emerged. These are the NABERS rating system for existing buildings and the Green Star rating system for design and construction of new buildings. Based on these rating tools the proposed index provides the first quantification of investment returns for ëgreen propertyí. The index provides tangible metrics on the performance of green buildings with a focus on investment rather than operational considerations. As such, the index can be used for benchmarking analysis on portfolios with green buildings. Results show that assets with high sustainability ratings have strong investment returns and outperform non-rated buildings. Higher rated assets experience capital value stability through the trough and recovery phase of the property investment cycle. In addition, assets with high ratings show lower capitalisation rates when compared to their peers, which is consistent with lower investment risk.