Correlation Relationships between Green Office Attributes and the Expected Returns of Investors from Green Office Buildings Mona Isa 1,2, Megat Mohamed Ghazali Megat Abd. Rahman 2, Ting Kien Hwa 1 and Ibrahim Sipan 2 1 Faculty of Architecture, Planning and Surveying (F.S.P.U), Universiti Teknologi MARA (UiTM), Shah Alam, Selangor Darul Ehsan, Malaysia 2 Faculty of Geoinformation and Real Estate, Universiti Teknologi Malaysia (UTM), Skudai, Johor Bahru, Malaysia ABSTRACT This preliminary study is conducted to determine the relationship between green office attributes and the expected return perceived by investors from green office buildings in Kuala Lumpur. The survey considers return on investment (ROI) and consists of financial, social and environmental benefits by seeking responses from building owners and their representatives to obtain perceived expected returns when investing in green office buildings. The Pearson correlation analysis reveals that the investors are keener to invest in green office buildings because of the cost savings achieved from the green attributes. This finding indicates a significant relationship between green office attributes and the ROI. This study is expected to fill the void of other such findings in Malaysia in the context of the advantages of green office investment compared with conventional investment. With this study, the transition of investments from the conventional to green buildings is envisaged to be more rapid and acceptable by the community as a whole. The study likewise contributes evidence to the growing body of research on green office building investments in Malaysia. Keywords: green attributes, return on investment (ROI), green office building 1.0 Background The new type of investment in green office buildings is currently capturing investor interest because this new feature offers a better investment option and financial, social and environmental returns. However, the significant benefits from these green attributes have not been fully assimilated into the investment equation. Green attributes for commercial properties generally include energy efficiency, climate control, waste and water management, adaptability, accessibility, occupier and contextual fit, and its operational system (Ellison & Sayce, 2007). A green rating accreditation system is provided to green office buildings according to the degree of its greenness. The higher the degree of green attributes applied onto the building, the better the awarded rating. Each green office building has unique characteristics as reflected by the green attributes applied to the building. The green available rating systems include, the US Green Building Council s Leadership in Energy and Environmental Design (LEED), Building Research Establishment s Environmental Assessment Method (BREEAM), Green Mark under Building and Construction Authority Singapore, Green Star Australia, and Green Building Index (GBI) Malaysia.
Every country employs similar criteria, but the issue of weighting for each criterion differs from country to country. Weight differences indicate that energy is the highest weighting when measuring the greenness of a building, followed by materials (Reed et al., 2009). Other features, such as management, transport, health, well-being, water, land use, ecology, and pollution, have non-uniform weightings in determining the green level of a particular building. These differences can be observed in the green criteria evaluation by BREEAM, LEED, Green Star and Green Mark. Other factors that influence these differences are likewise attribute to geographical and climate factors. In Malaysia, the guidelines for office buildings that fall under non-residential green construction are based on the six important criteria outlined by the GBI, namely, energy efficiency, indoor environment quality, sustainability of site planning and management, materials employed and resources, water efficiency and innovation (GBI Malaysia, 2013). The highest rating given based on the point allocation is platinum, followed by gold, silver and the lowest is certified. The financial return elements of green office investments, such as higher rent, capital appreciation and cost savings provide a strong platform in providing evidence for investors to invest. Among recent studies that relate the benefits of sustainability to real estate investment are Morri and Soffietti (2013), Newell, MacFarlane, and Kok (2011) and Harrison and Seiler (2011), to name a few. Several studies revealed that green office buildings positively impact the ROI. Mona Isa et al., (2013) summarised that green attributes (i.e green rating system, energy and water efficiency and indoor environmental quality) positively impact to ROI. These impacts include higher rental and market values, better occupancy rate, increased net rental income through cost savings of energy and water conservation, waste efficiency and decrease in operational and maintenance costs. Thus, the current study investigates whether the green attributes perceived by the investors are important in influencing ROI because green office buildings in Malaysia are new. Limited academic studies have thus been conducted in Malaysia to verify that green attributes positively affect the ROI. 2.0 Objectives To determine whether green office building attributes are significant for investment returns or additional factors contribute to such differences compared with non-green office buildings, establishing the rationality of investment in green office buildings with the following objectives is crucial: (a) To examine the perceived returns expected by the investors when investing in green office buildings (b) To determine the relationship between green attributes and ROI in green office buildings perceived by the investors. 3.0 Research Methodology and Methods The questionnaire survey is a method for obtaining a standard and stable collection of data from a specific location. This study employed a survey approach, in which 394 investors of office buildings in the Kuala Lumpur region were selected to answer a questionnaire regarding their perception on green office building investments. The opinions of investors provide valuable information about the degree of importance towards their expected returns
from green office building investments. The return factors consist of financial, social and environmental benefits. The criteria of green attributes based on the GBI assessment were likewise provided to the respondents as they were asked to share their opinions on the importance of each green attribute to the ROI. The confirmation of issues through this preliminary survey strengthened the need to conduct this research by focusing on the rationalisation of green office building investments in Malaysia. Results from the pilot survey conducted in July 2012, indicate that institutional investors own more than one office building. Multiple ownerships likewise exist in one building because of joint-ventures. Institutional and private investors have no established databases in the Klang Valley, except for property developers. The sampling size is thus based on the total population of office buildings to track down investors who own office buildings in this region. From the total of 394 questionnaires distributed to all office buildings in Kuala Lumpur, 106 questionnaires were returned for this study. However, eight unusable questionnaires received from respondents were excluded. A total of 114 responses (28%) represent an effective response rate. 4.0 Results and Discussion This study aims to establish that expected returns are perceived as important and determine the significant relationship between green attributes and ROI as perceived by investors of green office building investments. The results can rationalize green office building investments in Malaysia. In achieving this objective, descriptive, frequency and mean score analyses are used. 4.1 Demographic Profile This section briefly discusses the demographic profile of the respondents such as types of investors, office building ownership and office building types. It also provides general information on the current level of green office building investments in Malaysia. Table 1. Types of Investors Group Frequency (No.) Percentage (%) Institutional 51 48.1 Private Person 13 12.3 Property Developer / Company 42 39.6 Missing = 0 From Table 1, the majority of organizations that own office buildings in Kuala Lumpur are institutional investors. These investors range from financial institutions and, insurance companies to, building societies and, investment trust or fund management companies, Pension fund and government agencies represent 48%, followed by property developers (39.6%) and the remaining are the private individuals (12.3%). Institutional investors represent the highest percentage involved in office investments in Kuala Lumpur.
Table 2. Frequency of Office Building Ownership and Type Owning an Office Building Type of Owned Office Building Group Frequency % Group Frequency % Owner 88 83.0 Descriptive Statistics of Owned Office Building Std. Mean Dev Grou p Non- 67. 72 Green 9 Green 7 6.6 Both 9 8.5 Missing 18 17. 0 Non- Green 10.427 39.63 3 Su m 855 Green 1.563 1.031 25 Tenant 18 17.0 X X X X X X X Missing = 0 From Table 2, most of the organizations (83%) are building owners with 72 office buildings as non-green, 7 as green-certified, and 9 as both green and non-green office buildings. In contrast, only 17% of the organizations rent their buildings. Majority of the organizations own non-green office buildings (67.9%), 6.6% own green office buildings and another 8.5% own both green and non-green office buildings. The illustrations of the percentages are shown in Figure 1. 17% 83% Owner Non-Owner 8% 7% 17% 68% Non-Green Green Both Missing Figure 1.0 Frequency of Owning Office Buildings and Types 4.2 Importance of ROI from Green Office Building Investments as Perceived by Investors Table 3. Perceived Opinion of Investors on the Sources of ROI from Green Office Building Investments No. Item Mean (M) S.D 1 Energy conservation 4.13 0.536 2 Water and waste efficiency 4.04 0.584 3 Low operation and maintenance costs 4.00 0.640 4 Capital appreciation 3.92 0.603 5 Green incentives 3.80 0.668 6 Satisfaction from occupation 3.76 0.711 7 Rental Income 3.75 0.727
8 Occupancy Rate 3.74 0.721 9 Green Tax Assessment Benefits 3.73 0.670 10 Yield 3.61 0.626 11 Branding 3.56 0.806 12 Minimizing pollution 3.55 0.794 13 Image 3.52 0.842 14 Sustaining the environment 3.50 0.908 15 Insurance Premium 3.50 0.908 16 Corporate Social Responsibility 3.29 0.828 Table 3 indicates that energy conservation (M = 4.13) is perceived by investors as the most important item, followed by water and waste efficiency (M = 4.04), and low operations and maintenance cost (M = 4.00). Capital appreciation (M = 3.92) is perceived as important after the cost-saving attributes. Financial returns and cost savings were the most important return factors that influenced the investors when investing in green office buildings, followed by social and environmental benefits. The least important factors identified were insurance premium incentive and corporate social responsibility with a mean score ranging from 3.29 to 3.50. 4.3 Green Attributes and ROI from Green Office Building Investment A correlation analysis was performed to identify a significant relationship among green office building attributes and return factors, whether financially, socially or environmentally. The correlation analysis is conducted to determine whether the green attributes have significant relationships to returns on green office investments or vice versa. The sign preceding the correlation coefficient indicates whether the observed relationship is positive or negative. It can be weak, moderate or strong. The relationship between the variables was investigated using Pearson s correlation coefficient. Preliminary analyses were performed to ensure no violation of the assumptions of normality, linearity and homoscedasticity occurred (Pallant, 2010). The guidelines of the strength of relationship are as follows: (a) Small (r = 0.10 to.29), (b) medium (r = 0.30 to 0.49) and (c) and large (r = 0.5 to 1.0). 4.3.1 General Summary of Green Office Attributes and ROI Table 4. Pearson s Correlations between Green Office Attributes and ROI Item Construct 1 2 1. Green Attributes Pearson 1 0.564 ** Correlation 2. ROI Pearson 0.564 ** 1 Correlation Notes **. Correlation is significant at the 0.01 level (2-tailed). Table 4 shows that the green attributes are generally statistically significant to ROI. The ROI represents the financial return, social and environmental benefits. A strong positive
correlation was observed between the green attributes and ROI variables (r = 0.564, n=106 < 0.01). These confirmatory finding represent a step in pursuing a more advanced analysis using regression. The identification of the relationship between these two constructs through correlation analysis partly fulfils the second objective of this research. The components of each ROI (i.e., financial return, cost saving, social benefits and environmental benefits and its correlations to green office attributes) are provided in the succeeding sections. 4.3.2 Financial Return Table 5. Correlation Strength Between Financial Returns and Green Attributes Attributes 1 2 3 4 5 6 7 1. Financial Return 1 0.421 ** 0.076 0.389 ** 0.367 ** 0.195 * 0.222 * 2. Energy Efficiency 1 0.369 ** 0.404 ** 0.330 ** 0.262 ** 0.422 ** 3. Water Efficiency 1 0.474 ** 0.325 ** 0.420 ** 0.206 * 4. Indoor Environmental 5. Sustainable Site Planning and Management 6. Materials and Resources 1 0.525 ** 7. Innovation 1 Notes: **Correlation is significant at the 0.01 level (2 tailed) *Correlation is significant at the 0.05 level (2 tailed) Correlation coefficient=0.5 to 1=strong, 0.3-0.49 = medium, 0.1-0.29 = none/weak Table 5 shows that financial returns have a medium correlation with energy efficiency, indoor environmental quality and sustainable site planning and management. A strong positive correlation was observed between indoor environmental quality and sustainable site planning and management variables (r = 0.6, n = 106, p < 0.01), and materials, resources and innovation (r = 0.53, n = 106, p = < 0.01). The correlation strength between the financial return variables and green office attributes is explained in Table 6.
Table 6. Correlation Strength between Financial Return and Green Office Attributes Attributes 1 2 3 4 5 6 7 8 9 10 1.FR1_Capital appreciation 1 0.451 ** 0.539 ** 0.316 ** 0.239 * -0.113 0.159 0.158 0.032-0.045 2.FR2_Rental income 1 0.692 ** 0.291 ** 0.195 * 0.023 0.170 0.237 * 0.056 0.084 3.FR3_Occupancy rate 1 0.341 ** 0.222 * -0.009 0.170 0.169 0.087 0.029 4.FR4_Yield 1 0.241 * -0.074 0.328 ** 0.329 ** -0.033 0.004 5.Energy Efficiency 1 0.369 ** 0.404 ** 0.330 ** 0.262 ** 0.422 ** 6.Water Efficiency 1 0.474 ** 0.325 ** 0.420 ** 0.206 * 7.Indoor Environmental 8.Sustainable Site Planning and Management 9.Materials and Resources 1.525 ** 10.Innovation 1 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Correlation coefficient = 0.5 to 1 = strong, 0.3-0.49 = medium, 0.1-0.29 = none/weak
4.3.3 Cost Savings Table 7. Correlation Strength between Cost Saving and Green Attributes Attributes 1 2 3 4 5 6 7 1. Cost Saving 1 0.377 ** 0.214 * 0.353 ** 0.277 ** 0.295 ** 0.378 ** 2. Energy Efficiency 1 0.369 ** 0.404 ** 0.330 ** 0.262 ** 0.422 ** 3. Water Efficiency 1 0.474 ** 0.325 ** 0.420 ** 0.206 * 4. Indoor Environmental 5. Sustainable Site Planning and Management 6. Materials and Resources 1 0.525 ** 7. Innovation 1 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Correlation coefficient = 0.5 to 1 = strong, 0.3-0.49 = medium, 0.1-0.29 = none/weak From Table 7, cost savings have a medium correlation with energy efficiency, indoor environmental quality and innovation. A strong positive correlation was observed between the indoor environmental quality and sustainable site planning and management variables (r = 0.6, n = 106, p < 0.01) and materials and resources and innovation (r = 0.53, n = 106,p = <0.01), respectively. The correlation strength between cost-saving variables and green office attributes is explained in Table 8.
Table 8: Correlation Strength between Cost Savings and Green Office Attributes Attributes 1 2 3 4 5 6 7 8 9 10 11 12 1. CS1_Energy efficiency 1 0.744 ** 0.393 ** 0.174-0.005 0.340 ** 0.343 ** 0.222 * 0.308 ** 0.293 ** 0.283 ** 0.362 ** 2. CS2_Water and waste efficiency 1 0.459 ** 0.236 * 0.002 0.215 * 0.313 ** 0.298 ** 0.325 ** 0.236 * 0.320 ** 0.377 ** 3. CS3_Operation and maintenance 1 0.318 ** 0.038 0.374 ** 0.285 ** 0.028 0.247 * 0.169 0.140 0.211 * 4. FI1_Insurance_Premium 1 0.469 ** 0.457 ** 0.209 * 0.133 0.265 ** 0.162 0.170 0.080 5. FI2_Green Tax Assesment benefits 1 0.517 ** 0.250 ** 0.141 0.244 * 0.330 ** 0.253 ** 0.172 6. FI3_Green insentives 1 0.389 ** 0.259 ** 0.294 ** 0.405 ** 0.368 ** 0.293 ** 7. Energy Efficiency 1 0.369 ** 0.404 ** 0.330 ** 0.262 ** 0.422 ** 8. Water Efficiency 1 0.474 ** 0.325 ** 0.420 ** 0.206 * 9. Indoor Environmental 10.Sustainable Site Planning and Management 11.Materials and Resources 1 0.525 ** 12. Innovation 1 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Correlation coefficient = 0.5 to 1 = strong, 0.3-0.49 = medium, 0.1-0.29 = none/weak
4.3.4 Social Benefits Table 9. Correlation Strength between Social Benefits and Green Office Building Attributes Attributes 1 2 3 4 5 6 7 1.Social Benefit 1 0.390 ** 0.242 * 0.479 ** 0.466 ** 0.334 ** 0.296 ** 2.Energy Efficiency 1 0.369 ** 0.404 ** 0.330 ** 0.262 ** 0.422 ** 3.Water Efficiency 1 0.474 ** 0.325 ** 0.420 ** 0.206 * 4.Indoor Environmental 5.Sustainable Site Planning and Management 6.Materials and Resources 1 0.525 ** 7.Innovation 1 Notes: **Correlation is significant at 0.01 level (2 tailed) *Correlation is significant at 0.05 level (2 tailed) Correlation coefficient = 0.5 to 1 = strong, 0.3-0.49 = medium, 0.1-0.29 = none/weak Table 9 shows that the social benefits variable has a medium correlation with energy efficiency, indoor environmental quality, sustainable site planning, and management and, material and resources variables. A strong positive correlation was observed between indoor environmental quality and sustainable site planning and management variables (r = 0.56, n = 106, p < 0.01), and materials and resources and innovation (r = 0.53, n = 106, p < 0.01). The correlation strength between the social benefit variables and green office attributes is explained in Table 11.
Table 10: Correlation Strength between Social Benefits and Green Office Attributes Attributes 1 2 3 4 5 6 7 8 9 10 11 1.SB1_Corporate Social Responsibility 1 0.682 ** 0.453 ** 0.507 ** 0.337 ** 0.313 ** 0.086 0.386 ** 0.397 ** 0.218 * 0.137 2.SB2_Image 1 0.483 ** 0.572 ** 0.457 ** 0.294 ** 0.143 0.385 ** 0.368 ** 0.298 ** 0.257 ** 3.SB3_Branding 1 0.514 ** 0.403 ** 0.286 ** 0.236 * 0.244 * 0.319 ** 0.307 ** 0.390 ** 4.SB4_Satisfaction from occupation 1 0.677 ** 0.321 ** 0.167 0.414 ** 0.352 ** 0.209 * 0.161 5.SB5_Productivity 1 0.308 ** 0.339 ** 0.455 ** 0.380 ** 0.263 ** 0.198 * 6.Energy Efficiency 1 0.369 ** 0.404 ** 0.330 ** 0.262 ** 0.422 ** 7.Water Efficiency 1 0.474 ** 0.325 ** 0.420 ** 0.206 * 8.Indoor Environmental 9.Sustainable Site Planning and Management 10.Materials and Resources 1 0.525 ** 11.Innovation 1 Note: **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Correlation coefficient = 0.5 to 1 = strong, 0.3-0.49 = medium, 0.1-0.29 = none/weak
4.3.5 Environmental benefits Table 11: Correlations Strength between Environmental Benefits and Green Office Building Attributes Attributes 1 2 3 4 5 6 7 1.Environmental Benefit 1 0.292 ** 0.191 * 0.390 ** 0.369 ** 0.189 0.112 2.Energy Efficiency 1 0.369 ** 0.404 ** 0.330 ** 0.262 ** 0.422 ** 3.Water Efficiency 1 0.474 ** 0.325 ** 0.420 ** 0.206 * 4.Indoor Environmental 5.Sustainable Site Planning and Management 6.Materials and Resources 1 0.525 ** 7.Innovation 1 **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Correlation coefficient = 0.5 to 1 = strong, 0.3-0.49 = medium, 0.1-0.29 = none/weak Table 11 shows that the environmental benefits variable has a medium correlation with indoor environmental quality and sustainable site planning and management variables at r = 0.4,n = 106,p < 0.01 and r = 0.38, n = 106,p < 0.01, respectively. A strong positive correlation was observed between indoor environmental quality and sustainable site planning and management variables (r = 0.51, n =106,p < 0.01). The correlation strength between the social benefit variables and green office attributes is explained in Table 12.
Table 12. Correlation Strength between Environmental Benefits and Green Office Building Attributes Items 1 2 3 4 5 6 7 8 1.EB1_To sustain 1 environment 0.674 ** 0.336 ** 0.223 * 0.421 ** 0.375 ** 0.220 * 0.140 2.EB2_Minimise pollution 1 0.188 0.121 0.284 ** 0.295 ** 0.119 0.061 3.Energy Efficiency 1 0.369 ** 0.404 ** 0.330 ** 0.262 ** 0.422 ** 4.Water Efficiency 1 0.474 ** 0.325 ** 0.420 ** 0.206 * 5.Indoor Environmental 6.Sustainable Site Planning &Management 7.Materials & Resources 1 0.525 ** 8.Innovation 1 Note: **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed). Correlation coefficient = 0.5 to 1 = strong, 0.3-0.49 = medium, 0.1-0.29 = none/weak
5.0 Conclusion The correlation analysis revealed that, green attributes generally have a statistically significant relationship with ROI (r = 0.57, n = 106, p < 0.01). The significant relationships can be categorised into strong, medium and weak/none correlation coefficients. However, this study does not explain why these relationships exist among the return factors and green attributes. Investors invested in green office buildings because of their cost-saving features by indicating the highest mean score for the energy conservation attribute. Capital appreciation was perceived as important for long-term returns by investors. Investors in Malaysia likewise consider maintenance and operations as the third most important factor in determining their returns from green office buildings. These findings are consistent with those of other similar studies, which indicated that green office buildings reduce operating costs by 0.164 cents per square foot, compared with conventional office buildings (Mashitoh Halim, 2012). These findings indicate that Malaysian investors are highly keen on financial returns, if they achieve such financial returns; they have to crucially emphasize indoor environmental quality and innovation attributes that consequently bring better returns and benefits financially, socially and environmentally. Site planning and management, and materials and resources attributes, likewise play important roles in achieving the social and environmental benefits of green office buildings. From these findings, a significant relationship is observed between green attributes and expected returns from green office building investments perceived by investors in Kuala Lumpur. 6.0 References 1. Ellison, L., & Sayce, S. (2007). Assessing sustainability in the existing commercial property stock: Establishing sustainability criteria relevant for the commercial property investment sector. Journal of Property Management, 25(3), 287-304. 2. Green Building Index Malaysia. (2013). Green Building Index Criteria, from http://www.greenbuildingindex.org 3. Harrison, D., & Seiler, M. (2011). The political economy of green office buildings. Journal of Property Investment & Finance, 29(4/5), 551-565. 4. Mashitoh Halim. (2012). Economic Issues in Green Office Building in Malaysia. International Real Estate Research Symposium (IRERS), 13. 5. Mona Isa, Sipan, I., Ghazali, M. M., & Hwa, T. K. (2013). Green Attributes Affecting Investment Returns for Green Office Buildings. Paper presented at the International Conference on Green Building Technologies and Materials (GBTM 2013), Kuala Lumpur. 6. Morri, G., & Soffietti, F. (2013). Greenbuilding sustainability and market premiums in Italy. Journal Of European Real Estate Research, 6(3), 303-332.
7. Newell, G., MacFarlane, J., & Kok, N. (2011). Building Better Returns: A Study of the Financial Performance of Green Office Buildings in Australia. pp.13-47, http://www.api.org.au/assets/media_library 8. Pallant, J. (2010). SPSS Survival Manual: Open University Press. 9. Reed, R., Bilos, A., Wilkinson, S., & Schulte, K.-W. (2009). International Comparison of Sustainable Rating Tools. Journal of Sustainable Real Estate, 1. 1-22.