GREEN BUILDING ANNOUNCEMENTS AND ITS IMPACT ON REIT RETURN

Abstract

The growing popularity of REITs as an investment vehicle is due to its ability to provide yearly dividend and also because its risk is lower than stocks and shares, thus making it ideal for diversification of an investor’s portfolio. Concurrently, investors are growing an interest in sustainable/green buildings, especially after the ratification of the Kyoto Protocol in 2005. While there have been numerous studies on REITs and green buildings, but most of these focus on them separately as an investment tool. As such, this study seeks to contribute to the understanding on how green buildings can affect REITs return. Specifically, it will focus on green building announcements and how it affects REITs return during the window period. This study aims to leverage on well established event study methodology and findings in the financial realm, and to determine its applicability to investors’ decisions on green buildings.

Investors will always seek to maximize their returns and all the more so if they have insider information or information that they believe will help to provide them higher returns. As such, with the benefits and positive reputation of green buildings, it is expected that announcements on owning a green building in a portfolio will bring about positive abnormal returns. To test the effects, of green building announcements, event study methodology is applied, followed by a multivariate regression to test for the effects of the possible explanatory variables and finally a study on the long term effect of green buildings as compared to the NAREIT index.

The key findings of this research showed that green building announcements does provide abnormal returns, this is especially so from the Day -1 to Day +1.The CAAR (Cumulative Average Abnormal Return), also showed positive returns from Day-1 to Day 3, which suggest that green building announcements has a positive impact on the REITs. However the regression results showed that variables such as type of building, year and cumulative size of green buildings in the portfolio have little or no effect on the returns. Also, the long term effect study provided mixed results as not all REITs with green building provided a better performance as compared to the NAREIT index on a one year basis. But when compared on a 3 year time frame, green building REITs does perform better than NAREIT generally.

Due to the limited data availability, it may have affected the results of this study and as such it is further recommended that the same study be done but with its focus on a different country, where information is more readily available and transparent.

All in all, this study while unable to prove with full confidence that green building have a positive impact on REITs, it does show that days before and after such an announcement was made, there were positive returns, which does suggest that investors do see it as a positive addition to the portfolio but they are less concern about it as a long term investment.