Valuing Sustainability April 2016 - English

Co-funded by the Intelligent Energy Europeprogramme of the European Union

April 2016

Sustainability

Valuing

Create higher quality valuation reports.

Prevent errors and mispricing of assets.

Save time & costs through improved knowledge of relevant information sources.

Improve competitiveness and extend consulting competences.

will enable you to

Participation in this course

Recognise the impact of sustainability on the wider real estate market and the valuation professionals’ critical role with regard to market transformation.

Gain a holistic understanding of the importance of buildings in relation to climate change and energy targets and its relevance for managing risk for your clients.

it will HELP YOU To

More specifically

A number of benefits and opportunities of energy efficient/sustainable buildings to enable you to articulate the business case in conversations with your clients.

An overview of current sustainability-related guidelines, guidance and requirements for valuation professionals and respective approaches for integrating energy efficiency/sustainability considerations in valuations.

it will Provide you with

More specifically

This course is aimed at valuation professionals with entry or intermediate level of knowledge of the impact of sustainability on property valuation.

Valuations professionals’ work in potentially very different contexts, i.e. in large firms or as single practitioners and that this can have an impact on how far they can implement the recommendations that form part of this course in their daily practice and in conversations with their respective clients.

To note that

It is important

There may be national and local variances in valuation practice that might not be reflected in detail.

Valuations for more complex assets with higher investment volumes may require different more in-depth approaches than those outlined.

For regularly recurring valuations for corporate accounts, the extended due diligence process recommended as part of this training is not appropriate.

To note that

It is ALSO important

1. Introduction2. Rationale & Business Case3. Energy performance4. Key information sources5. Integration into valuation methodologies

and valuation reports6. Conclusions

Table of content

This section covers the following content/issues:

• Overview of existing guidance

• Role of valuation and valuation professionals

• Identification of new challenges for valuation professionals

• Justification of valuation professionals’ consideration of the topics of energy efficiency and sustainability

Learning objectives

INTRODUCTION

This section will enable you to:

• Understand valuation professionals’ responsibility/role in relation to the issues of energy efficiency and sustainability.

INTRODUCTION

Learning objectives

Why valuation

professionals are

crucial in

market transformation

• Valuations are carried out in almost any phase of the property life cycle.

• Valuation professionals are information managers in often highly non-transparent property markets.

• Arguments used in negotiations between transaction parties are usually based on advice given by valuers acting on both sides.

INTRODUCTION

Valuers do not ‘make the market’ but their advice and the nature and scope of their services influence property market outcomes.

INTRODUCTION

Why valuation

professionals are

crucial in

market transformation

• It is about applying quantitative evidence and qualitative judgement to new value-influencing features and improving market efficiency by providing accurate information to the market place.

• Valuing sustainably is an opportunity and NOT a threat to the valuation profession!

INTRODUCTION

Valuing sustainability

is not rocket science!

• The lack of empirical validation and appropriate comparable sales information requires valuation professionals to apply qualitative judgement to determine the extent to which sustainability features impact on value.

• You will have to decide to what extent a well-informed buyer would account for them within the property’s local market.

INTRODUCTION

But what does that

mean for

your daily practice?

• Qualitative judgement is needed in all valuation assignments for most building features. Sustainability features are no exception to this.

• However, to provide a transparent valuation service, valuation professionals are required to explain their expert opinion on both the benefits of sustainable design and risks of conventional design.

INTRODUCTION

But what does that

mean for

your daily practice?

INTRODUCTION

Your existing

sustainability

related guidance

INTRODUCTION

RICS Red Book (2014)“As commercial markets become more sensitised to sustainability matters, so they may begin to complement traditional value drivers, both in terms of occupier preferences and in terms of purchaser behaviour.”

Therefore valuers are advised to:

“[…] assess the extent to which the subject property currently meets sustainability criteria and arrive at an informed view on the likelihood of these impacting on value, i.e. how a well-informed purchaser would take account of them in making a decision as to offer price, […].”

Sustainability as a

potential driver and

risk factor!

Source: Royal Institution of Chartered Surveyors (RICS), 2014, RICS Valuation – Professional Standards January 2014, Valuation Practice Statement 4, p. 59

1. Introduction

2. Rationale & Business Case3. Energy performance4. Key information sources5. Integration into valuation methodologies


Table of content

Learning objectives


• Recognition of the role and importance of buildings

• Information on energy and climate change targets and their potential impact on the building sector

• Benefits and opportunities of energy efficient/sustainable buildings

RATIONALE & BUSINESS CASE


• Understand the importance of these developments/issues for valuation professionals’ daily practices

• Explain the relevance of sustainability to your clients


Learning objectives

Your (market)

environment

is changing


Climate change: flooding, extreme weather, droughts

Environmental risks: air, water and soil pollution

Resource scarcity: energy carriers, land, water, materials

Consumers’ and end-users’ increasing environmental consciousness and changing value-systems

... as is your clients'

business climate …


Key influencing issues:

Corporate Social Responsibility (CSR) policies

Sustainability reporting obligations

Responsible/sustainable property investment strategies

Why improving

the energy

performance

of our buildings is

important

According to IPCC, buildings account for:

~ 32 % of total global final energy use!

~ 19 % of energy-related GHG-emissions!

~ 33 % of black carbon emissions!

With a business as usual scenario, these figures could double by 2050!


International, EU

and national

policy measures

for buildings

• Increasingly stringent global climate and energy saving targets

• EU policy focus on improving energy efficiency in buildings sector

• EU Energy Performance of Buildings and Energy Efficiency Directives


International level

• Introduction of Energy Performance Certificates (EPCs)

• Financial benefits and incentives (subsidy programmes)

National level


International, EU

and national

policy measures

for buildings

One-letter

improvement in the

EPC rating can

make all the

difference!

Source: Bio Intelligence Service, Ronan Lyonsand IEEP, 2013, Energy performance certificatesin buildings and their impact on transactionprices and rents in selected EU countries, Finalreport prepared for European Commission (DGEnergy), p. 15.


• In Switzerland, sustainable/energy efficient building practices are becoming the norm in new construction.

• Going forward it is expected that current price premiums for sustainable buildings will turn into “brown discounts” on price for the conventional building stock!


Example: Rental price differences for MINERGIE-labeled flats in Switzerland

Managing risk and

future-proofing

assets:

from green premiums

to brown discounts

Managing risk and

future-proofing

assets:

from green premiums

to brown discounts

Source: Salvi, et. al, 2010, Der Minergie-Boom unter der Lupe,Center for Corporate Responsibility and Sustainability,Universität Zürich


Example: Rental price differences for MINERGIE-labeled flats in Switzerland

Sustainability as a

credit risk

assessment

criteria

Example: TEGoVA‘s European Property and Market Rating

Lists 4 criteria classes:• Market (national, regional)• Location• Quality of the property

cash flow• Property

Property class sub-criteria:

• Architecture / type of construction

• Fitout

• Structural condition

• Plot situation

• Ecological sustainability

• Profitability of the building concept


Energy performance of a building

is already influencing financial conditions!


Option 1

the carrot

Higher mortgage loan amounts and favourable

interest rates for energy-efficient low-

carbon buildings

Lower mortgage loan amounts and

unfavourable interest rates for inefficient

high-emission buildings

Option 2

the stick


1. Introduction2. Rationale & Business Case

3.Energy performance 4. Key information sources5. Integration into valuation methodologies


Table of content

Learning objectives

This section will cover the following content/issues:

• Typical energy use of residential and office buildings

• Basic elements of understanding of the energy performance of buildings

• Content and key elements of energy performance certificates (EPCs)

ENERGY PERFORMANCE


• Read and understand EPCs

• Be aware of energy performance features when undertaking a site visit / building inspection

ENERGY PERFORMANCE

Learning objectives

Why a specific focus

on energy?

• Energy consumption/demand and associated emissions are the most “tangible” (measurable) sustainability features

• Most “robust” empirical evidence base available

• Due to the introduction of EPCs, energy data is most readily available

• Client awareness is higher than with other sustainability features

• Energy consumption directly links through to operational costs

ENERGY EFFICIENCY PERFORMANCE


Single family dwelling and office building in Poland

72%

15%

6%

2%5% heating

domestic hot water

cooking

lighting

householdappliances

20%

22%

32%

14%

12%heating

cooling andvatilation

lighting

office equipment

other

Examples for typical

energy use in buildings

What are the key

factors affecting a

building’s

energy

consumption?

ENERGY PERFORMANCE

Construction date & type

Air tightness

Level of Insulation (roof, walls)

Heating Ventilation Air Conditioning (HVAC)

Hot water system

Occupier behaviour

Building Management/Control System

Renewable Energy Sources

Tell tale signs of

energy performance

What you need to look

out for…


Construction type and date?

Insulation of roof and walls?

Condition of building envelope?• External?

• Internal?

• Any visible damage?

• Any signs of humidity?

Type, age and quality of

windows?

Type of shading system (if any)?

ENERGY PERFORMANCE

Type and age of:• Heating systems?

• Heating/cooling source?

• Lighting system?

• Building control system?

Level of compliance with current

regulation?

EPC?• Available?

• Date?

• Recommendations?

Renewable energy source (solar,

wind, ground heat pump)?

Tell tale signs of

energy performance

What you need to look

out for…

The energy

performance

of a building

can be described

through

• (EPC) Energy efficiency class (A, B, C, etc.)

Examples of Energy Performance Certificates from across the EU

ENERGY PERFORMANCE

Degree of compliance with legal requirements (e.g. 20% below the national minimum standards)

Final energy demand/consumption expressed in kWh/m²a or l/m²a

Energy consumption level

Technical parameters of the building envelope and HVAC Systems

ENERGY PERFORMANCE

The energy

performance

of a building

can be described

through

Differences in type of use, building envelope, building systems

Faults within calculation model/calculation errors

Quality of construction process

Real climate

Type/intensity of use

Change of tariffs used for metering

Measurement errors

ENERGY PERFORMANCE

Why are there

differences between

calculated demand

and actual

consumption

levels?

1. Introduction2. Rationale & Business Case3. Energy performance

4. Key information sources5. Integration into valuation methodologies


Table of content

Learning objectives

This section will cover the following content/issues:

• Concept of a widened scope of information needs and related information sources

• Presentation and explanation of possible information sources to meet widened scope of information demand

KEY INFORMATION SOURCES


• Identify and extract relevant (building-related) information from various sources

• Understand and assess the quality of various information sources

KEY INFORMATION RESOURCES

Learning objectives

Extended information

requirements for

valuation professionals

“Valuers are advised to collect appropriate and sufficient sustainability data as and when it becomes available for future comparability even if it does not currently impact on value. Only where market evidence would support this should sustainability characteristics be built into a report on value.”

Source: RICS, 2013, Sustainability and commercial property valuation, RICS Professional guidance, global, Royal Institution of Chartered Surveyors, London, p. 5



Energy Consumption

(Drinking) water Consumption

Risks to local environment

Building flexibility and adaptability

Building accessibility

User comfort and indoor air quality


In addition to energy

data, to value

sustainability you have

to collect information

regarding

RICS Sustainability Checklist:

Inspection & Investigation


What is/are the building’s:

• Energy asset rating (if one exists)?

• Energy performance (consumption of non-renewable resources during use)?

• Carbon emissions?

• Source of energy sources available and/or used?

• Services in relation to age and efficiency and future life expectancy?

• Potential for energy renewal usage?

• Likely risks to the local environment through emissions, etc.?

• Water consumption during operation?

• Water conservation or installation of measures to promote water use efficiency?

Location

Building

Documentation

SiteConsideration

RICS Sustainability Checklist:

Inspection & Investigation


What is/are the building’s:

Location

Building

Documentation

SiteConsideration

• Waste reduction facilities (e.g. on-site waste segregation for recycling)?

• Likely resilience to the consequences of climate change (e.g. storm damage, maintaining usability if temperature change ensues)?

• Barrier-free accessibility to and inside the building (e.g. for disabled users)?

• Safety under extreme conditions (such as fire and tempest)?

• Health impacts in relation to building materials and building specifications (daylight/natural ventilation, etc..)?

• …

Your key

information sources

for energy consumption


Energy performance certificates (EPCs)

Green/sustainable building certificate/label/rating (BREEAM/LEED, etc.)

Planning Documentation

Due Diligence Reports

Field inspection/personal investigation



Utilities bills/annual utilities cost accounts

Information from Facility Management

Contracting agreements and energy performance guarantees

Field inspection/personal investigation


Your key

information sources

for energy consumption

“In undertaking their investigations, the valuer should also ask their clients to provide data (e.g. on energy performance).

If clients are unable (or unwilling) to provide data, then this should be treated as a potential additional risk factor.”


Treating your clients’

lack of data as a

potential additional

risk factor

1. Introduction2. Rationale & Business Case3. Energy performance 4. Key information sources

5. Integration into valuation methodologies and valuation reports

6. Conclusions

Table of content


• Definitions of value and respective approaches for integrating energy efficiency and sustainability considerations in valuations

• Suitability of different valuation methods and their input parameters for integrating energy efficiency/sustainability considerations

• How to adopt a holistic approach for building descriptions within valuation reports

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Learning objectives


• Compile a widened list of value-relevant building characteristics and attributes

• Understand how to translate available information/data into specific valuation input parameters

• Prepare extended/improved valuation reports


Learning objectives

Valuations based

on Market Value


For valuations based on Market Value, valuation input parameters need to be marked-derived.

If sustainability features are identified and recognised as having an impact on value, they should be built into the calculations only to the extent that a well-informed buyer would account for them, as evidenced from an analysis of the market.

Valuations based

on Investment

Value (worth)


For valuations based on Investment Value, valuation input parameters are investor specific, i.e. they are determined to reflect the investor’s expectations and preferences.

The extent of integrating sustainability issues depends on subjective investment objectives (which may well be shaped by strict sustainability requirements). Therefore, factors not yet reflected in Market Value – but which may influence an investor’s decision-making should be considered and built into the calculations.

Energy performance

of a building candirectly link through to various value-relevant factors!


Energy performance of a building can directly link through to various value-relevant factors!

Marketability/Lettability

Marketing speedLetting time

Level of operating costs

Achievable rent level

Reductions/discounts due to modernisation/refurbishment

backlog

Additional income/revenue due to supply of surplus energy to

third parties

Technical life span of a building

Useful economic life span of a

building

Image(of building and

owner)CO2 taxes

Degree of obsolescence/ deprecation rates

Taxes, subsidies, speed of achieving planning permit, etc.


Wider sustainable

building featureslinking through to value estimates


Energy efficiency

Lower operating and maintenance costs

Improved marketability, lower vacancy risk and higher stability os cash-flow

Property loss prevention benefits and lower business interruption risk

Reduced impacts on the environment

Reduced compensation costs and risk of litigation caused by Sick-Building Syndrome

Increased functionality, serviceability, durability and adaptability

Higher rental growth potential

User / occupant productivity and health gains

Ease of conducting maintenance, servicing and

recycling activities

Increased comfort and

well-being of occupants

Wider sustainable building features linking through to value estimates

Sustainable building features (examples)

Re

su

ltin

g e

ffe

cts

Mark

et

Valu

e /

Wo

rth

M

ort

gag

e L

en

din

g V

alu

e


Assumed impact of

sustainability credentialson key valuation input variables


- Growth component

+ Environmental / health impacts

+ Depreciation

+ Marketability

+ Other propertyrisks

Risk-free rate

CONVENTIONAL BUILDING SUSTAINABLE BUILDING

IMPACTS ON RISK PREMIUM

- Growth component

+ Environmental / health impacts

+ Depreciation

+ Marketability

+ Other propertyrisks

Risk-free rate

Ris

kP

rem

ium

CONVENTIONAL BUILDING

Operating costsattributable to

tenants

Costs of findingnew tenants

Maintenance

Management

Net Income

Operating costsattributable to

tenants

Costs of findingnew tenants

Maintenance

Management

Net Income

IMPACTS ON CASH FLOW & NET INCOME

SUSTAINABLE BUILDING

Mark

et

Re

nt

Assumed impact of sustainability credentials on key valuation input variables

Figure modified from: ITO, M. , 2009, “Embodiment of added value for Green Real Estate”, Paper presented at Tokyo Workshop 2009 on urban Cap and Trade Towards a Low Carbon Metropolis

Ris

kP

rem

ium


Key challenge

“Translation” of energyas a single sustainability feature


MarketValue

Key challenge: “translation” of energy as a single sustainability feature

Source: NUWEL, 2011, Nachhaltigkiet und Wertemittlung von Immobilien – Leitfaden für Deutschland, Österreich und de Schweiz , Published by: CCRS, Center for Corporate Responsibility and Sustainability , Universität Zürich

Floor area /cubature

Heat insulation of buildingenvelope

Energy source

Type and extent of renewable energy usage

Efficiency of heating and other building equipment

…

Facto

rsd

ete

rmin

ing

En

erg

y P

erf

orm

an

ce

Achievable Rent

Heating Costs

Energy consumptionCO2-Emissions

Compliance with legal requirements

Label / Certificate

Image / Marketability

…

Building Characteristics

Costs for building components/materials

Income Approach

Comparable Sales Method

Replacement CostApproach

Risk

Valuation methods

Energy Performance


Market adjustments

Valuation

methods

• Depending on the valuation methodology, you have to translate the sustainability features in different way

• Different valuation methods have different valuation-input

• parameters/‘adjustment screws’ (e.g. comparable sales, costs, rents, yields, depreciation rates, etc.)

• The application of different valuation methods is associated with different information requirements/demands

Consequently, there are several possibilities of ‘feeding’ energy efficiency and additional sustainability considerations into the valuation process!


“Adjustment Screws”

Comparable sales method


“Adjustment Screws”: comparable sales method

Lower/higher operating costs for building ownerFewer/more maintenance backlogs regarding energy standards

Higher comparable sales for sustainable buildingsLower comparable sales for conventional buildings

Lump-sum adjustment due to higher/lower market acceptance

Explanation:

𝒄𝟏 … 𝒄𝒏: Correction factors (e.g. to adjust for differences in location, building permissions, layout, conditions, energetic quality, etc.)

𝑲𝒑𝒊: Observed comparable sales

𝒘𝒊: Weight of adjusted comparable sales

𝒄𝒎: Market correction factor (shall be applied only when value influencing circumstances cannot be considered within the other valuation input parameters)

Source: Lorenz, D. and Lützkendorf, T., 2011, Sustainability and Property Valuation – Systematisation of existing approaches and recommendations for future action, Journal of Property Investment & Finance, Vol. 29, No. 6, pp. 644–676


Practical

recommendations

for comparable

sales analyses

• Follow your traditional approach of comparable sales analyses but extend/widen the scope of your investigation and enquiry to cover additional, potentially value-relevant factors.

• Check to what extent your comparable sales information already includes energy efficiency and other sustainability-related information.

• Contact your local/custom transaction information data provider and actively ask for additional sustainability-related information.


• Determine whether the sustainability-related characteristics and quality attributes of the property are below, above or equal to the local market average.

• Assess the position of the property in the competitive market place with regard to the property’s sustainability features. This assessment can be based on both, quantitative and/or professional judgement.

Practical

recommendations

for comparable

sales analyses


• Investigate the extent to which a deviation from the local market average justifies adjustments to comparable sales data.

If comparable sales data in your local market is insufficient, investigatecomparables from outside your local market (i.e. comparable markets/regions in your country).

Exploit additional sources: publications, case studies, press releases, etc.

Consider using the evidence presented in this document for advising clients and for justifying adjustments /corrections to comparable sales data and other valuation input factors such as useful life spans and obsolescence/ depreciation rates.

Practical

recommendations

for comparable

sales analyses


• Cooperate with other valuers and real estate professionals to improve your quantitative evidence base as well as your qualitative judgement of local market sentiment with regard to energy efficiency and other sustainability features as potential value drivers and risk factors.

Practical

recommendations

for comparable

sales analyses



Investment method


Adjustment Screws: Investment method

Changes in market participants’ preferencesLower share of operating costs for tenants

Ease of conducting maintenance and servicing activitiesLower repair costs

More stable cash flowImproved marketabilityShorter vacancy periodsImage/reputation gainsOther factors

Improved competitivenessRising energy costs“Sustainability Hype”

Longer useful economic lifespansLonger compliance with increasingly stringent environmental legislation

Explanation: GI: Gross rental income per yearOCT: Operating Costs non attributable to tenantsri Risk free rate rp Risk premiumg Growth rated Depreciation(ri + rp - g + d) All Risks Yield (ARY)

Source: Lorenz, D. and Lützkendorf, T., 2011, Sustainability and Property Valuation – Systematisationof existing approaches and recommendations for future action, Journal of Property Investment & Finance, Vol. 29, No. 6, pp. 644–676


Practical

recommendations

for the investment

method approach

• Follow the same fundamental process:

Assess the position of the subject property in the competitive market place with regard to the property’s sustainability features as well as its performance characteristics (consumption values, level of operating costs, comfort levels, etc.).

• As a new business routine, ask your clients about additional information on the subject property.This includes:

• Planning documentation; inventory records

• Energy performance certificates

• Availability of green/sustainable building certificates/labels/ratings

• Annual statements/accounts of utility costs

• Consumption values

Practical

recommendations

for the investment

method approach

• Contact facility managers as they usually have track records of consumption values and operating costs; (they usually also have data on vacancy rates and tenant turnover/retention times!).

• Ask local estate agents/brokers about differences between energy efficient/sustainable and conventional buildings with regard to absorption rates, marketing times and/or rates of sales.

• Investigate whether there is evidence in your local market (or in comparable markets) for green/sustainable premiums and/or brown discounts with regard to rents and yields

Practical

recommendations

for the investment

method approach

• What is the structure of green lease agreements in your country?

• What are (if any) typical arrangements to share costs and benefits of energy efficiency retrofits between landlords and tenants?

• How does the rental profile of the subject property compare to this?

• Does your choice of risk premium and growth rate appropriately represent the property’s risk/opportunity profile (particularly judged against the evidence/rationale presented in this course)?

Practical

recommendations

for the investment

method approach

• Are there signs of evidence in your local (or comparable) markets for faster obsolescence of conventional buildings?

• Does your choice of the deprecation rate (or of the remaining economic life span) for the subject property appropriately reflect the regulatory risk of non-compliance with increasingly stringent environmental legislation?

• Is there legislation in place (or planned) within your country to ban landlords from renting poorly performing buildings?

Practical

recommendations

for the investment

method approach

• Quantify the potential modernisation/refurbishment backlog due to poor energy performance, i.e. the refurbishment costs for energy efficiency retrofits and renewable energy installations.

• Consider the potential of renewable energy sources on site; this might include additional revenues from renting roof areas (solar power) and/or energy infeed.

Practical

recommendations

for the investment

method approach

Replacement cost approach



Adjustment Screws: Replacement cost approach

Slightly higher replacement cost

Longer useful lifespan

Fewer maintenance backlogs

Improved functionalitySpecial technical building equipment

Lump-sum adjustment due to higher market acceptance

Explanation:

RC: Replacement Costs

𝑹𝑳𝑺

𝑶𝑳𝑺:𝑹𝒆𝒎𝒂𝒊𝒏𝒊𝒏𝒈 𝒍𝒊𝒇𝒆 𝒔𝒑𝒂𝒏

𝑶𝒗𝒆𝒓𝒂𝒍𝒍 𝒍𝒊𝒇𝒆 𝒔𝒑𝒂𝒏= Depreciation factor due to age (linear depreciation)

D: Depreciation due to building damages, defects, maintenance backlog

OVC: Other value influencing circumstances (e.g. functional obsolescence, environmental obsolescence, etc.)

LV: Land Value

𝒄𝒎: Market correction factor (shall be applied only when value influencing circumstances cannot be considered within the other valuation input parameters)

Source: Lorenz, D. and Lützkendorf, T., 2011, Sustainability and Property Valuation – Systematisation of existing approaches and recommendations for future action, Journal of Property Investment & Finance, Vol. 29, No. 6, pp. 644–676


Practical

recommendations

for the replacement

cost approach

• Investigate the extent to which your national construction cost data provider has information on replacement costs for energy efficient/sustainable building types as well as for energy efficiency and renewable energy features and equipment. Actively request such kind of cost data.

• Consider life cycle cost analyses as an appropriate tool for comparing/ considering refurbishment measures needed for curing different forms of obsolescence.

• Provided that your national depreciation tables / useful economic life expectancy tables do not yet reflect energy efficient / sustainable buildings, make adjustments on a qualitative basis.

• If necessary, consider carrying out cost-benefit analyses for certain types of energy efficiency measures/renewable energy installations.

Practical

recommendations

for the replacement

cost approach

Discounted Cash Flow (DCF)



Adjustment Screws: Discounted Cash Flow (DCF)

Change in market participants’ preferencesLower share of operating costs for tenantsGreen lease

Ease of conducting maintenance and servicing activities

Improved marketabilityShorter vacancy periods

Lower expenses for modernisation/revitalization

Lower property risks (not yet explicitly taken into account in modelling of property cash flow

More stable cash flowsImproved marketabilityLower sales risksImage/reputation gainsPotential for increases in rents

Improved competitivenessRising energy costsSustainability Hype

Longer useful economic lifespansLonger compliance with stringent environmental legislation


Explanation:

n: time frame in years

GIe: Gross rental income

OETz: Operating expenses non attributable to tenants

ME: Marketing expenses

OE: Other expenses (e.g. modernisation, etc.)

OI: Other income (e.g. advertising on building facade, etc.)

𝑟𝑑𝑖𝑠𝑐: Discount rate

𝐺𝐼𝑒𝑛: Gross rental income in year n

𝑂𝐸𝑇𝑧𝑛 : Operating expenses non attributable to tenants in year n

𝑟𝑖: Risk free rate

𝑟𝑝: Risk premium

g: Growth rate

d: Depreciation(𝐺𝐼𝑒𝑛 – 𝑂𝐸𝑇𝑧𝑛)

(𝑟𝑖 + 𝑟𝑝 −𝑔 +𝑑): Terminal Value of the Building at the end of the

time frame

• Provided you have enough information to model annual cash flows, DCF gives you the opportunity (and greater flexibility) to account for a broad spectrum of sustainability-related benefits/risk through subtle adjustments to valuation input parameters in a transparent way.

• Carry out quantitative sub-financial analyses (e.g. Cost-Benefit Analyses, Health/Productivity Benefit Analyses, Life cycle costing) as an additional information source for the specification/adjustment of DCF input parameters.

Practical

recommendations

for the Discounted

Cash Flow (DCF)

• Carefully consider the choice of the exit capitalisation rate since all potential longer-term benefits/risks need to be reflected here.

• Try to address as many income/expense considerations within the cash flows and not in the discount rate (increases transparency).

• Consider carrying out sensitivity analyses/Monte-Carlo-Simulation in order to avoid the impression of unrealistic levels of precision.

Practical

recommendations

for the Discounted

Cash Flow (DCF)

RICS best practice forvaluation reports


RICS best practice for

valuation reports

Provide:

• A clear description of the sustainability-related property characteristics and attributes that have been collected, which may, where appropriate, include items not directly reflected in the final advice as to value

• A statement of the valuer’s opinion on the relationship between sustainability factors and the resultant valuation, including a comment on the current benefits/risks that are associated with these sustainability characteristics or the lack of risks.

• A statement of the valuer’s opinion on the potential impact of these benefits and/or risks to relative property values over time


Source: Royal Institutions of Chartered Surveyors (RICS), 2014, RICS Valuation -Professional Standards January 2014 Valuation Practice Statement 4, p. 59-60

Extended

building descriptions

as part of improved

valuation reports


• Location and market environment

• Cash flow/quality of cash flow

• Physical characteristics and attributes

• Performance/quality characteristics

Sustainability should not be treated as an add-on!

How to structure the information about the physical characteristics and attributes of the building in valuation reports


How to structure the information about the physical characteristics and attributes of the building in valuation reports


Practical recommendations for valuation reports


Practical

recommendations

for valuation reports

• Begin with an extended/improved description of the property

• Ask clients about certain types of performance information (e.g. on energy, water, etc.)

• Do not feel obliged/expected to generate/gather all sustainability-related information yourself; if clients cannot deliver the requested information, this shall be disclosed in the valuation report and treated as an additional risk-factor.


Practical

recommendations



• Disclose information sources used and declare data quality/reliability (e.g. energy consumption values are based on an EPC done by an expert in the year 2010).

• Describe how the relevant sustainability-features of the property (or the lack thereof) impact on value.

• Disclose adjustments to single valuation input parameters in the valuation report.

Practical

recommendations



• Include the following for more complex properties/valuations:

• Risk-documentation:Graphical illustration of sustainability-related risks and opportunities of the property.

• Sensitivity-analysis/Monte-Carlo simulation: Illustration of how changes in both, underlying assumptions and framework conditions may impact value (at the valuation date and over the longer-term).

1. Introduction2. Rationale & Business Case3. Energy performance4. Key information sources5. Integration into valuation methodologies

and valuation reports

6. Conclusions

Table oF contents

Final words

CONCLUSION

The extent and approach of reflecting sustainability in value estimates strongly depends on:

No straightforward or automated formula to account for sustainability issues in valuation exists.

The underlying definition of value

Property type

Regional and local market conventions

Regional and local market conditions

Availability of comparable evidence

Note: New ways of gathering, processing and presenting property related information are required!

Energy efficiency and

other sustainability

features must be

considered in the

valuation process in

order to…

CONCLUSION

Meet professional general duties and requirements

Reflect changing market conditions

Avoid mispricing of assets (i.e. valuing conventional buildings too high and sustainable ones too low)

Comply with professional organisations’ (e.g. RICS) and jurisdiction’s (e.g. Germany) mandatory valuation requirements

Exploit new business opportunities

The Project

About RENOVALUE

The use of property valuation is an essential aspect of the property lifecycle and directly influences financial decision making that is why encouraging the consideration of energy efficiency and renewable energy needs to start here.

Being able to demonstrate the business case to prospective buyers, sellers, lenders and investors is prerequisite to accelerating the market transition towards Nearly Zero Energy Buildings (NZEBs).

About RENOVALUE

Yet the ability to demonstrate this business case for sustainable buildings is exactly what is missing at present: many valuation professionals lack both the skills and the knowledge to consistently take energy efficiency and renewable energy issues into account when advising their clients.

RenoValue aims to fill this knowledge and skills gap by developing training material for practising valuation professionals on how to factor energy efficiency and renewable energy issues into valuation practices and how to advise their clients accordingly.

The Project

Partners

RenoValue is funded by the Intelligent Energy Europe Programme of the European Union and is managed by the Executive Agency for Small and Medium sized Enterprises (EASME)

The content of this document does not reflect the official opinion of the European Union. Responsibility for the information and views expressed lies entirely with the author(s).

Funded By

Contacts

Website

www.renovalue.eu

Twitter

@renovalueEU

Documents

Valuing Sustainability April 2016 - English