The impact of ESG on business valuation in the real estate sector in Hong Kong : an analysis of market and income approaches

Abstract

This research aims to analyze the impact of environmental, social, and governance (ESG) factors on business valuation in the real estate sector in Hong Kong, using a case study of Link Real Estate Investment Trust (REIT). The study employs both market and income approaches to valuation and examines the potential impact of ESG considerations on these approaches. The market-based approach analyzes the relationship between ESG performance and company values in Hong Kong. The research finds that companies with strong ESG performance receive higher premiums with higher price multiples compared to companies with weaker ESG performance. This suggests that investors and occupiers are willing to pay more for companies that meet certain ESG criteria, such as energy efficiency and green certifications. The income-based approach analyzes the potential impact of ESG considerations on a company's income and value in Hong Kong. The research finds that properties with energy-efficient systems and green features tend to have lower operating costs and higher rental yields, which can result in higher net operating income and affects the free cash flow of a company. The case study of Link REIT provides valuable insights into the benefits of incorporating ESG considerations into business practices to enhance financial performance and market competitiveness. Link REIT's implementation of various green initiatives and community engagement programs has helped to enhance its reputation and social license to operate, which may have positive impacts on its financial performance and market competitiveness in the long term. The research has implications for investors, company managers, and practitioners. Investors should consider incorporating ESG factors into their investment decision-making process, as properties with strong ESG performance may offer better financial performance and market competitiveness in the long term. Company managers should consider implementing various ESG initiatives and engagement programs to enhance their reputation and social license to operate, which may have positive impacts on their financial performance and market competitiveness in the long term. practitioners should consider incorporating ESG considerations into their valuation standards and formulate universal guidelines, to ensure that valuers are taking into account the potential impact of ESG factors on business valuations in the real estate sector in Hong Kong.