Green buildings facing frothy valuations in ESG push: SMU-Mapletree panel

SINGAPORE (THE BUSINESS TIMES) – Valuations of green assets could get frothier in the short run, said panellists at Mapletree Investments’ annual lecture at the Singapore Management University.

Investment flows are chasing environmental, social and corporate governance (ESG) assets, and pushing valuations up, said Stijn Van Nieuwerburgh, professor of real estate at Columbia University’s Graduate School of Business.

These higher price tags are unjustified, however, as rents have not increased significantly for green assets, he said during the virtual panel discussion on Wednesday. The operating expenditure of green buildings has not declined “dramatically” either.

Wong Mun Hoong, Mapletree’s regional chief executive officer for Australia and North Asia, also said tenants are not paying “much more” for space at green buildings.

This comes even as real estate companies are paying more attention to sustainable building design, renewable energy and tenants’ mental well-being – through green spaces and natural lighting. “There are more and more things to incorporate (under the ESG strategy). We need to weigh the costs and benefits… We don’t get much more savings, but it’s the right thing to do,” Mr Wong said.

Priya Kini, HSBC managing director and head of global banking, Singapore, expects to see strict penalties in the near future for assets that are not sustainable. She noted that ESG metrics have also become a critical part of conducting due diligence on assets.

At the same time, Ms Kini estimated sustainable finance is likely to see a “huge spike” in growth to become the only form of financing over the next 25 to 30 years. “By definition, all finance will move towards that.”

What all this means for property owners is that there is a risk they could end up with climate-change “stranded assets” or “brown” buildings that no longer satisfy sustainability requirements, said Prof Van Nieuwerburgh.

Such assets will be worth “a lot less” then, he added, as lenders will likely hesitate to offer financing while insurers may not provide property insurance.

“We should expect lower returns on green buildings, going forward, because we’re essentially overpaying for these assets today,” Prof Van Nieuwerburgh said.

“In the short run, all this capital chasing and too few green buildings essentially leads to a bubble… the cash flows (or net operating income) are not there to make up for it.

“How this corrects, I think, is an interesting question.”

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