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This framework provides an objective tool for real estate asset managers to evaluate Returns on Investment (ROI) for green capex in a holistic manner.

Vinamra Srivastava
Chief Sustainability & Sustainable Investments Officer, CLI 

Executive Summary

As sustainability becomes a key pillar of long-term value creation in real estate, CapitaLand Investment (CLI) has developed a proprietary Return on Sustainability (RoS) framework to rigorously assess the financial impact of green capital expenditure.

Designed as a data-driven, decision-making tool, the RoS framework evaluates eight key variables that influence financial performance: green capital expenditure (capex), utility savings, carbon cost reductions, rental premiums, longer leasing durations, lower interest rates, reduced insurance premiums, and enhanced asset valuations. By quantifying both risks and returns, this model equips asset managers with a holistic view of the tangible value that sustainability initiatives can unlock.

More than a reporting metric, the RoS framework serves as a capital allocation compass - guiding decisions on investment, asset-level budgets, cost-benefit analysis for asset enhancement initiatives or redevelopments. In an environment where regulatory standards, investor expectations, and climate resilience are evolving rapidly, having a structured methodology to assess the financial case for sustainable investments is not just prudent - it is essential. CLI’s RoS framework bridges the gap between environmental responsibility and financial accountability, ensuring that decisions around sustainability are grounded in both environmental intent and financial discipline.

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Background: 

The Green Hurdle Faced By Asset Managers

Considering the need for robust financial justification for any green investments in buildings, asset managers commonly face questions such as, ‘What is the ROI or payback period?’, ‘How can I justify this to investors?’, or ‘How do I address high upfront improvement costs?’.

While the answers for certain green interventions, such as energy-efficient lighting upgrades, are quite straightforward due to a short payback, it can be significantly more challenging to justify interventions with much longer payback periods.

State of Current Research

There has been consistent research in the market on quantifying the green premiums for sustainable buildings. Key highlights from such reports are summarised below:

● Asia Pacific: The estimated green premium ranges from barely 1% to as much as 4% over non-green buildings. As of Q2 2024, green office buildings reported an occupancy rate of 83%, while non-green office buildings had an occupancy rate of 81%¹.

● China: Rental premiums for green-certified Grade A offices in Beijing, Shanghai and Guangzhou are between 2% to 10%².

● Hong Kong: Rental premium of 2% to 5% associated with green-certified Grade A office across four business districts³.

● Japan: For Tokyo office market, rental premium for medium-sized old green buildings is 5.4%, while that for large-sized new green buildings is 2.6%⁴.

● Australia: Rental premium of 2% to 8% for office buildings with higher NABERS rating⁵.

● Europe: Buildings with sustainability certification earn approximately 7% rental premium over their non-certified peers. Offices with the highest Energy Performance Certificates (EPC) ratings enjoy rent premium of 10% to 15% on average⁶.

Most of these studies are typically based on a Hedonic Pricing model using regression analysis, comparing rental premiums between green and non-green buildings while keeping constant factors such as location, age, amenities, specifications, etc. In practice however, due to the multiplicity of market factors, it can be difficult or even nearly impossible to isolate the impact on asset rental premiums due solely to the building’s green factors.

On-the-ground customer engagement reveals that while tenants generally qualitatively appreciate the value of green buildings and may at times even exclude non-green buildings from their consideration set, it is hard to directly link any rental uplift to how green a building is. Some current studies also rely upon surveys or market data, and do not have access to the underlying financial models of actual assets to assess the impact of green capex and other factors. These are the gaps that the RoS framework aims to fill.

Return on Sustainability Framework 

Asset Level Methodology 

To approach this subject from a broader perspective, aside from rental premiums associated with green capex, a list of levers that could impact an asset’s Internal Rate of Return (IRR) was identified. The levers were then assessed based on the magnitude of impact on returns and likelihood of occurrence (Figure 1).

The impact on returns is driven by the extent, direction, and magnitude to which each lever drives the cash flows in the financial model. For instance, lower capitalisation rates (cap rates) and rental premiums have an outsized impact on valuation and returns, while interest rate savings may not move the needle that significantly.

The likelihood of occurrence is driven by available empirical evidence, the level of existing implementation, and the extent of control by the asset manager. For example, green capex decisions are within the company’s control and utilities savings have well-established results and therefore ranked as ‘high likelihood’, while factors such as asset valuation present challenges in isolating the impact of green capex and have a ‘low likelihood’ of occurrence.

1. Source: CBRE - “Decarbonising Asia Pacific’s Office Buildings”, March 2025.

2. Source: JLL – “The Value of Sustainability: Evidence For a Green Premium in Asia”, November 2022.

3. Source: Colliers – “ESG: Giving Built Assets a Competitive Advantage”, November 2023.

4. Source: MDPI Sustainability – “Green Premium in the Tokyo Office Rent Market”, November 2021.

5. Source: CBRE – “The Green Building Premium – Does it Exist?”, March 2023. NABERS (National Australian Built Environment Rating System) is a government initiative providing certified sustainability ratings to support the efficiency of buildings across Australia.

6. Source: CBRE – “Is Sustainability Certification in Real Estate Worth It?”, November 2023. EPC: An Energy Performance Certificate (EPC) rates how energy efficient your building is using grades from A to G (with ‘A’ the most efficient grade).

Although not currently included in the asset-level framework, Renewable Energy Certificate (REC) / carbon offset costs can be considered on a case-by-case basis. RECs / carbon offsets can be purchased to fill the gap against stated public carbon targets. This will negatively impact returns without a change in the asset condition.

A scenario / sensitivity analysis was also conducted outlining three distinct cases – Best, Base, and Worst – to evaluate IRR impact under different conditions (Figure 2). The input variables were defined based on inputs from both CLI’s proprietary data and market sources.

Lastly, six existing assets owned and managed by CLI were chosen for the analysis. In order to mimic a regional portfolio under a private equity fund, the assets chosen are commercial offices and business parks located in Australia, India, Japan, and Singapore. Each asset’s current financial model was updated, incorporating these variables under the different scenarios. The IRR impact of each variable was then assessed independently as well as in conjunction with all other variables to form a holistic analysis.

Key Findings

For all but two assets, the Base-Case was sufficient to generate a net positive impact on IRR. In the Best-Case, we observed a returns uplift of up to 2.1%. However, the Worst-Case erosion of returns also stretched to 2% for one asset (Figure 3).

Portfolio Level Methodology and Results 

Building upon the asset-level analysis framework above, another methodology is then proposed for evaluating RoS at a portfolio level. This adaptation acknowledges that it may not be practical to update individual financial models for IRR impact on a large number of assets in a portfolio, hence requiring a simpler ‘break-even’ analysis that can be used easily by portfolio managers and sustainability professionals. Consequently, while the core concept remains consistent, several impact factors have been modified for portfolio-scale application (Figure 5). 

A bottom-up study was separately carried out to assess the capex required to meet SMP targets for over 350 assets owned by CLI across the world. The output of that exercise was then included within the portfolio-level analysis. For example, for every S$1,000 of green capex, the associated utilities, carbon tax and RECs savings, among others, were assessed. The results are compiled into Figure 6 below.

The study found that the portfolio-wide capex allocated for greening assets is nearly fully recovered from savings across utilities, RECs, carbon tax, and interest rate reduction. The potential valuation uplift, while significant, is more difficult to isolate and has therefore been listed as an ‘Optional’ factor. However, even without this appreciation, the green capex can break even solely through the capitalised savings from the other four factors.

Conclusion

The RoS framework, when applied to existing assets within the sample portfolio, shows that there is generally a positive impact on IRR from the implementation of green capex.

Not all assets will necessarily see an improved IRR. However, even in such cases, green capex protects against asset value destruction.

Applications across multiple assets and sensitivity analysis demonstrates that factors such as rental premium, higher asset valuation, and increased leasing time will generally dominate the impact on IRR while factors such as reductions in insurance premiums and interest rates will generally have a minor impact.

The portfolio-level methodology can be adopted to assess the portfolio-wide impact and can prove to be a more practical and quicker way to assess the financial feasibility of green capex investments. When applied to CLI’s global portfolio, the capitalised value of utilities savings, carbon tax savings, reduced RECs purchased, and interest rate savings was able to almost entirely make up for the upfront capex investment.

Recommendations

It is acknowledged that these results, whether at the asset-IRR level or the portfolio-breakeven level, can vary significantly depending on various factors including the type of asset, location, customer preferences and policy regime among others.

The purpose of this framework is to provide a tool to asset managers for analysing the potential ROI for green capex investments, both at asset as well as portfolio levels. This could be utilised to aid in business decision-making during budget formulations, asset enhancement initiatives, green capex allocations, redevelopment cost-benefit assessments, RECs / carbon offsets purchase decisions and other similar projects where the value of green investments needs to be justified.

Various asset managers and consultants alike are working on similar frameworks to quantify the financial value of green real assets, and to assess the financial feasibility of green investments in the real estate sector. Indeed, the more research and pilots focused on this topic, the stronger the justification will be for asset managers, investors and customers to invest in greening their assets and strengthening their value and resilience against climate change.