The value of sustainability in real estate: a review from a valuation perspective
| DOI | https://doi.org/10.1108/14635781211206887 |
| Published date | 02 March 2012 |
| Pages | 115-144 |
| Date | 02 March 2012 |
| Author | Georgia Warren‐Myers |
| Subject Matter | Property management & built environment |
The value of sustainability in real
estate: a review from a valuation
perspective
Georgia Warren-Myers
Faculty of Business and Law, Deakin University, Melbourne, Australia
Abstract
Purpose – The purpose of this paper is to synthesise the plethora of research that has been
conducted into the relationship between sustainability and market value in real estate, by critically
analysing the research and the applicability of sustainability and value research in valuation practice.
Design/methodology/approach – The research on the relationship between sustainability and
market value in real estate is examined from the perspective of its usefulness to the valuation
profession in providing guidance, information and evidence to be used in valuation practice.
Findings – Existing research conducted into the relationship between sustainability and market
value has not provided the valuation profession with evidence which would allow the incorporation of
normative theories on the value of sustainability in valuation practice. This review highlights the lack
of evidence, and the applicability of current research into sustainability and value to the valuation
profession in providing guidance and information in valuing real estate incorporating sustainability.
Practical implications – This paper highlights the limited applicability of research to date in regard
to the relationship between sustainability and market value for the valuation profession. The lack of
historical evidence, data or information on the quantifiable effects on market value of this new trend
(sustainability), leaves the valuation profession uncertain as to the relationship between sustainability
and market value. There is a probable risk of valuers interpreting strategic research incorrectly, and
making inappropriate adjustments or comparisons because of their lack of knowledge and limited
sustainability assessment skills. Although there is an evolving body of knowledge, there is a need for
extensive analysis of unbiased, evidence-based research in individual and broader markets to provide
guidance, evidence and knowledge of the implications of sustainability in the valuation of real estate.
Originality/value – The examination of research investigating the relationship between
sustainability and value from a valuation perspective provides an alternative insight into the
applicability of current research in valuation practice. The increasing profile and role of sustainability
in the real estate sector needs to be addressed in valuation practice; however, the variety of research to
date needs to be interpreted by valuers in the correct context. This paper brings to light the
applicability of sustainability and value research for the broader valuation profession, and the
potential implications of misuse or misunderstanding of that research.
Keywords Real estate, Marketvalue, Valuation, Sustainability,Research work
Paper type Literature review
Introduction
The importance of increasing the level of sustainability in the commercial real estate
stock is paramount for reducing the negative impact of the built environment on our
planet. However, without financial justification and viability of the required investment
it is likely that the advancement of sustainability in commercial real estate will be
limited. Investors are in the business to maximise their return on capital outlay based on
economic theory. Valuers, in their pivotal role within real estate markets, as the
assessors and advisors of market value, are being consulted as to their opinions,
judgement, and assumptions about the effect of sustainability on market value.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1463-578X.htm
Sustainability
in real estate
115
Journal of Property Investment
& Finance
Vol. 30 No. 2, 2012
pp. 115-144
qEmerald Group Publishing Limited
1463-578X
DOI 10.1108/14635781211206887
Currently, however, the lack of empirical evidence, appropriate knowledge, applicable
and unbiased research, and assessment tools for sustainability, jeopardise the ability of
valuers to provide an informed opinion of market value for both existing and sustainable
assets.
The lack of evidence for a relationship between sustainability and market value is
seen as a barrier to broader investment (Sayce and Sundberg, 2009). Valuers have been
criticised in recent research for being laggards and are being blamed for failing to
produce financial justifications for investing in sustainability in commercial real estate
(Armitage, 2009). Valuers have a pivotal role in the commercial real estate market, not
only as critics of the real estate market but also as the third-party, arbitrary assessors
of the market value of assets (Levy and Schuck, 2005). Consequently, their treatment of
sustainability in valuation practice has ramifications for the real estate industry, and
for broader financial markets with interests in real estate.
A plethora of research has been conducted into the relationship between
sustainability and market value, however, the interpretation and implementation of
this research in valuation has been limited. This paper provides a critical analysis of
the research and highlights the inappropriateness of the research and its applicability,
or lack thereof, in valuation practice.
Background
The limited number of sustainable properties in the commercial real estate market may
be a result of the inadequate information identif ying a relationship between
sustainability and market value. To date, research seems limited to normative
proposals of how sustainability “should” affect market value, demonstrated primarily
through case studies and statistical models which have been used in an attempt to
identify a positive relationship between sustainability and market value. Research on
sustainability and market value has received considerable attention in research in recent
years, which has led to a rapidly evolving body of research. However, the positivist focus
and limited critical assessment of the relationship between sustainability and market
value has left the valuation profession uncertain of the clarity, reliability and validity of
the information presented. Existing research has endeavoured to provide a rationale
and, in some cases, to provide evidence of the relationship between sustainability and
market value. However, the valuation profession, as a whole, seems to have remained
relatively unaware of the research proposing a relationship between sustainability and
market value and the implications for valuation practice.
The evolving body of research has a large proportion focused on the normative
effects of sustainability, indicating how sustainability “should” affect market value, for
example, Paumgartten (2003), Kats (2003) and Bartlett and Nigel (2000). Alternatively,
compelling business cases were developed by industry and government to provide
financial justification for sustainability to real estate owners, managers, developers,
architects and designers of real estate, for example, US Green Building Council (2003),
Frej (2003), Paumgartten (2003), Madew (2006), Lucuik (2005), RICS (2005), New Zealand
Ministry for the Environment (2006, 2007) and Bartlett and Nigel (2000). These studies
concentrate on reduced operating costs and increased occupant productivity, employee
retention, pay-back periods and net present value. However, the conversion from
“should be” to “what” is has been limited, particularly in the production of evidence to
demonstrate the relationship between sustainability and value. From a valuation
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