Green and climate-resilient buildings and properties provide higher returns on investment, typically have lower vacancy rates and their cost-to-income ratios are tracking ahead of buildings that are managed without green objectives.

On a like-for-like property asset basis, buildings and properties that are certified as green mitigate the climate risks associated with these property investments, and green-certified properties outperform non-certified buildings and property across all financial metrics, said market research and investment decision support company Morgan Stanley Capital International (MSCI) South Africa client coverage VP Eileen Andrew.

The latest ‘MSCI South Africa Green Property Index 2024’, released on July 1, has again showed that green-certified buildings and properties are more resilient assets than non-certified buildings and properties, and the results continued to reinforce the investment rationale for sustainable, resource-efficient real estate.

For 2024, the index showed that green certified prime and A-grade offices produced a total return of 10.1%, which was 120 basis points above that of non-certified office assets of a similar quality.

Since the index’s launch in 2016, green-certified offices have outperformed non-certified assets by a cumulative 28.2%, delivering superior capital growth and operational resilience.

Since 2016, prime and A-grade green-certified offices have consistently delivered stronger capital growth than non-certified office properties each year, underscoring the resilience and value proposition of sustainable buildings.

While the office sector has led the way in the adoption of green certification, the performance advantage is becoming increasingly evident in the retail segment as well - where a similar return differential emerged in 2024, signalling broader market recognition of the investment benefits of sustainable real estate.

“Nine years of consistent outperformance both on valuations and income show that certified properties deliver higher returns to investors. The next step in this journey is to show that certified properties better mitigate climate risk, and MSCI is well equipped to do that,” said Andrew.

The index only tracks institutional investment organisations and funds, but derives direct data from about two-thirds of the R400-billion real estate portfolios of participating organisations in South Africa.

“We have lots of data from clients. Our MSCI climate laboratory in Switzerland ran the South African real estate dataset of about R400-billion through their climate risk models, and provided benchmark information, which we can break down in terms of region and property type, as well as other physical attributes.

“This allows us to give guidance on the impact of green certification of properties on vacancies, returns and operating metrics, as well as climate factors,” she said.

This enabled MSCI South Africa to build a benchmark figure for the local market. South Africa's average property carbon intensity is about 130 kg of CO₂/m² a year, she added.

This would imply a warming impact of 2.1 °C by the end of the century, which is too high and well above the 1.5 °C goal of the Paris Agreement. This also means that there is inherent climate risk in the South African market, she said.

Further, the analysis of the data enables MSCI to assess physical climate risks to properties. Surprisingly, these numbers are quite small in South Africa, meaning that assets are generally quite resilient against physical risks posed by climate change.

However, while the average number was quite small, there were some assets which were exposed, Andrew added.

The country's transition risks to properties were much higher than physical risks and this was where the impairments in values showed more strongly, she said.

By 2030, about 2.5% of property values would be at risk to climate impacts owing to the amount of carbon those assets produced. This figure went up to 25% of the value of the assets by 2050, she highlighted.

“This impact on transition risks is primarily owing to how electricity is generated in South Africa,” she said.

CERTIFIED PERFORMANCE
The outperformance of green-certified prime and A-grade offices in 2024 was driven by a higher capital growth on the back of a 34% higher gross income per square meter, a significantly lower operating cost to income ratio of 39% compared with 46% for non-certified offices and a 30 basis point lower capitalisation rate.

“The index has shown, over several years, that green-certified offices typically have better investment returns than non-certified offices,” said industry environmental nonprofit organisation Green Building Council South Africa technical head Georgina Smit.

Further, for green certified retail property, the outperformance was similar in 2024. Green-certified retail property delivered a total return of 13.2%, or 130 basis points higher than that of non-certified retail, with the outperformance driven by an 80 basis point lower capitalisation rate and a 18% higher net operating income per square meter.

Similar to the green office sample, certified retail properties also boasted a lower cost to income ratio of 41% compared with the 44% of its non-certified peers.

Additionally, green certified offices also had a lower discount rate, driven in part by a lower vacancy rate at 11.1% compared with 14.8% for non-green certified prime and A-grade offices, which reinforces the premium placed on green office accommodation by occupiers and valuers alike, she said.

“This year’s expansion to include the retail sector is exciting for us and reflects our commitment to supporting the drive for green across all building typologies. Through this expansion, we’re looking forward to tracking these results, and bringing new insights to market,” said Smit.

The expansion of green certification in the retail space remained limited, with only 9% of retail assets in the index being certified. However, plenty of runway remained and MSCI aimed to gather data from retail as more sought green certification to be able to segment its data and gain more granular insights, said Andrew.

“This year's index shows that the average returns for green-certified retail properties was 13.2% and for non-certified retail properties the average returns were 11.8%.”

Certified retail properties also showed stronger fundamentals in terms of net operating income growth, vacancy rates and operating costs, she noted.

“These numbers are already pointing in the right direction, but it is still early days, similar to that observed in the movement to certify offices, with few certifications and we can expect to see the benefits grow as more retail properties work towards green certification,” she said.