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Valuing

Sustainability

Co-funded by the Intelligent Energy Europe
programme of the European Union

June 2016

Participation in this course

Create higher quality valuation reports.

will enable you to

Prevent errors and mispricing of assets.
Save time & costs through improved
knowledge of relevant information sources.

Improve competitiveness and extend
consulting competences.

More specifically

it will HELP YOU To

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.

More specifically

it will Provide you with

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 is important

To note that

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.

It is ALSO important

To note that

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.

Table of content

1. Introduction
2.
3.
4.
5.

Rationale & Business Case
Energy performance
Key information sources
Integration into valuation methodologies
and valuation reports
6. Conclusions

INTRODUCTION

Learning objectives
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

INTRODUCTION

Learning objectives
This section will enable you to:

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

INTRODUCTION

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

Why valuation
professionals are
crucial in
market transformation

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

INTRODUCTION

Valuing sustainability
is not rocket science!

• It is about applying quantitative
evidence and qualitative
judgement to new valueinfluencing 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

But what does that
mean for
your daily practice?

• 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

Your existing
sustainability
related guidance

INTRODUCTION

RICS Red Book (2014)
Sustainability as a
potential driver and
risk factor!

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

Table of content

1. Introduction

2. Rationale & Business Case
3. Energy performance
4. Key information sources
5. Integration into valuation methodologies
and valuation reports
6. Conclusions

RATIONALE & BUSINESS CASE

Learning objectives
This section covers the following
content/issues:

• 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

Learning objectives
This section will enable you to:

• Understand the importance of these
developments/issues for valuation
professionals’ daily practices
• Explain the relevance of sustainability to your
clients

RATIONALE & BUSINESS CASE

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

RATIONALE & BUSINESS CASE

Key influencing issues:

... as is your clients'
business climate …

Corporate Social Responsibility
(CSR) policies
Sustainability reporting
obligations
Responsible/sustainable
property investment strategies

RATIONALE & BUSINESS CASE

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 GHGemissions!

~ 33 % of black carbon emissions!

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

RATIONALE & BUSINESS CASE

International, EU
and national
policy measures
for buildings

International level

• 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

RATIONALE & BUSINESS CASE

International, EU
and national
policy measures
for buildings

National level

• Introduction of Energy
Performance Certificates (EPCs)
• Financial benefits and incentives
(subsidy programmes)

RATIONALE & BUSINESS CASE

One-letter
improvement in the
EPC rating can
make all the
difference!
Source: Bio Intelligence Service, Ronan Lyons
and IEEP, 2013, Energy performance certificates
in buildings and their impact on transaction
prices and rents in selected EU countries, Final
report prepared for European Commission (DG
Energy), p. 15.

RATIONALE & BUSINESS CASE

Managing risk and
future-proofing
assets:
from green premiums
to brown discounts

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

• 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!

RATIONALE & BUSINESS CASE

Managing risk and
future-proofing
assets:
from green premiums
to brown discounts

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

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

RATIONALE & BUSINESS CASE

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

RATIONALE & BUSINESS CASE

Energy performance of a building
is already influencing financial conditions!

RATIONALE & BUSINESS CASE

Option 1
the carrot

Higher mortgage loan
amounts and favourable
interest rates for
energy-efficient lowcarbon buildings

Option 2
the stick

Lower mortgage loan
amounts and
unfavourable interest
rates for inefficient
high-emission buildings

Table of content

1. Introduction
2. Rationale & Business Case

3. Energy performance
4. Key information sources
5. Integration into valuation methodologies
and valuation reports
6. Conclusions

ENERGY PERFORMANCE

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

Learning objectives
This section will enable you to:

• Read and understand EPCs
• Be aware of energy performance features when
undertaking a site visit / building inspection

ENERGY EFFICIENCY PERFORMANCE

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

2%
5%

Examples for typical
energy use in buildings

heating

6%
domestic hot water

15%

cooking
lighting
72%

Single family dwelling and
office building in Poland

household
appliances

12%

heating

20%

cooling and
vatilation

14%

lighting
22%

office equipment
other

32%

ENERGY PERFORMANCE

What are the key
factors affecting a
building’s
energy
consumption?

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

ENERGY EFFICIENCY PERFORMANCE

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

Tell tale signs of
energy performance
What you need to look
out for…

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)?

ENERGY PERFORMANCE

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

The energy
performance
of a building
can be described
through

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

Why are there
differences between
calculated demand
and actual
consumption
levels?

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

Table of content

1. Introduction
2. Rationale & Business Case
3. Energy performance

4. Key information sources
5. Integration into valuation methodologies
and valuation reports
1. Conclusions

KEY INFORMATION SOURCES

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 RESOURCES

Learning objectives
This section will enable you to:

• Identify and extract relevant (buildingrelated) information from various sources
• Understand and assess the quality of various
information sources

KEY INFORMATION SOURCES

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

KEY
KEYINFORMATION
INFORMATIONRESOURCES
SOURCES

In addition to energy
data, to value
sustainability you have
to collect information
regarding

Energy Consumption
(Drinking) water Consumption
Risks to local environment
Building flexibility and adaptability
Building accessibility
User comfort and indoor air
quality

RICS Sustainability Checklist:
Inspection & Investigation

KEY INFORMATION SOURCES

What is/are the building’s:
Location

Site
Consideration

Building

Documentation

• 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?

RICS Sustainability Checklist:
Inspection & Investigation

KEY INFORMATION SOURCES

What is/are the building’s:
Location

Site
Consideration

Building

Documentation

• Waste reduction facilities (e.g. onsite 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..)?
• …

KEY
KEYINFORMATION
INFORMATIONRESOURCES
SOURCES

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

KEY
KEYINFORMATION
INFORMATIONRESOURCES
SOURCES

Your key
information sources
for energy consumption

Utilities bills/annual utilities
cost accounts
Information from Facility
Management
Contracting agreements and
energy performance
guarantees

Field inspection/personal
investigation

KEY INFORMATION SOURCES

Treating your clients’
lack of data as a
potential additional
risk factor

“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.”

Table of content

1. Introduction
2. Rationale & Business Case
3. Energy performance
4. Key information sources

5. Integration into valuation
methodologies and valuation
reports
6. Conclusions

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Learning objectives
This section covers the following content/issues:

• 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
This section will enable you to:

• 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

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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.

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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.

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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

Marketability/
Lettability

Marketing speed
Letting time

Reductions/discounts due to
modernisation/refurbishment
backlog

Technical life span
of a building

Useful economic
life span of a
building

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

Level of operating
costs

Achievable rent
level

Additional income/revenue due
to supply of surplus energy to
third parties

Image
(of building and
owner)

CO2 taxes

Degree of obsolescence/
deprecation rates

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Wider sustainable
building features
linking through to value
estimates

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Wider sustainable building features linking through to value estimates

Sustainable building features (examples)

Energy efficiency

Reduced impacts on
the environment

Increased
functionality,
serviceability,
durability and
adaptability

Ease of conducting
maintenance,
servicing and
recycling activities

Increased comfort
and
well-being of
occupants

Resulting effects

Improved marketability, lower vacancy risk
and higher stability os cash-flow
Higher rental growth potential
Property loss prevention benefits and lower
business interruption risk

User / occupant productivity
and health gains
Reduced compensation costs and risk of
litigation caused by Sick-Building Syndrome

Market Value / Worth
Mortgage Lending Value

Lower operating and maintenance costs

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Assumed impact of
sustainability credentials
on key valuation input
variables

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Assumed impact of sustainability credentials on key valuation input variables

CONVENTIONAL BUILDING

SUSTAINABLE BUILDING

CONVENTIONAL BUILDING

SUSTAINABLE BUILDING

- Growth component

+ Marketability

+ Other property
risks

+ Environmental /
health impacts

+ Depreciation

+ Marketability

Costs of finding
new tenants
Maintenance

Costs of finding
new tenants

Market Rent

+ Depreciation

Operating costs
attributable to
tenants

Operating costs
attributable to
tenants

Risk Premium

Risk Premium

+ Environmental /
health impacts

- Growth component

Maintenance
Management

Management

+ Other property
risks

Net Income
Net Income

Risk-free rate

Risk-free rate

IMPACTS ON RISK PREMIUM

IMPACTS ON CASH FLOW & NET INCOME

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

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Key challenge
“Translation” of energy
as a single sustainability feature

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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

Factors determining Energy Performance

Floor area /cubature

Type and extent of
renewable energy usage
Efficiency of heating and
other building equipment

Comparable Sales Method

Costs for building
components/materials

Replacement Cost
Approach

Achievable Rent

Income Approach

Heating Costs

Heat insulation of building
envelope

Energy source

Building Characteristics

Energy consumption
CO2-Emissions

Energy
Performance

Risk

Market
Value

Compliance with legal
requirements
Label / Certificate

Image / Marketability

Market adjustments

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

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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!

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

“Adjustment Screws”
Comparable sales method

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

“Adjustment Screws”: comparable sales method

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

Explanation:

Higher comparable sales for
sustainable buildings
Lower comparable sales for
conventional buildings

??? : Observed comparable sales

Lump-sum adjustment due to
higher/lower market acceptance

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

??: Weight of adjusted comparable sales

??: 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

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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 valuerelevant 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.

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Practical
recommendations
for comparable
sales analyses

• 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.

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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, investigate
comparables 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.

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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.

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

“Adjustment Screws”
Investment method

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Adjustment Screws: Investment method

Changes in market participants’
preferences
Lower share of operating costs for
tenants
Ease of conducting maintenance
and servicing activities
Lower repair costs
More stable cash flow
Improved marketability
Shorter vacancy periods
Image/reputation gains
Other factors

Improved competitiveness
Rising energy costs
“Sustainability Hype”

Longer useful economic lifespans
Longer compliance with increasingly
stringent environmental legislation

Explanation:
GI: Gross rental income per year
OCT: Operating Costs non attributable to tenants
ri Risk free rate
rp Risk premium
g Growth rate
d Depreciation
(ri + rp - g + d) All Risks Yield (ARY)

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 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.).

Practical
recommendations
for the investment
method approach

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.

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

“Adjustment Screws”
Replacement cost approach

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Adjustment Screws: Replacement cost approach

Slightly higher replacement cost
Longer useful lifespan

Fewer maintenance backlogs
Improved functionality
Special technical building equipment
Lump-sum adjustment due to
higher market acceptance

Explanation:
RC: Replacement Costs
??? ????????? ???? ????
:
=
???
??????? ???? ????

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
??: 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.

Practical
recommendations
for the replacement
cost approach

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.

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

“Adjustment Screws”
Discounted Cash Flow (DCF)

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Adjustment Screws: Discounted Cash Flow (DCF)

Change in market participants’
preferences
Lower share of operating costs for
tenants
Green lease
Ease of conducting maintenance
and servicing activities
Improved marketability
Shorter vacancy periods

Lower expenses for
modernisation/revitalization
Lower property risks (not yet
explicitly taken into account in
modelling of property cash flow

Explanation:
n: time frame in years
GIe: Gross rental income
OETz: Operating expenses non attributable to tenants
ME: Marketing expenses
Improved competitiveness
OE: Other expenses (e.g. modernisation, etc.)
Rising energy costs
OI: Other income (e.g. advertising on building facade, etc.)
Sustainability Hype
????? : Discount rate
Longer useful economic lifespans ???? : Gross rental income in year n
Longer compliance with stringent ????? : Operating expenses non attributable to tenants in year n
environmental legislation
?? : Risk free rate
?? : Risk premium
g: Growth rate
d: Depreciation
More stable cash flows
Improved marketability
Lower sales risks
Image/reputation gains
Potential for increases in rents

(???? – ????? )
:
(?? + ?? −? +?)

time frame

Terminal Value of the Building at the end of the

Practical
recommendations
for the Discounted
Cash Flow (DCF)

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.

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

RICS best practice for
valuation reports

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Provide:

RICS best practice for
valuation reports

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

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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!

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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









4

Heating and cooling system (HVAC-part1)
including heat and hot water production,
cooling generation
Energy generation for internal use and/or third
parties (PV, etc…)
Ventilation system (HVAC-part2)
Electrical system incl. lighting
Elevators & Internal transport
ICT
Water supply, distribution and wastewater (e.g.
water efficient taps, rain- and grey-water
usage, own clarification plant, rain-water
infiltration, etc..
Waste collection sytem
Distribution pipelines (e.g. within supply/utility
shafts)
Controlling instrumentation
Measurement instrumentation

1









2

3

Energy source

Energy sources (fossil, renewable) for heating
Energy sources (others)

Building description A (volume &
surfaces)
Size (m²) per zone of use
Volume (m³) and surface/volume-ration (m²/m³)
External surfaces and orientation (walls,
windows) (m²) by type
Internal surfaces (m²) by type
Ceiling/room height
Size/type of rooms (e.g. open-plan office,
cellular office)
Width of doors and corridors
Size of facilities/rest-room regarding barrierfree accessibility
Ratio between usable (effective floor area and
traffic (common) area

Building description B
(construction & products)








Construction type
Carrying structure and foundation
Load bearing reserve
Type of external walls/envelope
Type of windows and glazing
Type of internal walls
External surface materials
Internal surface materials
Other materials and products

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

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

Technical quality

Society









Cultural & Social
Quality

Technical
Quality

Structurlal safety
Fire protection
Noise protection
Moisture protection
Maintanability
Flexibility and adaptability
Ease of cleaning
Durability
Resilience against natural and
man-made hazards
Design for deconstruction and
recyclability

Cultural and social
quality








Functional
Quality
Environmental
Quality

Economic
Quality

Functional quality

Environment

Economy

Serviceability (fitness for
purpose, usability)
Space efficiency

Environmental quality



Economic quality

Life cycle costs

Aesthetic quality
Urban design quality
Cultural value
Health & well-being
Indoor air quality
Comfort (thermal, visual,
acoustic, olfactory)
User safety
User participation and control
Accessibility (to and inside the
building)




Energy performance
Resource depletion
GHG-emissions & GWP
Other impact on the global &
local environment incl. Risks to
the local environment
Land use change & sealing
Water consumption
Wastewater
Waste (construction & user
related)

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Practical recommendations
for valuation reports

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

• Begin with an extended/improved
description of the property

Practical
recommendations
for valuation reports

• 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.

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

Practical
recommendations
for valuation reports

• 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.

INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS

• Include the following for more
complex properties/valuations:

Practical
recommendations
for valuation reports

• 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).

Table oF contents

1.
2.
3.
4.
5.

Introduction
Rationale & Business Case
Energy performance
Key information sources
Integration into valuation methodologies
and valuation reports

6. Conclusions

CONCLUSION

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

Final words

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

About RENOVALUE

The Project

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

The Project

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.

Partners

Funded By
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).

Website
www.renovalue.eu

Contacts

Twitter
@renovalueEU