Sustainability and property valuation. Systematisation of existing approaches and recommendations for future action
| Pages | 644-676 |
| Published date | 27 September 2011 |
| DOI | https://doi.org/10.1108/14635781111171797 |
| Date | 27 September 2011 |
| Author | David Lorenz,Thomas Lützkendorf |
| Subject Matter | Property management & built environment |
Sustainability and property
valuation
Systematisation of existing approaches and
recommendations for future action
David Lorenz
Lorenz Property Advisors – Chartered Surveyors, Gaggenau, Germany, and
Thomas Lu
¨tzkendorf
School of Economics and Business Engineering,
Karlsruhe Institute of Technology (KIT), Karlsruhe, Germany
Abstract
Purpose – The aims of this paper are to: provide a systematic overview of various publications and
international research efforts undertaken to integrate sustainability considerations into the property
valuation process; summarize the key results of these publications and research efforts; highlight the
role of key valuation-input variables in considering sustainability issues when applying traditional
methods of valuing income-producing properties; briefly present and comment on a broader concept of
property value and the resulting implications for property valuation practice; and provide
recommendations for change in the everyday practice of individual valuation professionals and for the
future operation of professional organisations and valuation-standard-setting bodies.
Design/methodology/approach – This paper builds on the authors’ previous contributions to the
discussion on sustainability and valuation, presents advances on these previous works and condenses
the more theoretical issues debated earlier into concrete recommendations for future action. Starting
from a literature review of the different strands of research relating to the new discipline of sustainable
property investment, 31 publications and ten research projects that investigate in detail the topic of
sustainability and property valuation are identified and the current stage of discussion is briefly
commented on. On this basis, a systematisation of existing approaches for the integration of
sustainability issues into the valuation process is presented, followed by further explanations of
practical valuation issues such as identifying the key “adjustment screws” or valuation input
parameters of traditional valuation methods. Finally, the underlying concept of property value is
discussed and a “value map” is presented which conceptualises the relationships between different
components of value as well as other value-influencing forces.
Findings – Changes are required in the processes of gathering, processing and presenting
property-related information, as well as in the methods for determining individual valuation-input
parameters and for explicitly stating formerly implicit assumptions and qualitative judgement. This
includes but is not limited to the extension of the scope and informational content of standard
valuation reports to include sensitivity analyses, risk documentation and a separate section on
sustainability. The required changes should be supported by actions that could be undertaken by the
professional and valuation-standard-setting bodies and organisations within the valuation world.
These actions include: embracing and improved marketing of the qualitative nature of the valuation
service; the development of educational material and formal guidelines; the provision of dedicated
market research to assist valuation practitioners operating in different market segments, geographic
regions and local sub-markets; and adjusting and further developing existing valuation standards to
enable and support individual practitioners in offering a two-tier valuation service to clients.
Originality/value – This paper proposes that valuation professionals and their professional bodies
are confronted with a new reality of changing value perceptions and systems among market
participants, and offers practical recommendations on how to cope with this situation.
Keywords Sustainability,Value, Property valuation, Valuationmethods, Property, Asset valuation
Paper type Research paper
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
JPIF
29,6
644
Journal of Property Investment &
Finance
Vol. 29 No. 6, 2011
pp. 644-676
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781111171797
Introduction and background
The challenges posed by sustainable development and the sustainability discourse
have inspired a wave of publications within the property industry dealing with and
investigating the topic of sustainable building and the interconnected areas of
sustainable property investment and management strategies, sustainable
property-investmen t products, and valuation an d risk analysis from various
perspectives. While the issues of environmentally friendly and
health-standard-compliant design, construction and management of buildings have
been investigated and implemented by architects and engineers within the
construction industry for decades, an examination of these and related topics within
the property industry (and within the related areas of banking and finance) was only
initiated about ten years ago. At the beginning of this century, few publications
(mainly conference papers) with a property-specific background made reference to
sustainability issues. Today, in contrast, there exists an abundant pool of literature
made available by property-related associations, organisations and corporations, as
well as articles in magazines and scientific and professional journals.
In a broad sense, the existing literature on sustainable building topics can be
subdivided into publications on:
.the sustainable design, planning and construction process;
.the methodological basics of sustainability assessments of buildings, and the
development and application of certification systems;
.the further development of sustainable-building basics related to natural science
and engineering, as well as respective construction systems and components;
.analyses with a political, microeconomic and social science focus (ranging to and
including the field of corporate social responsibility); and
.the methods, instruments and processes of sustainable property investment.
The latter group of publications, on the newly shaped discipline of sustainable
property investment[1], draws on the results and methods of the aforementioned areas
and forms the property-economic entry to the issue of sustainable development. The
literature on sustainable property investment issues can, in turn, be classified into the
following groups or strands of research:
(1) Cost-benefit studies. Analyses and case studies on the costs and benefits of
sustainable building and management of property assets (e.g. Kats et al., 2003;
Morris Hargreaves McIntyre, 2006; Matthiessen and Morris, 2007; Kibert, 2008;
Miller et al., 2009).
(2) Analyses of transaction and market data. Empirical analyses on the
relationships between sustainability-related building characteristics or
eco-labelling and realised sale prices, investment returns, vacancy rates, etc.
(e.g. JP Morgan, 2008; Fuerst and McAllister, 2008; Salvi et al., 2008; Griffin et al.,
2009; Miller et al., 2009; Pivo and Fisher, 2009; Fuerst and McAllister, 2010; for a
comprehensive review of this issue for the commercial property sector, see
Sayce et al., 2010).
(3) Principles, strategies and guidance. Publications on the development of
strategies, principles and guidelines for sustainable property investment and
Sustainability
and property
valuation
645
management of buildings (e.g. Pivo and McNamara, 2005; Rapson et al., 2007;
UNEP FI, 2007, 2008; Jones and White, 2008; Lu
¨tzkendorf et al., 2008; Kriese,
2009; Lu
¨tzkendorf and Lorenz, 2009a; RICS, 2009a, b, c; UNEP FI and RPIC,
2009; good sources on this issue are the web sites of the United Nations
Environment Programme Finance Initiative Property Working Group[2], the
Green Building Finance Consortium[3], and the Responsible Property Investing
Center[4]).
(4) Performance measurement and reporting. Publications on the development of
criteria, indicators and benchmarks for sustainability assessment, reporting
purposes and performance measurement of buildings, portfolios and property
investment products (e.g. Kohler and Lu
¨tzkendorf, 2002; Sayce and Ellison,
2003; Kimmet and Boyd, 2004; Cole, 2006; Lu
¨tzkendorf and Lorenz, 2006, 2009b;
Ellison and Sayce, 2007; Newell, 2009; Pivo, 2009).
(5) Investor behaviour and attitudes. Analyses and surveys of investor demand and
behaviour as well as of investor attitudes regarding sustainable buildings and
property-investment products (e.g. Keeping, 2000; Pivo, 2007; Sayce et al., 2007;
CoreNet and JLL, 2008; Myers et al., 2008; Bu
¨gl et al., 2009; Rohde and
Lu
¨tzkendorf, 2009).
(6) Sustainability and risk analysis. Publications on approaches for integrating
sustainability issues into property risk analysis (e.g. Lu
¨tzkendorf and Lorenz,
2007; CMP, 2008; Rohde et al., 2010).
(7) Sustainability and property valuation. Publications on approaches for
integrating sustainability issues into the theory and practice of property
valuation.
The present paper focuses on the latter group of publications or strand of research.
However, it needs to be acknowledged that overlaps exist between the different areas
of research related to sustainable property investment (see Figure 1). For this reason, a
straightforward classification of different strands of research is not always possible or
appropriate.
The present authors have been engaged in the process of translating and adapting
sustainable development issues to the particularities of the construction, housing and
property industry, and have contributed to the ongoing discussion on integrating
sustainability issues into the valuation process (Lu
¨tzkendorf and Lorenz, 2005, 2006,
2011; Lorenz et al., 2007; Lorenz and Lu
¨tzkendorf, 2008).
On the one hand, this paper aims to present advances on the authors’ previous
works and to condense the more theoretical issues debated earlier into concre te
recommendations for future action. Consequently, these earlier works are referred to
several times in the remaining part of this paper. On the other hand, the literature
review and brief summary of the current stage of discussion will be of use to those
readers who are now confronted with the questions of if and to what extent valuation
practice could and should respond to the challenges posed by sustainable development.
This paper proposes that valuation professionals and their professional bodies must
cope with a new reality of changing value perceptions and systems among market
participants due to the steadily growing interest in sustainability issues of various
groups of property market actors.
JPIF
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