Reflecting sustainability in property valuation – a progress report
| DOI | https://doi.org/10.1108/JPIF-03-2016-0022 |
| Pages | 552-577 |
| Published date | 05 September 2016 |
| Date | 05 September 2016 |
| Author | Peter Michl,David Lorenz,Thomas Lützkendorf,Sarah Sayce |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Reflecting sustainability
in property valuation –a
progress report
Peter Michl, David Lorenz and Thomas Lützkendorf
Centre for Real Estate, Karlsruhe Institute of Technology,
Karlsruhe, Germany, and
Sarah Sayce
Royal Agricultural University, Cirencester, UK
Abstract
Purpose –The purpose of this paper is to report on the findings of a survey conducted by the Royal
Institution of Chartered Surveyors (RICS) to discuss the extent to which qualified valuers have adapted
their valuation practices in the light of guidance published by RICS in respect of sustainability and
commercial property. The findings are placed within a wider debate between assessment of market
value and investment value (worth).
Design/methodology/approach –The paper is a theoretical discussion incorporating the results
from an empirical survey of valuation practitioners.
Findings –The paper reveals that guidance published by RICS in 2011 has achieved limited,
but variable, impact in terms of impacting on valuation practice due to a combination of
factors including lack of knowledge of the guidance, non-requirement of clients to request
sustainability reporting within valuations, paucity of data. It found that where worth
(investment value) is required, sustainability factors are more likely to impact the calculation
than where an estimate of market value is prepared. The paper identifies theoretical
problems and practical barriers hindering an integration of sustainability aspects into valuation
practice.
Research limitations/implications –The empirical work was conducted prior to the embedding of
guidance within the mandatory provisions of the “Red Book”; the study therefore reports on a direction
of travel rather than the current position. The implications for research are the requirement to enhance
data capture and to seek ways to break down the barriers to more comprehensive integration of such
data so that worth and market values may begin to converge.
Practical implications –The paper has practical implications for both the education of valuers
which is proposed through the RenoValue project discussed in the paper and for the RICS in
monitoring progr ess towards more sp ecific integrati on within valuers’c alculations. Furt her,
the paper identifies that clients and lenders have a key role to play through the instructions
given to valuers.
Social implications –There is now widespread recognition that properties which are not
resource efficient and which are not equipped to flex to changing occupier needs may not
currently be “future proofed”in investment value terms and are likely to see value erosion over time.
Further, buildings have a key role in terms of climate change policy. Whilst new buildings can be
mandated to meet improved efficiency standards, the ways in which buildings owners
can be encouraged to upgrade will be important moving forward. One way is through a value
chain response.
Originality/value –The survey is the most comprehensive investigation of valuer’s practice in
relation to sustainability and the assessment of market value and worth undertaken. This provides a
unique insight into the effectiveness of professional guidance and enables an informed discussion as to
appropriate ways to enhance guidance moving forward.
Keywords Property, Regulation, Valuation, Professional, Market, Worth
Paper type Research paper
Journal of Property Investment &
Finance
Vol. 34 No. 6, 2016
pp. 552-577
©Emerald Group Publishing Limited
1463-578X
DOI 10.1108/JPIF-03-2016-0022
Received 31 March 2016
Revised 17 April 2016
Accepted 19 April 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
552
JPIF
34,6
Introduction
According to a growing body of empirical research, within some sub-markets and in
some countries, commercial property market pricing is increasingly distinguishing
between buildings that exhibit different sustainability-related building features and
associated physical or operational performance and those that do not (for an overview
see e.g. Bio Intelligence Service et al., 2013; WGBC, 2013). There is increasing
recognition that buildings which are not resource efficient, low carbon in terms of
operation and location and unable easily to be adapted to accommodate changing
occupier needs will suffer early obsolescence and may suffer both rental and capital
value depreciation moving forward. Those which do will be better “future proofed”
(Ellison et al., 2007; Sayce and Ellison, 2007). Further, as new building codes place ever
more stringent requirements in relation to energy efficiency and other sustainability
factors, so existing buildings may fall “behind the curve”in terms of specification thus
exacerbating value depreciation. Whether the differential in value between buildings
which are better “future proofed”takes the form or a “green premium”or “brown
discount”is debateable, but in practice, the age of the building and hence the code to
which it is compliant, may be critical. Put simply, newer buildings are more likely to
carry an environmental rating which has been associated with higher values (see
Reichardt et al., 2012; Eichholtz et al., 2013).
The issue with which this paper engages is how, both in theory and in practice,
valuers could or should build sustainability into their valuations of existing buildings.
The paper recognizes that there may be a “gap”between the theoretical case for how
sustainability factors should reflect in practice and how, in practice, valuers seek to
analyse such factors when preparing valuations.
The primary role of the professional valuer is to reflect, not anticipate, market
movements (RICS, 2013, p. 5). Nonetheless, robust and reliable valuations should reflect
movements quickly through a robust due diligence process which allows all relevant
factors to be built into analysis and modelling in order to advise clients appropriately.
The role of valuation and of valuation professionals within the context of the
sustainable development discourse has already been discussed in earlier research
contributions (see e.g. Lorenz and Lützkendorf, 2011); the impact of sustainability
on investment worth has also been considered (see e.g. Ellison et al., 2007;
Sayce et al., 2007).
The present paper discusses the following questions:
•How and to what extent have valuation standard setting bodies, notably the
Royal Institution of Chartered Surveyors (RICS) provided instruction or/and
guidance to valuers?
•Are valuation methods being adapted to incorporate sustainability issues within
everyday practice?
•How far are individual valuers aware of the issues and have they sufficient
knowledge and understanding to enable them to provide effective client advice
in relation to the impact of sustainability on the worth and value of commercial
buildings?
•Which (if any) sustainability-related factors are regarded/treated as value-
influencing factors?
•What (if any) sustainability-related information/data are actually being gathered
and used within valuations/appraisals?
553
Sustainability
in property
valuation
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