Green Finance Innovation from Japan: Sumitomo Trust’s Lending Products for Sustainable Real Estate

Meet Masato Ito!

We have a post from an honored guest today!  I had the great pleasure of watching a presentation by Masato Ito, of Sumitomo Trust, earlier this year during the Responsible Property Investing Summit. He gave us an overview of Sumitomo Trust’s new green real estate financing products that they have developed. Fortunately for us all, Masato has been kind enough to share his work with Our Green Journey.

Hint: Pay close attention to his focus on quantifying the value-add of green in real estate via reducing depreciation and the property’s risk premium within net income and the cap rate.

Enjoy and please let us know your comments!

Note: If you click directly on the images, a pop up window will show you a closeup of the diagram.

The Sumitomo Trust’s “Eco Trustution” 

I am a licensed Real Estate Appraiser in Japan and am working for the Sumitomo Trust and Banking Co., Ltd. The Sumitomo Trust is trying to utilize the trust bank’s functions as much as possible to provide eco-friendly products and services and has coined a new word “Eco Trustution”, which means 'to provide solutions to eco-problems by using the functions of trust banks'.

Under the “Eco Trustution” concept, Sumitomo Trust is developing and promoting financial products, such as preferential rate loans for environmentally friendly housing, environmentally conscious construction consulting, and an Eco Land Fund (support for contaminated land purchases and revitalization fund). We are also on the way to launching a  “Japanese Sustainable Real Estate Fund."

Pursuing the Value-Add of Sustainable Real Estate 
To promote the “Eco Trustution” business further, I am working on  the value-add  provided by sustainable real estate. In case of “direct capitalization”, of the income approach, value is calculated by “Figure 1” (dividing net income by capitalization rate).

Therefore, I thought that it was possible to evaluate the environmental value-add if I arranged countermeasures from the environmental consideration of real estate systematically, and then connected them to "net income" and the “capitalization rate“.

It becomes like Figure 2 below, when shown in a little more detail. 

The left side of the graph shows how net income of real estate is different from normal real estate. As for the sustainable real estate, the utilities and the repair costs will decrease faster than those of normal real estate by effects of energy saving and improvement of the durability. It is thought that net income increases and, if the total income increases by the quality improvement, the net income will also increase.

The graph on the right side of Figure 2 shows how a capitalization rate of sustainable real estate is different from normal real estate. Because I use net income before depreciation here, I used a capitalization rate including depreciation rate of a building. When durability of a building increases, it is thought that depreciation ratio reduces. In addition, I can express the added value as "a risk premium reduction" in a capitalization rate of real estate which does not catch influence of future taxation and regulation reinforcement by environmental consideration.

In this way, I think that sustainable real estate has the possibility to make value by increase of net income and reduction of capitalization rate.

Amended from “A note on environmental value added for real estate “(Masato Ito) for the tenth anniversary memorable article for Tokyo Association of Real Estate Appraisers in 2005

In January 2008, as a Deputy Chair of Research & Study Committee of Japanese Association of Real Estate Appraisal, I launched the “Added Value of Sustainable Real Estate“ working group.

Connecting CASBEE to Real Estate Appraisal 

Connecting Comprehensive Assessment System for Building Environmental Efficiency (CASBEE) to real estate appraisal is one of the most important missions of the “Added Value of Sustainable Real Estate“ working group.

In Japan, a cooperative academic, industrial and governmental project was launched to establish a new system called CASBEE. Buildings certified by CASBEE so far are less than 30, but some Japanese local governments have introduced the CASBEE system for their environmental policy to encourage green buildings. These governments require building owners to report CASBEE's result of their buildings when they put up a new building. The number of the reports submitted to local governments is more than 2,000.

As for CASBEE, BEE (Building Environmental Efficiency) is calculated by Figure 3 (dividing building environmental quality and performance by building environmental loadings). BEE shows how the assessment results for buildings can be labeled as class C (poor), class B-, class B+, class A, and class S (excellent), in order of increasing BEE value.

Figure 3: Formula of BEE (http://www.ibec.or.jp/CASBEE/english/methodE.htm)

By the way, I described that in case of “direct capitalization” (one of income approach), value is calculated by the formula in Figure 1 (dividing net income by capitalization rate). I found an important relationship between these two formulas.

As shown in Figure 4 below, Indoor environment (Q-1) will reflect to increase of total income. Improvement of Durability (Q-2) will reflect the decrease of repairs and reduction of depreciation ratio. Energy saving (L-1) will reflect the decrease of utilities and reduction of environmental risk. Finally, Sustainability Ranking will reflect the reduction of marketability risk. In this way I think it is possible to connect CASBEE to Real Estate Appraisal and we are pursuing the method. Now, this work is a collaboration of the CASBEE working group and Japanese Association of Real Estate Appraisal.

Figure 4: Connecting CASBEE to Real Estate Appraisal

Once again, our many thanks to Masato Ito for sharing his very important work with the Green Journey community. We would welcome any comments or questions that you may have for Masato about this article.