EXPLORING THE RELATIONSHIP BETWEEN REITS AND ENERGY EFFICIENCY INVESTMENTS: RATIONALES OF REIT MANAGEMENTS

Abstract

The paper studies the dynamics between REITs and energy efficiency investments. In order to understand REITs' investment rationales on energy efficiency, in-depth interviews were conducted with representatives from REIT managements. This field study reveals that while REIT managements generally agree that energy efficiency brings operational savings, their priorities on managing energy efficiency were different. Key factors that affect energy efficiency investment decisions include a high rate of return, tenants' lease structures, REITs' business sectors and influence of the REIT sponsors' energy efficiency directives, as well as Government incentives. The research also addresses the issue of whether the operational, financial and legal structures of REITs drive or impede energy efficiency investments. While most REITs felt the structures did not discourage such investments, respondents admitted that limitations on retained earnings and gearing levels affected the scale of energy efficient investments made. Majority of the REITs accord higher priority to space enhancement investments that directly contributed to rental income rather than energy efficiency investments as the REIT managements observe that energy efficiency investments do not lead to higher tenant take-up rates and higher rents. The biggest barrier to energy efficiency investments is how its returns are not immediate and 'visible' in the REIT's quarterly financial reports. Taking the research one step further, the study also shows that REIT managements were not optimistic about the feasibility of REITs specializing in energy efficient buildings because investors and tenants do not recognize its financial returns and there are constraints in acquiring a portfolio of energy efficient buildings.