Economic Efficiency of Green Buildings - Essay Example

Economic Efficiency of Green Buildings 1. The environmental value of green buildings The net operating income and the capitalization rate for a building are the two key indicators of return on investment on a real estate property over a period of time. The value of a property is directly proportional to the net operating income from the property and is inversely proportional to the capitalization rate. According to Ito (2005), green buildings not only have a higher net operating income, but also a lower risk premium. Figure 1 (below) shows how green buildings generate more revenue by reducing various expenses, and how they have a lower capitalization rate due to reduced risk premium. Figure 1: Analysis of Value Added to Conventional vs. Green Properties (United Nations Environment Programme Finance Initiative, 2008) 2. Empirical study of green buildings’ economic efficiency We can get information about the environmental performance of CASBEE certified buildings by accessing their certification reports. Also, the cash flow information about some CASBEE buildings, which are owned by real estate investment trusts, is available in their respective financial reports. Using this data, an empirical study was conducted to see if green buildings and conventional buildings owned by the same real estate investment trusts generate different values for the firm. 3. Data analysis An analysis to segregate conventional and green buildings was first conducted on all properties held by the Japanese Real Estate Investment Trusts (J-REITs). The data for properties was collected based on the latest financial reports as of March, 2011. It was found that out of total 1822 properties held by 35 REITs, 23 are CASBEE certified buildings (Table 1). For further analysis then, the 1799 non-CASBEE certified building were considered as conventional, the 23 CASBEE certified buildings were considered as “green buildings “ for the purposes of this analysis. Table 1: CASBEE Certified Buildings Owned by REITs To determine economic performance, one can use the capitalization rate, calculated by dividing the net operating income by the appraisal value. The capitalization rate is the rate of return on investment, which is commonly used by investors to determine profitability. Equation 1: Capitalization Rate I. Dissimilarity of the capitalization rate between CASBEE certified buildings and non-certified buildings The first analysis was conducted in order to determine if there is a dissimilarity of capitalization rate between CASBEE certified buildings (green buildings) and non-certified buildings (conventional buildings). Table 2 represents basic statistical information such as sample size, mean, standard deviations, and standard error mean for both the dataset. Table 2 Levene’s test is a test to assess the equality of variances in different samples, and tests the following hypothesis: “Hypothesis Ho: equal variances of population assumed”. The test statistic of the test of the difference between two population means depends on whether or not this hypothesis is rejected. Since this output result shows that p value 0.052 > significance level 0.05, this hypothesis cannot be rejected. Therefore, we can conclude that the populations have equal variances. The test of the difference between two population means tests the following hypothesis: “Hypothesis Ho: the population means of the two groups are equal”. The test statistic with the assumption of equal variances is adopted since equal variances are assumed from the result of Levene’s test. The output result shows that t=0.737 in the case of making the assumption of equal variances and that its p value is 0.461. That is, the hypothesis cannot be rejected because here p value 0.461 > significance level 0.05. We can therefore conclude that the two populations have equal mean. Table 3 From the two tests, we see that both populations have equal mean and variance. It therefore means that a statistical dissimilarity of capitalization rate between CASBEE certified buildings and non-certified buildings is not found. II. Trend among CASBEE certified buildings A dissimilarity of capitalization rate was not found between certified buildings and non-certified buildings. Therefore, trends among certified buildings were examined. A regression analysis was carried out regarding the relationship between the capitalization rate and the building environmental efficiency, which is a measure used in performing the CASBEE evaluation. Figure 2 below shows the scatter plot of capitalization rate against building environment efficiency. Figure 2: Scatter Plot of Capitalization Rate against Building Environment Efficiency Now, for the regressions analysis we have: Hypothesis: Capitalization rate is not affected by building environment efficiency Null hypothesis: there is a linear relationship between capitalization rate and building environment efficiency Dependant variable: Capitalization rate of buildings Independent variable: Environment efficiency of the buildings Table 4 shows that the regression line is: (Capitalization Rate) = 0.068-0.007*(Building Environmental Efficiency) since B is at 0.068 and -0.007. Beta is the standard regression coefficient and is the same as the correlation coefficient of the building environmental efficiency and the capitalization rate. The hypothesis can be rejected because of the T value of -3.645, p value 0.002 Read More