IS THERE A GREEN BOND PREMIUM FOR REAL ESTATE?

Abstract

This paper aims to review the growth of the green bond market for the real estate industry. In doing so, the study examines the attributes of green labelled (green) and non-green labelled (conventional) bonds to establish the effect of the green label and thereby investigates the existence of the green premium. The green premium is defined as the difference between the ask yield to maturity, less liquidity, of the green and conventional bonds in the real estate sector. A sample of 98 green real estate bonds is obtained from 2014 up till May 2018. From the same issuers, a sample of 353 conventional bonds is gathered. A multivariate regression is first conducted on both samples to examine their attributes and derive the preliminary effect of the green label. To obtain the green premium, two methods, propensity score matching and direct matching approach, are applied. The findings show a positive green premium of 127 bps obtained from Method 1 and a premium of 12 bps obtained from strict matching in Method 2. The implication is that real estate companies may prefer to issue conventional bonds to avoid additional green certification costs. However, return-driven investors may be attracted to green bonds over conventional bonds for the same level of positive yield, thus bringing more financing flow into green market. As green bonds are a contemporary research area, its limitations include the thin literature on green premium that do not provide sufficient insights to craft more specific research questions, as well as the small dataset for the real estate market segment. However, in the light of the developing literature on green bonds, this paper serves as a timely first step to fill the literature gaps in real estate and green bond market.