Sustainability is a much used term in all aspects of modern life, and particularly in the property industry. I am interested in the impact of sustainable development on value. There appears to be a broad acceptance that we need to manage our consumption of diminishing resources and generation of CO2 but how can this be reflected in the valuation of sustainable property?
The Royal Institution of Chartered Surveyors Global Sustainability Survey (Q3, 2009) found:
- The vast majority of surveyors believe their clients place some to considerable importance on sustainability issues.
- Energy efficiency continues to be the most important sustainability issue according to the survey.
- Business bottom line continues to be overwhelmingly the primary driver of clients’ sustainability agenda.
However, the Investment Property Databank Index of UK sustainable property returns for the period 2008 2010 shows only a small difference between the less and more sustainable properties in the index, and that differential has only arisen relatively recently.
In the UK, as in many other locations, the supply of new property comprises only a small addition to the existing stock, so it may be surmised that the value of less sustainable stock is supported by the effects of substitution: that is, occupiers are prepared to offer higher rents for the best of the less sustainable property stock than would be the case if the supply of fully sustainable property were greater. Given this financial evidence, one may not be surprised to find that developers are sometimes reluctant to incur the what they construe as the additional capital cost of constructing sustainable buildings.
Participants at the RICS International Valuation Conference (London) suggested that the investor market had anticipated increased rental growth, and therefore yield, prospects for more sustainable property. They consider that such properties will better sustain their rental and capital values over time, as shown in the following diagram.
It may be argued that conventional property valuation, based on transactions which have taken place, cannot realistically allow for this scenario. The supply of sustainable property being a low proportion of total stock means market evidence for sustainable buildings is close to the vertical axis. Therefore, there is no proof of the “sustainability risk” gap on which to base a formal valuation.
However, valuers are also involved in providing valuation advice and it seems to me we should be advising our clients of this risk (or potential improved return). Discounted cash flow techniques allow us to model a range of rental values in differing economic circumstances. We can also take account of building costs, which may make timely refurbishment to sustainable standards a more effective long term investment decision, rather than waiting for the non-sustainable value to fall below site value.
Some aspects of valuing and advising in this way will require considered input from other professionals quantity surveyors experienced in refurbishment to sustainable standards, technology experts able to advise on the most beneficial sustainable technologies, economists and planners all of which make the valuation process a true team effort.
