Room For More Green Reits: Study

Source : The Business Times, December 10, 2007

Need to push for more eco-friendly practices in real estate, especially Reits sector: NUS report

REAL estate investment trusts (Reits) are becoming increasingly ubiquitous in Singapore, thanks to their popularity. But more could be done to improve their environmental impact, given their growing significance in the property scene.

Dr Joseph Chun of law firm Shook Lin & Bok has noted - in a recent study he undertook while he was then employed by the NUS’s Department of Real Estate - that the legal framework in which Reits operate has the likely effect of undermining the Singapore government’s efforts to encourage green property development and management.

And he has suggested that there may be a need to consider measures to counteract these presumably unintended adverse environmental effects.

‘Real estate is one of the most significant asset classes in Singapore … However, the land is more than an investment asset to be managed for maximum income; it is also our abode in which we live, work, and play. Investment decisions that enhance or degrade this abode have serious impacts on our lives that go beyond financial returns,’ Dr Chun said, in his article Are Reits Built to be Green?.

He suggests that more needs to be done to encourage environmentally friendly practices within the property sector in general, and the Reits sector in particular.

The popularity of Reits as an investment tool in Singapore has encouraged the growth and creation of such trusts. The number has grown from just one - CapitaMall Trust, listed in July 2002 - to 20 Reits now listed on the Singapore Exchange.

There have been estimates that Reits could eventually constitute up to 70 per cent of the listed real estate in Singapore - in line with international trends.

‘As Reits increase their dominance of the urban environment, the need to avoid or at least mitigate those aspects of Reit law that encourage unsustainable behaviour will correspondingly become more urgent,’ Dr Chun proposed in his article.

He believes the nature of Reits as an investment tool and the legal framework governing them significantly restrict the scope of any green agenda.

He observed that Reits are designed to appeal to investors looking for short-term, steady cash returns - with little to motivate the Reit manager to invest in measures that benefit the public or the occupants of the Reit’s properties, ie. green measures, if these do not increase the Reit’s income.

‘As long as tenants who pay the utility charges are not willing to pay a premium for energy efficiency or healthier indoor environment, investing in green refurbishments that do not provide significant quantifiable financial returns is simply not an attractive use of limited funds,’ he noted.

The short-term orientation is further encouraged via the reporting requirements placed on Reits - with managers having to report the trust’s financial performance every quarter, value each property of the trust at least once a year and report the annual value in the annual report. These act as a barrier towards a life cycle approach to investing in environmental performance.

There are also funding constraints to pursuing a green agenda, with Reits having to distribute most of their taxable income to unit holders in order to maintain their tax transparent status.

‘The legal limit on the amount of its funds a Reit can invest in property development coupled with the relatively risky nature of property development also doesn’t help the green cause as it means that a Reit is more likely to seek out existing buildings to acquire rather than opportunities to develop new properties,’ Dr Chun said.

Typically, it is easier and less costly for developers to incorporate environmentally friendly features into new buildings than it is to improve the energy efficiency of existing buildings.

A cue could be taken from the US, where several states offer tax credits for buildings that meet certain green standards.

Dr Chun believes the law can be amended to encourage the development of more environmentally friendly buildings. He suggests relaxing the legal requirements on the minimum distribution of dividends and limits on borrowings in respect of retained earnings or borrowings invested in refurbishment, retrofitting and renovation activities that lead to a property achieving a green rating.

He also believes that measures could be put in place to mandate annual assessments of the environmental performance of the properties owned by Reits, alongside the current annual valuations needed of the properties owned by Reits. ‘(This will) help ethical investors make informed decisions about the green value of a Reit, thereby giving the Reit looking to attract the ethical investors’ dollar a motivation to upgrade its environmental performance,’ he said.

Dr Chun concludes, in his piece: ‘Sustainable development requires us to integrate the environmental considerations into all our development decisions, including our investment decisions, so it is unsatisfactory when the law encourages investment in real estate that has the potential to cause environmental harm without simultaneously providing for compensating measures to avoid or mitigate the harm.’