ArticlePDF Available

Sustainability and property valuation: A risk-based approach

Authors:

Abstract and Figures

The proportion of sustainable property in the total building stock remains small. One reason is that the financial added value resulting from sustainability is not sufficiently taken into account in property valuation due to the tendency of valuations to lag behind market trends. This article presents the development of a new approach that attempts to provide the quantitative information necessary to integrate those aspects of sustainability relating to value into valuations and thereby contribute to reducing the valuation lag. The CCRS Economic Sustainability Indicator ESI measures the risk of property to lose and the opportunity to gain value due to future developments like climate change or rising energy prices. Five groups of value-related sustainability features were identified: flexibility and polyvalence, energy and water dependency, accessibility and mobility, security, health and comfort. By minimizing the risk of loss in value through future developments, those sustainability features contribute to the property value. Their effects on property value were quantified by risk modelling. As an indicator for future-oriented property risk, ESI is integrated in the discount rate of Discounted Cash Flow (DCF ) valuations. The approach has been tested for plausibility and practicability on more than 200 properties.
Content may be subject to copyright.
University of Zurich
Zurich Open Repository and Archive
Winterthurerstr. 190
CH-8057 Zurich
http://www.zora.uzh.ch
Year: 2010
Sustainability and property valuation: a risk-based approach
Meins, E; Wallbaum, H; Hardziewski, R; Feige, A
Meins, E; Wallbaum, H; Hardziewski, R; Feige, A (2010). Sustainability and property valuation: a risk-based
approach. Building Research & Information, 38(3):280-300.
Postprint available at:
http://www.zora.uzh.ch
Posted at the Zurich Open Repository and Archive, University of Zurich.
http://www.zora.uzh.ch
Originally published at:
Meins, E; Wallbaum, H; Hardziewski, R; Feige, A (2010). Sustainability and property valuation: a risk-based
approach. Building Research & Information, 38(3):280-300.
Meins, E; Wallbaum, H; Hardziewski, R; Feige, A (2010). Sustainability and property valuation: a risk-based
approach. Building Research & Information, 38(3):280-300.
Postprint available at:
http://www.zora.uzh.ch
Posted at the Zurich Open Repository and Archive, University of Zurich.
http://www.zora.uzh.ch
Originally published at:
Meins, E; Wallbaum, H; Hardziewski, R; Feige, A (2010). Sustainability and property valuation: a risk-based
approach. Building Research & Information, 38(3):280-300.
Sustainability and property valuation: a risk-based approach
Abstract
The proportion of sustainable property in the total building stock remains small. One reason is that the
financial added value resulting from sustainability is not sufficiently taken into account in property
valuation due to the tendency of valuations to lag behind market trends. This article presents the
development of a new approach that attempts to provide the quantitative information necessary to
integrate those aspects of sustainability relating to value into valuations and thereby contribute to
reducing the valuation lag. The CCRS Economic Sustainability Indicator ESI measures the risk of
property to lose and the opportunity to gain value due to future developments like climate change or
rising energy prices. Five groups of value-related sustainability features were identified: flexibility and
polyvalence, energy and water dependency, accessibility and mobility, security, health and comfort. By
minimizing the risk of loss in value through future developments, those sustainability features contribute
to the property value. Their effects on property value were quantified by risk modelling. As an indicator
for future-oriented property risk, ESI is integrated in the discount rate of Discounted Cash Flow (DCF )
valuations. The approach has been tested for plausibility and practicability on more than 200 properties.
CCRS Working Paper Series
Working Paper No. 05/09
Sustainability and Property Valuation -
A Risk-Based Approach
Erika Meins, Holger Wallbaum, Regina Hardziewski
Annika Feige
This is a working paper currently under review for publication in Building Research &
Information; Building Research & Information is available online at:
http://www.informaworld.com/rbri.
December 2009
2
Sustainability and Property Valuation –
A Risk-Based Approach
Erika Meins
*
, Holger Wallbaum
, Regina Hardziewski
, Annika Feige
December 2009
Executive Summary
The proportion of sustainable property in the total building stock remains small. One reason is
that
the financial added value resulting from sustainability is not sufficiently taken into account
in property valuation due to the tendency of valuations to lag behind market trends. This
article presents the development of a new approach that attempts to provide the quantitative
information necessary to integrate those aspects of sustainability relating to value into
valuations and thereby contribute to reducing the valuation lag. The CCRS Economic
Sustainability Indicator ESI
®
measures the risk of property to lose and the opportunity to gain
value due to future developments
like climate change or rising energy prices. Five groups of
value-related sustainability features were identified: flexibility and polyvalence, energy and water
dependency, accessibility and mobility, security, health and comfort. By minimizing the risk of
loss in value through future developments, those sustainability features contribute to the property
value.
Their effects on property value were quantified by risk modelling.
As an indicator for
future-oriented property risk, ESI
®
is integrated in the discount rate of Discounted Cash Flow
(DCF ) valuations. The approach has been tested for plausibility and practicability on more
than 200 properties.
Keywords
Sustainability, property valuation, discounted cash flow, risk model, sustainability features,
economic sustainability indicator, sustainable buildings
Number of Words: 8297
*
Centre for Corporate Responsibility and Sustainability at the University of Zurich (CCRS), Switzerland,
erika.meins@ccrs.uzh.ch
Institute for Construction Engineering and Management. Department of Sustainable Construction. Swiss Federal
Institute of Technology Zurich (ETH), Switzerland,
wallbaum@ibb.baug.ethz.ch
Institute for Construction Engineering and Management. Department of Sustainable Construction. Swiss Federal
Institute of Technology Zurich (ETH), Switzerland,
hardziewski@ibb.baug.ethz.ch
Institute for Construction Engineering and Management. Department of Sustainable Construction. Swiss Federal
Institute of Technology Zurich (ETH), Switzerland feige@ibb.baug.ethz.ch
3
Sustainability and Property Valuation – A Risk-Based Approach
1 Introduction
Energy efficient properties achieve a premium price in some markets. Based on a broad data
basis, a recent study shows that the property market in Switzerland has – on average – paid a
premium of seven percent on the purchase price for energy-efficient single family houses and
a premium of 3.5 percent for freehold apartments during the last ten years (Salvi et al., 2008).
These results have been confirmed by similar studies in the USA (Miller et al., 2007,
Eichholtz et al., 2009). Empirical evidence also suggests that office buildings with a „green
rating“ generate rental income which is three percent higher per square meter compared to
non „green“ buildings (Eichholtz et al., 2009). An analysis of a portfolio consisting of Energy
Star
1
labelled office properties shows that these properties had “5.9% higher net incomes per
square foot (due to 9.8% lower utility expenditures, 4.8% higher rents, and 0.9% higher
occupancy rates), 13.5% higher market values per square foot, 0.5% lower cap rates, and
appreciation and total returns similar to other office properties” (Pivo and Fisher 2009). The
results of a study about the effect of eco-certification on the rental and sales prices of US
offices properties confirms that there exists a rental premium of about 6% for LEED
2
and
Energy Star certification (Fuerst and McAllister, 2009).
However, energy efficiency is only one aspect of a sustainable property, and rising energy
prices are only one example of long-term changes that are anticipated today. Other changes
include global warming, demographic changes and changing social standards are aspects that
should be covered by a holistic sustainability assessment. Some of these developments can
also have an impact on the value of real estate. Property owners are becoming increasingly
aware of this and sustainability features seem to matter increasingly to property owners
(RICS, 2009). These value-related aspects are the focus of the authors of this paper.
According to a recently published survey, 59 percent of the approximately 100 property
4
investors interviewed stated their intent to invest much larger amounts in sustainable property
(Union Investment, 2008). More than half of the investors who were interviewed in Germany
believe that higher prices can be realised with sustainable property than with conventional
property (Union Investment, 2008).
It is assumed that many investors, principals, building owners and planners believe that a
sustainable building is primarily characterized by its environmental related parameters or –
even more limited – to its energy demand for electricity, heating and cooling. This
understanding is still widespread, also visible in the criteria of the internationally renowned
building labelling schemes LEED and BREEAM, but obviously too short-sighted. Lützendorf
and Lorenz (2005) provide a more elaborated classification of buildings that contribute to a
sustainable development. Based on a classification of areas of protection “protection of the
natural environment, protection of basic natural resources, protection of human health and
well-being, protection of social values and public goods, protection and preservation of
capital and material goods” (Lützkendorf and Lorenz, 2005) the authors derived a more
comprehensive set of requirements to classify sustainable buildings.
This more holistic interpretation of a sustainable building that is also shared by the authors of
this article has also been the basis for a new Labelling scheme, developed by the German
Association for Sustainable Buildings (Deutsche Gesellschaft für Nachhaltiges Bauen,
DGNB)
3
. The approach represents the second generation of labelling schemes for buildings,
covering the three dimensions of a sustainable development following the Brundtland
definition (WCED, 1987), whereas the majority of building labels are still these of the first
generation (environmental and energy focused).
Apart from rising energy prices, this is another reason for a high level of dynamism in the
construction of (only) energy-efficient buildings that can be observed, particularly regarding
new buildings. In Switzerland, for example, the stock of energy-efficient Minergie
®4
5
buildings, which are commonly viewed as being „sustainable“, has tripled between 2004 and
2008. This dynamism is also evident in LEED certification – for example in commercial
construction registered to receive LEED certification: From 3% in 2002 (USGBC, 2002) the
annual volume has risen to 6% in 2008 – according to some estimates (Hoffman and Henn,
2008). Despite all of this, the proportion of actually built sustainable properties remains low.
In the USA there are currently only 1,703 LEED certified buildings (Eichholtz et al., 2009) –
an insignificant amount compared to the 1.8 million houses and 170,000 commercial
buildings that are built each year (Hoffman and Henn, 2008). With 12,579 buildings in
Switzerland, the proportion of Minergie
®
buildings represents only about one percent of the
total stock (Steinemann et al., 2008).
There are various reasons for the low proportion of energy efficient and sustainable property.
One of them is that property is a fairly durable asset. In Switzerland, the annual proportion of
new buildings represents less than 1% of the total stock. Even with a high level of conversion,
it will take some time for an appreciable share of the stock to be renovated.
A further reason for the slow implementation of veritably sustainable properties is that there
is a lack of a true understanding of what sustainable property really is. Relatively clear
concepts exist only with regard to technical aspects such as energy efficiency and building
ecology, while the social aspects and economic issues remain largely unclear. In this regard
the DGNB label provides a significant step further in the concretization of the non-
environmental dimensions within a sustainable building scheme.
In addition, the slow rate of implementation of sustainable property can be traced back to the
fact that sustainability is only taken into account to an insufficient extent if at all when
appraising a property financially (Schäfer et al., 2008, Sayce et al., 2006, Lorenz and
Lützkendorf, 2008). The Royal Institution of Charted Surveyors (RICS) has acknowledged
this recently (Lorenz et al., 2008) and has drafted a Valuation Information Paper (VIP) as a
6
first step to bridge this gap (RICS, 2009). The VIP clarifies that valuers’ role is solely to
reflect the market’s assessment of an asset’s future performance and that if the market does
not differentiate between sustainable and non-sustainable properties, there will be no impact
on value. However, as is stated in the RICS VIP “within the UK, the US and other mature and
transparent markets, there are signs that, increasingly, sustainability criteria matter to property
owners (be they owner-occupiers or investors) and to tenants” (RICS, 2009). Since valuers
attempt to base their valuations on empirical evidence they are forced to rely on market data,
which is per definition historical data since the market is in constant evolution (Szerdahelyi,
2006). It is therefore in the nature of valuations that new market trends, e.g. investors paying
a premium for sustainable properties, are reflected with a certain time lag. The solution to
reduce this “valuation lag” is to provide valuers with quantitative information on the effects
of long-term developments on property values to enable the integration of value-related
sustainability features into property valuation.
This article pursues two goals. First, for the purpose of property valuation, sustainability is
defined from a financial point of view and substantiated so that it can be measured with
concrete features and indicators. And second, the ESI
®
Property Valuation is presented – a
risk-based attempt to show how existing valuation methods can be supplemented by those
sustainability aspects, which have an effect on the financial value of a property. The article
focuses on the Discounted Cash Flow (DCF) method as it is commonly used in many parts of
Europe and is the preferred method for many real estate valuators. Finally, the limits and
opportunities of this attempt as well as the most important consequences from these findings
for practical experience will be examined.
7
2 The Need for a Sustainable Property Valuation
2.1 Point of Departure Property Valuations
Real estate differs from many other assets due to certain specific features (Gantenbein, 1999).
The special challenges in valuing real estate can be attributed to some of these special
features. Property is an immobile asset and is characterized by a high level of longevity. Each
property is singular on the one hand because of its geographic and topographic uniqueness
and on the other hand as a result of the large number of variable building characteristics. In
contrast to shares or securities, the price of real estate cannot be determined without a
transaction taking place due to the fact that each property is unique. Instead, a property’s
value needs to be estimated as an approximation of the price.
There is no generally applicable definition of real estate value. In practice, the concept market
value has become prevalent. The International Valuation Standards (2005) define market
value as „the estimated amount for which a property should exchange on the date of valuation
between a willing buyer and a willing seller in an arm’s-length transaction after proper
marketing wherein the parties had each acted knowledgeably, prudently, and without
compulsion".
A further common definition is the value in use or worth.
7
According to RICS “worth is a
specific investor’s perception of the capital sum which he would be prepared to pay (or
accept) for the stream of benefits which he expects to be produced by the investment”(RICS,
1997). In the framework of real estate, value should always be referred to price (value in
exchange) not worth (value in use). Both price and value are in line with the market, while
worth is subjective and based on the particular requirements of the client. In the property
market a valuation is often defined as the best estimate of the exchange price of the building
and calculation of worth is the individual assessment of worth to a specific investor (RICS,
1997).
8
The large number of value concepts is reflected in the large number of valuation methods and
valuation standards such as the USPAP in the USA, the RICS Red Book in the UK, the Blue
Book as the European standard and the White Book as the international standard. The most
common property valuation methods used today can be divided into three main groups: Sales
Comparison Approaches, Income Capitalization Approaches and Cost Approaches.
While RICS states that “the choice of method to be employed in making a valuation must
always remain with the valuer” (2001), the choice of the valuation method is generally
determined on the basis of the goal of the valuation and the purpose for which the property is
used (self occupancy or as an investment). A reason for valuing a property includes the
purchase or sale of a property, granting mortgages, insurance and tax issues as well as the
valuation of property assets for companies and institutional investors. In many European
countries, including Switzerland, the DCF method – belonging to the Income Capitalization
Approaches – has become the most commonly used valuation method for investment
property. In the following, therefore, only the DCF will be discussed and the other methods,
as they are not relevant for this paper, will be omitted.
8
DCF is a method of dynamic investment valuation which discounts future cash flows
(revenues and expenditures) to a single reference date to obtain the present values which are
added afterwards. The sum of the present values results in the net present value (White and
Jenyon, 2003). RICS defines the DCF as a “technique used in investment … appraisal
whereby future inflows and outflows of cash associated with a particular project are
expressed in present-day terms by discounting” (RICS, 2001). In the so-called two-phase-
approach, two time periods are distinguished. In the first period of the DCF-Model the cash-
flows forecasted for the next 5 to 10 years are discounted. The forecasts of the cash-flows are
based on known developments from lease contracts (e.g. indexed rents) and expenditures (e.g.
renovation in 5 years). In the second period the residual value
9
at the end of the period under
consideration is calculated by income-capitalization. The market value results from the sum
9
of the discounted cash-flows within the period under consideration and the residual value.
The discount rate plays a central role in the determination of the market value. An important
task of the discount rate is the consideration of those risks, which are not otherwise
considered in the DCF, i.e. by the cash-flows.
2.2 Three Challenges for Property Valuation
Because quantifying the value of real estate ultimately is based on estimates, the range of
options while valuating real estate is broad. In practice there are three main challenges: how
to deal with uncertainties (“Valuation Uncertainty”), the lack of transparency (“Valuation
Black Box”) and the tendency of valuations to lag behind market trends (“Valuation Lag”).
Valuation Uncertainty. Valuations can only be as good as the data on which they are based.
“All valuations are estimates and carry with them a degree of uncertainty. The range of
uncertainty may vary in different market conditions and for different types of property”
(RICS, 2001). The accuracy of the value determined primarily depends on which factors are
included in the valuation and on which basis of data and experience these factors are
quantified. Experience shows that regardless of the method applied, estimation errors of from
±20 to ±30 percent can occur (Maier, 2004, UBS, 2005) and an empirical study for
Switzerland shows that one third of all valuations have estimation errors that are larger than
±10 percent (Tochtermann, 2003). The reason for the large margin of error is not primarily
methodological deficiencies, but rather incomplete information, especially concerning new
market trends and developments in the future.
For the DCF method, the assumptions regarding future cash flows as well as the choice of the
discount rate determine the value. On the income side this concerns the rental potential minus
vacancies as well as the costs for maintenance and renovation as well as the running costs on
the costs side. Studies of individual value drivers show that the discount rate has a
particularly high leverage effect in this process, namely up to 40 percent (Schwartz, 2006,
10
Szerdahelyi, 2006), i.e. small changes of the discount rate lead to high variations in the
estimated value. An accurate determination of the discount rate is therefore preferable to
reduce the margin of error or the “Valuation Uncertainty”.
Valuation Black Box. The definition and determination of the discount rate used in the DCF
method are not specified in detail – neither in the real estate practice nor in the International
Valuation Standards (IVS) or in the International Accounting Standards (IAS) (Frank, 2007).
In practice – at least in Switzerland – , the discount rate for the DCF method is determined
chiefly by using the so-called “Risk Premium Model”, also known as “Risk Component
Model” (Shilling, 2002). The basis of this is the return on a risk-free capital investment. Risk
premiums for the general real estate risk as well as for the property specific risk are added to
the return on the risk-free capital investment. The Appraisal Institute
®
states that “…a
discount rate may be developed with the built-up method, which involves adding together the
four components in the rate, i.e., a basic safe or riskless rate plus adjustments for risk,
illiquidity, and management”
10
(Appraisal Institute, 1996). In addition to this approach, there
exists more empirical approach, which is applied less frequently in practice. In this case,
market data is used as a basis to determine the discount rate. Depending on the property risk,
which is estimated individually, this empirically determined rate is adjusted upwards or
downwards.
Not all valuation reports disclose how the discount rate was derived and whether or which of
the risk components were used. The discount rate is therefore similar to a “Black Box”. This
is particularly problematic because the discount rate is one of the value drivers with the
greatest leverage (Schwartz, 2006).
Valuation Lag. The worth of real estate depends to a large extent on the development of
exogenous framework conditions. For some of the framework conditions, long-term changes
can be anticipated today. These include climate change, demographic changes or rising
11
energy prices. A weakness of current valuation methods is that in their commendable attempt
to base the valuation on empirical evidence they are forced to rely on market data, which is
per definition historical data since the market is in constant evolution (Szerdahelyi, 2006). It
is therefore in the nature of valuations that new market trends are reflected with a certain time
lag. This creates a time slot of insecurity for valuers and leads – among other things – to an
initial failure to take the consequences of long-term changes into account. Since many
sustainability features are related to emerging long-term developments, this leads to a failure
of valuations to take worth-relevant sustainability features into account. This is especially
aggravated for those DCF valuations, which are not based on new rental agreements because
here the income cash flows are based on market data that may be several years old. In
general, it is a contradiction that the DCF method attempts to estimate
today
’s market value
based on estimations of
future
cash flows. This contributes further to the inaccuracy of DCF
valuations, as it is not always clear what the market’s expectations for the future are. In sum,
the “valuation lag” leads to valuers lagging behind the market when it comes to integrating
value-related sustainability features in their assessment of a property’s value.
3 ESI
®
Property Valuation
Because existing valuation methods are widely accepted and, in addition, the mentioned
challenges are not due to the valuation methods but rather to the input data and the lack of
transparency, an approach has been developed which builds on existing valuation methods (in
particular DCF). By using the ESI
®
Property Valuation, current valuations are supplemented
by the CCRS Economic Sustainability Indicator ESI
®
in order to integrate the consequences
of long-term developments, which are not yet taken into account or only to an insufficient
extent in valuations due to the before mentioned valuation lag.
11
As elaborated above,
estimating the value of a property is associated with a high level of uncertainty and,
moreover, the issue of sustainability and valuation is situated within the blurriness created by
the valuation lag. Therefore, it is not possible to come to a final conclusion whether the
12
estimated value resulting from an ESI
®
Property Valuation reflects the market value or the
worth of a property.
Based on our own observations of the market and anecdotic evidence we strongly have the
impression that the market in Switzerland is increasingly paying a premium for the value-
relevant sustainability features described subsequently. This conclusion is also supported
tentatively for markets in the UK, US and some other countries by a new RICS Valuation
Information Paper (RICS, 2009). We therefore believe that the ESI
®
Property Valuation is
increasingly reflecting the actual market value. Obviously though – and possibly due to the
valuation lag – the available empirical evidence is not strong enough to support this
impression. To be on the safe side we therefore propose to use the ESI
®
Property Valuation as
a calculation of worth. In the end, however, it is up to the individual valuer to decide about
whether to use the ESI
®
Property Valuation as a calculation of worth or an estimate of market
value based on the actual market data/view of the specific country.
3.1 Sustainability of Property from a Financial Point of View
3.1.1 Definition
In order to incorporate sustainability aspects into property valuation in a systematic way, it is
first necessary to define and substantiate sustainability relating to property from a financial
point of view. The term sustainability is used in general and for property in particular far too
frequently and usually inaccurately. The reasons for this are the complexity of the subject and
the fact that there is a lack of a satisfying definition. In addition to the environment, current
sustainability concepts concentrate increasingly on society and the economy, e.g. the triple
bottom line approach (Elkington, 1999). Therefore, a clear differentiation of sustainability
especially from “green building” definitions have to take place (Lützkendorf and Lorenz,
2007). Following the definition of sustainable development arising from the Brundtland
Report (WCED, 1987) we put forward the following definition: a property is sustainable if it
13
provides long-term environmental, social and economic benefits or at the least avoids harm in
these areas.
Existing approaches to define and substantiate the sustainability of property generally
concentrate on technical aspects and therefore implicitly on environmental sustainability (see
amongst others Haute qualité environnementale (HQE), Leadership in Environmental &
Energy Design (LEED), BRE´s Environmental Assessment Method (BREAM) etc.)
(Wallbaum, 2008).
If the financial value is the main concern, as is the case for valuation, then the focus of
sustainability should be on the long-term economic benefits. The social and environmental
benefits are in this understanding secondary considerations, which should be satisfied if
possible. From the point of view of an investor, mortgage lender or owner, a sustainable
property within this approach corresponds to a property which maintains its value or increases
in value in the long term. In this definition, a sustainable property provides investors with a
secured long-term profit.
12
When considered from a dynamic financial point of view, property is sustainable if it – ceteris
paribus – can easily deal with changes to the environmental, social, political and economic
framework conditions (adaptability) and therefore minimizes the risk of a reduction in value
or increases the opportunity of an increase in value. A property, for example, which remains
cool in summer because of the quality of its construction, will experience a greater increase in
value the more hot days occur due to climate change. When deriving concrete sustainability
features, it is therefore vital to recognize the long-term developments relevant to property and
to derive the consequences for the property value from them.
3.1.2 Long-term Developments with Consequences for the Value of Property
Assuming a long-term perspective as the core component of sustainability, the question
arises, which long-term developments or framework conditions will have an effect on the
14
value of property. However, only those framework conditions, whose developments have a
clear direction, can be taken into account. Without a clear direction (trend) it is not possible to
forecast the effects on the value of property. Existing state-of-the-art scientific scenarios from
sources like the Intergovernmental Panel for Climate Change (IPCC) or the Federal Statistic
Office provide the fundament for the selection of the relevant framework conditions.
13
The
scenarios on which the following forecasts are based refer to Switzerland, but are likely to
also be relevant in a modified form for most industrialized countries:
As a result of demographic change, in many industrialized countries population scenarios
predict a decline in the number of people in the workforce and an increase in the
proportion of older people (over 65 years old) in the population (BFS, 2005).
Due to rising fuel prices and the increasing proportion of older people, the demand for
public transport will increase (EEA, 2009, BFE, 2007).
Due to continually rising greenhouse gas emissions, climate change will accelerate and
lead amongst other things to more frequent and longer heat waves in many areas as well
as more frequent extreme weather events such as storms, torrential rain and hailstones
(OcCC, 2007).
The price of fossil fuels will rise on the one hand due to increased scarcity and on the
other hand because of increasing costs of CO
2
emissions. As a result of increased demand
(due in part to the substitution of crude oil by electricity), the price of electricity will also
rise (Prognos, 2005).
From a global point of view the emerging water shortage will lead to water becoming
more expensive (UNESCO and Earthscan, 2009).
As a result of social trends, populations’ requirement for security and general health
awareness will continue to increase (GdW, 2008).
15
3.2 Features of the ESI
®
Property Valuation
The CCRS Economic Sustainability Indicator ESI
®
is an attempt to measure the risk of a
property losing value or the opportunity of gaining value due to the future developments. This
risk-based approach to sustainability is not a totally new concept, as there are a number of
German banks which use “rating criteria that allow treating unsustainability as property risk
factors” (Lützkendorf and Lorenz, 2007) and the view that sustainability is an additional and
changing set of risks for property investors has also been put forward by other authors
(Ellison et al., 2007). At the same time, the ESI
®
-Indicator tries to improve the transparency
of the DCF method in determining the property risk used in the discount rate. Since the cash
flows in the DCF method are forecasted as accurately as possible over the next 5 to 10 years
and then capitalized for the remaining property life, the ESI
®
-Indicator assumes a differential
approach, i.e. long-term aspects are incorporated by determining the difference between the
consequences of current framework conditions and the consequences of the anticipated
change in these conditions. The indicator is therefore specified in such a way that it only
includes the risks which result from between 10 and approximately 35 years as of today. This
means that only those risks are included, which are not already indicated in the cash flows of
DCF valuations (see Figure 1 and chapter
2.1).
The ESI
®
-Indicator is integrated in the DCF method in the discount rate, namely as the
property risk (also referred to as beta-factor) – if so far not specified – or as an addition to the
property risk. Apart from this, the discount rate is determined the same way as is normally the
case by using the risk component model. To determine the weighting of the indicator when
incorporating it into DCF a risk model was specified and quantified (Holthausen et al., 2009).
The specification of the risk model and the weighting results are described in chapter 3.3.3.
As an alternative to this risk-based approach, cash-flows could be modelled for the total
property life taking the consequences of long-term developments into account. This approach
16
was not adopted for two reasons. First, there is a high degree of uncertainty associated with
the consequences of long-term developments. Therefore a risk-based approach, which allows
for different scenarios and according probabilities and consequences, is in our opinion more
adequate. The second reason is a practical one: in Switzerland the use of the two-phase DCF
prevails and therefore a compatible approach (i.e. modelling cash-flows for 5-10 years and
addressing sustainability issues with the risk-approach) was favoured.
3.3 Operationalising the CCRS Economic Sustainability Indicator ESI
®
Five steps need to be taken to operationalise the ESI
®
-Indicator. To begin with, the
sustainability features which are relevant to the long-term property value are derived based on
the anticipated long-term developments which have already been described. The next step
involves specifying and codifying measurable partial indicators for the latter. The weighting
of the partial indicators is carried out based on a risk model. The coded and weighted partial
indicators are subsequently combined to become the ESI
®
-Indicator.
3.3.1 Derivation of the Sustainability Features
The derivation of the sustainability features based on long-term developments will be
presented in the following. In accordance with the economic model of the property market of
DiPasquale and Wheaton (1996), four types of effects need to be differentiated: changes to
the exogenous framework conditions might lead to a change in demand depending on floor
space or investment opportunities in property or to a change in the supply of new buildings or
in floor space. These changes can be quantitative and/or qualitative in nature. A quantitative
effect results in a change of the amount of floor space or investment opportunities demanded
or supplied: A decreasing number of people in the labour force for example means that the
demand for office space will decline. Ceteris paribus a decreasing number of people in the
labour force also mean a lower wage bill, less available resources for property investments
17
among the labour force and of pension funds, therefore resulting in a decline in the demand
for property investment.
A qualitative change leads only to a shift in demand or supply. The demand for (or the supply
of) property with certain features is shifted towards property with other characteristics. If, for
example, the proportion of older people in the population rises, then the relative demand for
obstacle-free (and therefore wheelchair accessible) residential property increases to the
disadvantage of residential property with steps, thresholds, and other obstacles which cannot
be tackled without assistance if using a wheelchair.
In this context, it is primarily the qualitative changes in demand which are of interest because
they indicate which property features will increase in importance in the future. The
sustainability features of property, which will increase the value of the property on the basis
of anticipated long-term developments, which have been described previously, have been
determined step by step. A timeframe of approximately 35 years has been assumed for the
long-term developments.
The derivation of the sustainability features is based on a broad national discussion with
leading property experts
14
and scientists
15
over a period of two years. Simultaneously, other
supporting methodologies have been used to support the educated guess that the sustainability
features on which the ESI
®
valuation relies are actually value drivers. For instance, a hedonic
analysis has been conducted to demonstrate the willingness of the market to pay more for
energy-efficient buildings Switzerland (Salvi et al., 2008). Based on a broad data basis, this
study shows that the property market in Switzerland has – on average – paid a premium of
seven percent on the purchase price for energy-efficient single family houses and a premium
of 3.5 percent for freehold apartments during the last ten years. In addition, it would be
desirable to demonstrate the importance on property value for the other sustainability features
as well, e.g. by conducting further hedonic analysis. So far this uncertainty has been
18
addressed by a scenario-based risk assessment for each criterion within the list of
sustainability features (a more precise description is given in chapter
3.3.3).
The property features described in Table 1 represent the actual value-related sustainability
features. They are divided into five groups of property features: flexibility and polyvalence,
energy and water dependency, accessibility and mobility, security as well as health and
comfort. Some of the property features are new. However, others such as public transport
connections are already taken into account in current valuations, but not to a sufficient extent
– in view of the anticipated long-term changes to framework conditions.
Flexibility and Polyvalence. Property features that affect the flexibility and polyvalence of a
property are selected on the one hand on the basis of emerging social changes (demography
and structure of households) and on the other hand they are a response to future changes in
framework conditions, which are not foreseeable today and for which there is therefore no
clear trend. For example, it cannot yet be foreseen today which technological developments
will make it necessary to lay new cables (such as for example with LAN cables in the past).
In the case of flexibility and polyvalence, a distinction is made between flexibility of use and
user flexibility. With regard to flexibility of use, this means that a property permits various
uses (such as residential, office, medical practice, day care facility for children etc.). As far as
user flexibility is concerned, this means that a property should be able to be used by different
kinds of users (such as older people, families with small children, wheelchair users etc.).
Energy and Water Dependency. With regard to energy and water dependency, it is a question
of seeing how well a property can deal with the consequences of climate change as well as
with rising energy and water prices. As far as energy is concerned, on the one hand it is a
matter of energy efficiency, i.e. an energy consumption which is as low as possible for
heating (heating and hot water) and cooling (on the basis of global warming the demand for
cooling will increase in the summer). On the other hand, the dependency on energy sources or
19
the expected energy costs of these will play a role. Decentralized renewable energy in the
form of electricity and heat (solar and wind energy, ambient heat and geothermal energy etc.)
reduces dependency on non-renewable energy sources
16
and in this way reduces the risk for
future cost rises. With regard to water dependency, low water consumption, the disposal of
wastewater as well as collecting rain water will increase in importance.
Accessibility and Mobility. On the basis of rising fuel prices and a higher proportion of older
people in the population, the proportion of public and non-motorized transport will increase.
The site which should be assessed can therefore be described as sustainable if on the one hand
it has good connections to public transportation (short distance to bus stop or train station as
well as high frequency of transport), and on the other hand, if it can be easily and safely
reached by non-motorized traffic such as bicycles or pedestrians and if space for bicycle racks
are provided. As far as accessibility is concerned, a short distance to the nearest local centre,
shops for daily provisions and local recreation (e.g. woods, rivers, lakes) play an important
role.
Safety and Security. On the basis of climate change it is expected that in future extreme
weather events (floods, storms, hailstorms etc.) will increase. A sustainable property
minimizes the risk of suffering damage from the expected extreme weather conditions in the
future by not being located in a potentially high-risk area.
Additionally, property-related safety measures such as for example special construction
measures providing precautionary protection against flooding can increase the value of a
property. Safety and security measures relating to people are increasing in importance due to
increasing awareness in the population. Good lighting and illumination should be considered,
in particular with regard to areas without good visibility such as underground garages.
Furthermore, suitable fire prevention or escape routes and emergency exits need to be
considered.
20
Health and Comfort. Increasing security requirements and health awareness will continue to
lead to an increase in the significance of property-related health and comfort aspects. A
sustainable property has high air quality amongst other things. This includes a low level of
ozone, fine dust and radiation exposure (electromagnetic pollution and radon emissions) as
well as the use of ecological building materials, which do not emit any harmful substances
inside the building. With regard to location-dependent air pollution, air conditioning with the
appropriate filters represents a sustainability feature.
A low exposure to noise is another sustainability feature. Air conditioning can also be an
advantage in noisy locations. Lastly sufficient daylight should also be mentioned: a building
design, which ensures sufficient daylight, will become increasingly important due to rising
health awareness but also because of rising costs for lighting (electricity).
3.3.2 Operationalization: Further Steps
In addition to the determination of the five groups of sustainability features, the following
additional steps were carried out in order to operationalise the ESI
®
-Indicator.
Partial indicators were determined for the five groups of sustainability features. The
chosen partial indicators are a compromise between plausibility and practicability. While
chosen to be as accurate as possible, they ensure that the necessary data is actually
available in practice or is easy to collect.
With regard to coding, the best specification was allocated the value +1 (the most
sustainable) and the worst specification was given the value -1 (the least sustainable). The
value 0 corresponds to an average new building (in relation to the building stock).
Partial indicators and coding were validated as part of a board composed of experts from
practice and academia during a two-year consultation process.
A risk model was specified in order to quantify the weighting, which is described in more
detail in chapter
3.3.3.
21
The coded and weighted partial indicators were summarized into the CCRS Economic
Sustainability Indicator ESI
®
(the application is demonstrated on practical examples in
chapter 3.4).
The specification of the ESI
®
-Indicator is represented in Table 2. Obviously, different
property types (e.g. residential versus offices) have different requirements of use. This has
consequences for the operationalisation of the sustainability features. Therefore the ESI
®
-
Indicator is specified separately for apartment, offices, and sales buildings. A simple
standalone software is available for the application of the ESI
®
-Indicator.
17
3.3.3 ESI
®
Risk Model
In order to quantify (or weigh) the ESI
®
-Indicator a risk-based weighting model was adopted.
To derive the weighting in an as systematic way as possible the ESI
®
Risk Model was
developed in collaboration with risk experts
18
. Obviously, quantifying the risk poses a big
challenge as it requires estimating the probability of future developments occurring and the
magnitude of their consequences on property values. A high level of subjectivity is inevitable.
Moreover, in able to specify a model and estimate the input parameters, it is necessary to
adopt many simplifying assumptions.
We addressed these challenges by three means. First, as a means of reducing the subjectivity,
we had seven real estate experts replicate the original estimations independently (and without
knowledge of the original estimations) and the subsequently achieved consensus values were
used as the input parameters for the model. Second, the results of the model underwent
rigorous testing of its robustness by the means of extensive sensitivity tests. Third, the model
was documented in detail in a working paper and thus all assumptions were made transparent
(Holthausen et al., 2009).
One of the strongest simplifications was to assume identical probabilities and consequences
for all considered property types (i.e. residential, office and retail). A differentiation, i.e. an
estimation of the parameters for each property type, would present a desirable further
22
development of the model. In the following, the three central elements of ESI
®
Risk Model –
scenarios, probabilities and consequences – will be described briefly.
Scenarios. Changes in framework conditions result in changes concerning the requirements
for property. For example, future rising energy prices will require properties to meet higher
standards with regard to energy efficiency. The extent of the possible requirements was
described for each partial indicator by the means of four scenarios: A realistic maximum
scenario, a medium scenario, a minimum scenario and a zero scenario are specified for every
case. For example, it is possible that as a result of a future rise in energy prices the market
demands zero energy houses (maximum scenario), Minergie-P
®
houses (medium scenario),
Minergie
®
houses (minimum scenario) or no increased energy efficiency (zero scenario).
Probabilities. Probabilities of occurrence are assigned to all of the scenarios. It is assumed
that the actual development in the remaining building lifetime can be allocated to one of the
scenarios. In order to quantify the parameters of the model, the probabilities (and the
consequences) were estimated and then validated by a group of leading property experts. To
do so, the experts initially estimated the probabilities and the consequences of the scenarios
independently of each other and subsequently validated the results as a group. I.e. the
assignment of the probabilities (and the consequences) was based on subjective assessments
in form of a consensus among experts.
Consequences as a Proportion of the Property Values. The consequences of the scenarios are
indicated as a proportion of the property value in order to obtain results which are
independent of the property size. In order to implement this as a model, the following
assumptions were made or the following model properties specified:
Whenever possible, the consequences were estimated on the bases of the estimated costs
to refurbish the property due to the new requirements as laid out by the scenarios. If the
new requirements could not be addressed by refurbishing (e.g. in the case of location-
23
related features) then the consequences were estimated based on the expected loss of
rental return.
In the cases where refurbishment costs were estimated, the estimates were carried out as a
proportion of the building value in a first step and were then extrapolated to the total
property value. In able to do this it is necessary to assume a relation between value of the
building and value of the land. As a rule of thumb it is assumed that 65% of the value of
the property is based on the value of the building and 35% is accounted for by the value
of the land (based on empirical findings for Switzerland (Kubli et al., 2008)).
The changes in the exogenous framework conditions which cause a shift in the
properties’ financial value often occur by single events. As in the net present value
method the events are entered in the risk model as the annual expectation value of the
consequences associated with the respective scenario.
The value of the consequences of the scenarios is discounted to their present value.
19
Therefore, the assumed point in time the event occurs has a considerable impact on the
net present value. In the risk model, this is considered by varying the point in time the
event occurs within the considered range of 11 to 40 years by the means of a Monte Carlo
simulation – i.e. by computer based repeated random sampling. Thus a realistic expected
value of the consequences of each scenario can be calculated.
The weighting of the partial indicators is derived from the size of the spread of the risk
between the best possible and worst possible specification of the partial indicators (e.g. the
difference between the risk of a zero energy house and a building without increased energy
efficiency). The weighting for each sustainability feature is undertaken by adding up the
spreads for the partial indicators.
20
The model-based weighting of the property features is
illustrated in the distribution shown in
Figure 2.
In order to determine the weighting of the ESI
®
-Indicator when it is integrated in the DCF
method, the maximum over- and underestimation in value are quantified. To this means, the
24
expected costs on the basis of negative values for all the partial indicators are linked to
determine the maximally possible over-estimation of the value of property by using DCF.
This represents the discounted future costs which are expected but not taken into account in
the DCF method (in proportion to the value of the property), and which occur as a result of
changes expected in the exogenous framework conditions. On the other hand, the maximum
possible underestimation in value by using DCF is determined by linking the most favourable
values for all the partial indicators.
21
The maximum influence of the ESI
®
-Indicator with regard to an over- or underestimation of
the property value by neglecting the sustainability aspects taken into account in the indicator
amounts to -14.9% or +6.6% of the property value.
The robustness of the model was tested by the means of extensive sensitivity analyses.
22
The
results are presented in the Tables 3 and 4. The variation coefficients in Table 3 show that the
partial indicators with the absolute highest weights also have a relatively higher accuracy of
estimation. Overall, the sensitivity analyses demonstrate that the model is sufficiently robust.
Based on the weighting, it is possible to calculate the ESI
®
Risk Component for the discount
rate (the calculation is described in the subsequent practical example). It is generally used in
addition to the existing risk components. As already mentioned, because the determination of
the discount rate and the risk component are often not undertaken uniformly in Switzerland
and are often not transparent, it is recommended that this step is verified on a case by case
basis in order to avoid improbable but nevertheless possible overlapping.
3.4 Practical Application of ESI
®
Property Valuation
During the last 1.5 years practical tests have been carried out on approximately 200 properties
(apartment buildings, offices and sales properties as well as properties for mixed use). The
properties came from the portfolios of 8 different private and public owners and included
investments properties as well as corporate real estate.
23
The valuations were carried out
25
either by the owners or by external certified valuators. In the following, the application of the
ESI
®
Property Valuation is illustrated first by means of a concrete example of an object and
then of a small portfolio.
Practical Example Apartment Building: The object in question is an apartment building
located in Central Switzerland (a more detailed description of the object is given in Figure 3).
In a first step, the ESI
®
-Indicator is determined. As the radar diagram in Figure 3
demonstrates at a glance, the property’s sustainability performance concerning flexibility and
polyvalence, accessibility and mobility, as well as health and comfort are very good. The
property performs well concerning energy and water dependency as well as safety and
security. The detailed calculation of the ESI
®
-Indicator is illustrated in Table 5. The overall
application of the ESI
®
-Indicator to the property results in a value of +0.5. This corresponds
to an over-average sustainability assessment. In addition to the sustainability performance,
measures to increase the value of a property can be derived from the results. Possible
potential for improvement has been identified for the features energy and water dependency
as well as for security (see
Figure 3).
In the second step, the results of the ESI
®
-Indicator are used to determine the ESI
®
Value
based on a conventional DCF valuation. To calculate the correction factor the ESI
®
-Indicator
with the value of +0.5 is multiplied with the weighting factor of +6.6% (which corresponds to
the estimated overestimation of property value, see chapter 3.3.3). This calculation amounts
to a correction factor of 3.3% and therefore results in an increase of the current market value
by 3.3%. By applying the correction factor to the discount rate from the conventional DCF
valuation the ESI
®
Risk Component can be calculated (in a backward calculation
24
). In this
case it amounts to -0.14%. The ESI
®
Discount Rate from the ESI
®
Valuation consists of the
following components:
Risk-free base rate (nominal): 3.00%
26
Inflation rate: -1.20%
General real estate risk: 2.10%
Property specific risk: 0.40%
Conventional discount rate (DCF): 4.30%
ESI
®
Risk Component: -0.14%
ESI
®
Discount Rate: 4.16%
In this example the apartment building’s market value was estimated at CHF 28,190,000 by
the means of a conventional DCF valuation. Therefore, the correction of 3.3% amounts to
CHF 930,270 and results in the ESI
®
Value of CHF 29,120,270 incorporating the weighted
ESI
®
-Indicator of +0.5 in the discount rate.
Practical Example Portfolio: Table 6 presents the results of the ESI
®
Valuation for a small
portfolio belonging to a private investor. The portfolio consists of 11 apartment buildings and
one construction project. The ESI
®
-Indicators over the whole portfolio average to 0.03. This
corresponds to an average sustainability performance of the portfolio. The absolute value of
the added nominal deviation from conventional valuation (the sum of the respective over- and
underestimations) amounts to CHF 5,432,307. This can be interpreted as the total error
margin of the conventional DCF valuation compared to the ESI
®
Property Valuation for this
small portfolio. In sum, the value of the portfolio is corrected by -0.99%.
Overall, the practical tests applied to the approximately 200 properties suggest that ESI
®
Valuation yields plausible results and that its implementation is practicable. They have shown
that on average it is possible to determine the ESI
®
-Indicator in two hours. The range lies
within half an hour to three hours per property depending on the quality of the plans and
whether an on-site inspection of the property is necessary.
27
4 Conclusions and Further Research
4.1 Opportunities and Limits of the Approach
ESI
®
Property Valuation combines an academic approach with practicality. It is an attempt to
contribute to making the “Valuation Black Box” more transparent. The ESI
®
-Indicator
anticipates and quantifies the consequences of long-term changes such as rising energy prices,
demographic and climate change on the worth of property. It thereby provides the necessary
quantitative, risk-based information for valuers who wish to reduce the valuation lag, i.e. the
tendency of valuations to lag behind market trends. However, the approach has its limitations.
It can not change the fact that every property valuation essentially is nothing but an
estimation on the basis of certain assumptions and comparisons, meaning that the potential
for uncertainty remains high. Therefore, despite aiming at reducing the error of margin
inherent to every valuation, the problem of “Valuation Uncertainty” can not be resolved. The
fact that several large investors in Switzerland have decided to valuate their portfolios with
the ESI
®
Valuation and have commissioned their external valuators to do so shows there is a
real demand for integration of value-relevant sustainability features in valuation.
4.2 Outlook
In principle, ESI
®
Property Valuation can be applied in any country. The selection of the
sustainability features and in particular the operationalisation of the ESI
®
-Indicator however
must be adjusted to national circumstances. The ESI
®
-Indicator presented here was developed
for Switzerland. Adaptations to other property markets and to their specific characteristics
and framework conditions may be necessary before applying ESI
®
to other countries.
Moreover, further empirical evidence is needed to test the impact of the sustainability features
identified by the ESI
®
-Indicator, e.g. by integrating and testing these features in hedonic
models (as has been carried out for energy-efficiency).
28
Furthermore, a comparison of the results of the ESI
®
valuation
and the actual sales priced
needs to be conducted to provide empirical evidence about the plausibility of the ESI
®
valuation.
It also needs to be investigated how a property valued as sustainable in accordance with ESI
®
can be compared in detail with a LEED/BREEAM certification or be classified as the latter.
Another point to review is whether the weighting of the sustainability features should differ
for different kinds of building types. Finally, ESI
®
Valuation was developed as a supplement
to the DCF method used for investment property. It still needs to be clarified how
sustainability aspects can be integrated in other valuation methods, which are currently being
used.
The results of this paper do not only contribute to the ongoing debate on sustainability and
valuation, but also for other aspects of property management. Knowing which property
features contribute to the value of a property in the long term is relevant to almost every
decision during the life cycle of a property: during the planning and building stage, as well as
when making renovation and dismantling decisions, or in purchase and sales decisions.
29
Acknowledgement
First of all, sincere thanks go to all the people and institutions, which have supported this
paper financially and in terms of content, namely the City and Canton of Zurich, Ernst Basler
+ Partners AG, the Federal Office for Energy BFE, the Federal Office for the Environment
BAFU, Implenia / Reuss Engineering AG, Max Pfister Baubüro AG, Novatlantis at the ETH,
pom+ Consulting AG, SUVA, Swisscanto, Swiss Life Property Management AG, the Swiss
Treasury Experts Chamber SEK/SVIT, QualiCasa AG, Versicherungseinrichtung des
Flugpersonals der Swissair (VeF), Wüest & Partner and particularly the Zürcher
Kantonalbank (ZKB). Furthermore, we would like to give our special thanks to Christopher
Bahn, CUREM, as well as the anonymous reviewers of this paper for their very helpful
comments and well appreciated suggestions.
30
Endnotes
1. Energy Star is a joint program of the U.S. Environmental Protection Agency and the
U.S. Department of Energy to protect the environment through energy efficient
products and practices.
2. LEED (Leadership in Energy and Environmental Design) is an internationally
recognized green building certification system developed by the U.S. Green Building
Council.
3. DGNB (Deutsche Gesellschaft für Nachhaltiges Bauen): http://www.dgnb.de/
4. Minergie
®
is a registered sustainability brand for new and refurbished buildings.
Minergie
®
focuses on the comfort of the users living or working in the building. The
regular Minergie
®
-Standard requires that general energy consumption must not to be
higher than 75% of that of average buildings. Minergie-P
®
defines buildings with
very low energy consumption. Minergie-ECO
®
adds ecological requirements such as
indoor air quality, noise protection etc. to the regular Minergie
®
-Requirements.
5. In addition to the financial barriers this paper focuses on, there are also social and
psychological barriers, which have to be overcome for a rapid and broad acceptance
of sustainable buildings. They are divided into individual organizational and
institutional barriers by (Hoffman and Henn, 2008).
6. Another explanation why investors may be slow in implementing energy efficient
buildings is that in a lifecycle costs perspective energy costs for electricity, heating
and cooling purposes as part of the utility costs is of minor importance. Stoy (2005)
showed that the costs of utilities and waste disposal represents only approximately
22% of the affecting expenses. With a data pool of 105 Swiss office buildings (Stoy
and Kytzia, 2008) illustrate the importance of the electricity costs (50%) for the costs
of utilities and waste disposal. In contrast, the waste water, water, and heating costs
are of minor significance. Kats (2003) drew similar conclusions on “green buildings“
31
in the report to California’s Sustainable Building Task Force. This situation is
aggravated when owner and occupier are not congruent, as the investor bears the
higher investments and the benefits (in the form of lower energy costs) are reaped by
the occupier.
7. A useful overview of commonly used value definitions is given in Tegova (The
European Group of Valuars´ Associations, 2009)
8. There is a large body of literature that gives useful overviews of common valuation
methods (e.g. Diederichs, 2006, The Appraisal Institute, 1996).
9. The residual value corresponds to the summarized value of all cash-flows for the
remaining years of a property after a certain period under consideration.
10. Traditionally, valuation literature has not presented the built-up method as a viable
method for deriving discount and yield rates. The 6. and 7. editions of the Appraisal
of Real Estate stated that “because of the intangible character of the components, the
built-up method is not considered a valid procedure through which a specific rate
may derived.” With the securitization of real estate investment and new
methodologies to rate the risk associated with commercial real estate properties,
however, some analysts have called for a reconsideration of built-up rates. (Appraisal
Institute, 1996)
11. See also Meins, Erika, (2009) and (forthcoming).
12. The author is well aware of the fact that sustainability ideally should be defined in a
more holistic way and not focus on one main aspect like it is done here (see chapter
1).
13. For a detailed discussion of this selection process please refer to Meins and Burkhard
(2009).
14. Experts representing amongst others: 1) Iván Antón, Project leader sustainability
from a leading Swiss consultancy firm with focus on the property and construction
32
sector, 2) Thorsten Busch, Senior consultant of a consultancy firm with focus on real
estate management, 3) Niels Holthausen, Risk expert of an international engineering,
planning and consulting company, 4) Andreas Pfeiffer, Area manager energy &
environment of a planning office with focus on services to do with building
technology, 5) Rolf Truninger, Managing Director of a consultancy firm with focus
on real estate controlling & risk management.
15. Scientists representing amongst others: 1) Hans-Peter Burkhard, Director of the
Centre for Corporate Responsibility and Sustainability at the University of Zurich, 2)
Roland Stulz, Executive Director of Novatlantis, the flagship of the Swiss Federal
Institute of Technology domain for the 2000-watt society, 3) Holger Wallbaum, Chair
of Sustainable Construction at the Swiss Federal Institute of Technology Zurich.
16. Decentrally renewable energy means that energy production is divided into various
locations and is not controlled only by one single location. A solar panel on the roof
of a building is an example of a decentrally renewable energy source.
17. The coding of all the partial indicators is apparent in the software. The software is
available from QualiCasa AG.
18. Niels Holthausen and Peter Christen from Ernst Basler + Partners AG are experts for
risk-based modelling of the consequences of natural catastrophes.
19. A discount rate of 4.7% was used, which corresponds to a long-term empirical value
from Swiss property valuation practice.
20. This is only possible without any distortion if the potential figures for all the partial
indicators taken into account are actually also possible at the same time, i.e. that there
is no overlapping of the figures. For this reason partial indicators are sometimes
combined (example: wide doors, wide corridors, wheelchair accessible
bathroom/toilet).
33
21. The link is made via a progressive multiplication of the changes in value indicated as
a proportion of the property value by the favourable or unfavourable specification
with regard to the relevant partial indicator. In doing so at each stage the amended
real estate value is used, which has already been determined by taking into account
the other partial indicators. Cost-relevant synergies, which may result from various
renovations completed at the same time, are used as a basis to estimate each partial
indicator and are included in the calculation as a reduction factor.
22. Sensitivity analyses: The spreads of each partial indicator were varied by +/- 50% for
the probability of the scenarios and by +/-25% for the consequences by the means of
a Monte Carlo Simulation. A triangular distribution with the given value as the most
likely mean was assumed. In the same way the assumed discount rate was also
varied: from 4% to 5.4%. The results of the effects of the variation on the weighting
are presented in Tables 3 and 4.
23. The practical tests were carried out on property belonging to ABZ (Allgemeine
Baugenossenschaft Zürich), Implenia/Reuss Engineering AG, Migros
Genossenschaftsbund, Nest Sammelstiftung, the City of Zurich (property
management), SUVA, Swiss Life Property Management AG as well as ZKB (Zürcher
Kantonalbank).
24. Since the weight to incorporate the ESI
®
-Indicator is relative to the total value, the
correction is not calculated by means of the discount rate. Optionally, in a backwards
calculation, this can be done, e.g. if the valuer would like to display the ESI
®
Risk
Component as an additional information.
34
Table 1: Sustainability features from a financial point of view
Sustainability features External conditions
1. Flexibility and polyvalence
1.1 Flexibility of use
1.2 Adaptability to users
Demographics, structure of
households
2. Energy and water dependency
2.1 Energy demand and production
2.2 Water use and wastewater disposal
Climate change, energy and
water prices
3. Accessibility and mobility
3.1 Public transport
3.2 Pedestrians and non-motorized vehicles
3.3 Accessibility
Percentage of aged population,
cost of fossil fuels
4. Safety / security
4.1 Location regarding natural hazards
4.2 Building safety and security measures
Climate change, need for safety
and security
5. Health and comfort
5.1 Inside air quality
5.2 Noise
5.3 Daylight
5.4 Radiation
5.5 Ecological construction materials
Need for safety, health
awareness, building services
35
Table 2: Specification of CCRS Economic Sustainability Indicator ESI
®
Sustainabilit
y features
Partial indicators
Apartment
building
Office
Retail
1. Flexibility and Polyvalence
1.1 Flexibility of use
1.1.1 Floor plan
1.1.2 Storey height
1.1.3 Accessibility, reserve capacity, and wiring /
pipes / building services
1.2 Adaptability to users
1.2.1 Wheelchair accessibility
1.2.6 Flexibility of kitchen layout
1.2.7 Room for storage of walker / pram
1.2.8 Balcony with window
1.2.9 Usability of outside space
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
2. Energy and Water Dependency
2.1 Energy
2.1.1 Energy
2.1.2 Locally produced renewable energy
2.2 Water
2.2.1 Water use
2.2.2 Wastewater disposal
2.2.3 Rainwater use
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
36
3. Accessibility and Mobility
3.1 Public Transport
3.1.1 Good connection to public transport
3.2 Non-motorized vehicles
3.2.1 Bicycle parking near the building
3.3 Accessibility
3.3.1 Distance to local / regional centre
3.3.2 Distance to shops
3.3.3 Distance to local recreation area
x
x
x
x
x
x
x
x
x
4. Safety and Security
4.1 Location regarding natural hazards
4.1.1 Location regarding natural hazards (Risk of
floods, avalanches, landslides, collapse)
4.2 Building safety and security measures
4.2.1 Object related safety and security
measures
4.2.2 Safety and security measures related to
people
x
x
x
x
x
x
x
x
x
x
x
x
5. Health and Comfort
5.1 Health and Comfort
5.1.1 Inside air quality
5.1.2 Noise exposure
5.1.3 Sufficient natural light
5.1.4 Radiation exposure
5.1.5 Ecological construction materials
x
x
x
x
x
x
x
x
x
x
x
x
x
Table 3: Sensitivity Analysis 1
0% 10% 25% 50% 75% 90% 100%
1. Flexibility und Polyvalence 19.0%
35. 0%
38. 5%
42. 6%
46. 7%
50. 3%
67. 7% 0. 059 42.6%
13. 9%
2. Energy and Water Depende 5.6%
10.8%
12.9%
16.1%
20.1%
23.5%
38.6% 0.048 16.7%
29.0%
3. Accessibility and Mobility 2.8%
6. 0%
7. 3%
9. 1%
11. 2%
13. 3%
23. 8% 0. 028 9. 4%
29. 7%
4. Saf et y and Securi t y 1.6%
4.2%
5.1%
6.5%
8.0%
9.6%
18.5% 0.021 6.7%
31.3%
5. Heal t h and Comf ort 10.5%
19.1%
21.5%
24.3%
27.4%
30.3%
48.2% 0.044 24.6%
17.7%
Quantiles Standard
deviation
Mean
Coefficient
of variation
Period under consideration 40 years, variation of bank rate, variation of time of occurrence
37
Table 4: Sensitivity Analysis 2
0% 10% 25% 50% 75% 90% 100%
1. Flexibility und Polyvalence 19.0%
35. 0 %
38. 5%
42. 6%
46. 7%
50. 3%
67.7% 0. 0 59 42.6%
13. 9 %
2. Energy and Water Depende 5.6%
10.8%
12.9%
16.1%
20.1%
23.5%
38.6% 0.048 16.7%
29.0%
3. Accessibility and Mobility 2.8%
6. 0%
7. 3%
9. 1%
11. 2%
13. 3%
23. 8% 0.028 9. 4%
29. 7 %
4. Safety and Security 1.6%
4. 2%
5.1%
6. 5%
8. 0 %
9. 6%
18. 5% 0. 021 6.7%
31.3%
5. Heal t h and Comf ort 10.5%
19.1%
21.5%
24.3%
27.4%
30.3%
48.2% 0.044 24.6%
17.7%
Quantiles Standard
deviation
Mean
Coefficient
of variation
Period under consideration 40 years, variation of bank rate, variation of time of occurrence
38
39
Table 5: Detailed determination of ESI
®
-Indicator for the practical example
Partial indicators
1.1 Flexibility of use
1.1.1 Floor plan
1
1.1.2 Storey height
0
1.1.3 Accessibility wiring / pipes / building services
1
1.1.4 Reserve capacity wiring / pipes / building services
1
Average (Min:-1 / Max: 1) 0.8
1.2 Adaptability to users
1.2.1 Lift existing for all stories if multi-story
1
1.2.2 Manageable differences in height, interior and exterior
1
1.2.3 Sufficiently wide doors
0
1.2.4 Sufficiently wide halls
-1
1.2.5 Wheelchair accessible washrooms
-1
1.2.6 Flexibility of kitchen layout
1
1.2.7 Room for storage of walker / pram
1
1.2.8 Balcony with window
1
1.2.9 Usability of outside space
1
Average (Min:-1 / Max: 1) 0.4
Average 1.1 / 1.2 0.6
42.6
2.1 Energy
2.1.1 Energy demand
2.1.1.1 Hot water usage in MJ/m
2
a
0
2.1.1.2 Cooling
1
2.1.2 Locally produced renewable energy
2.1.2.1 To cover all warming needs
-1
2.1.2.2 To cover all electrical needs
-1
Average (Min:-1 / Max: 1) -0.3
2.2 Water
2.2.1 Water use
1
2.2.2 Wastewater disposal
1
2.2.3 Rainwater use
-1
Average (Min:-1 / Max: 1) 0.3
Average 2.1 / 2.2 0.0
16.7
3.1 Public Transport
3.1.1 Good connection to public transport
3.1.1.1 Distance bus/tram
1
3.1.1.2 Distance rapid-transit railway/train
1
3.1.1.3 Frequency bus/tram
1
3.1.1.4 Frequency rapid-transit railway/train
1
Average (Min:-1 / Max: 1) 1.0
3.2 Non-motorized vehicles
3.2.1 Bicycle parking near the building
0
Average (Min:-1 / Max: 1) 0.0
3.3 Accessibility
3.3.1 Distance to local / regional centre
1
3.3.2 Distance to shops
1
3.3.3 Distance to local recreation area
1
Average (Min:-1 / Max: 1) 1.0
Average 3.1 / 3.2 / 3.3 0.7
9.4
Sustainability
features
2. Energy and Water Dependency3. Accessibility and Mobility
Central
Switzerland
Weighting %
1. Flexibility and Polyvalence
Appartment
Building
Partial indicators
4.1 Location regarding natural hazards
4.1.1 Location regarding natural hazards (Risk of floods,
l h l d lid ll )
-1
Average (Min:-1 / Max: 1) -1.0
4.2 Building safety and security measures
4.2.1 Object related safety and security measures
4.2.1.1 Fill out only for flooding danger:
1
4.2.2 Safety and security measures related to people
4.2.2.1 Lightning / illumination
1
4.2.2.2 Fill out only for buildings built in 1985: Fire protection
-
Average (Min:-1 / Max: 1) 1.0
Average 4.1 / 4.2 0.0
6.7
5.1 Health and Comfort
5.1.1 Inside air quality
-1
5.1.2 Noise exposure
5.1.2.1 Ventilation comfort
-1
5.1.2.2 Interior noise exposure / acoustics
a) Airborne sound
1
b) Impact sound
1
c) Noise from building service equipment and tighter builidng
fi t
1
5.1.3 Sufficient natural light
1
5.1.4 Radiation exposure
5.1.4.1 Electromagnetic pollution (non-ionizing)
1
5.1.4.2 Radon (ionizing)
1
5.1.5 Ecological construction materials
5.1.5.1 With alterations and new additions
0
5.1.5.2 Material with adverse health effects
-
Average (Min:-1 / Max: 1) 0.6
24.6
Sustainability
Indicator ESI
®
0.5
Weighting
%
Appartment
Building
Central
Switzerland
Weighted average (Min:-1 / Max: 1)
Sustainability
features
5. Health and Comfort 4. Safety and Security
40
Table 6: Practical example: portfolio with 12 objects
Location
North Switzerland East Switzerland West Switzerland East Switzerland Central Switzerland Central Switzerland
Property Description Total 165
apartments. Built in
1969 and
completely
refurbished in 2003.
The apartments are
in good condition
and have a normal
standard.
Apartment building
with 2 entrances
and huge living
space. Good overall
condition of the
object.
Former workers'
housing estate
consisting of 152
apartments with
small rooms and
bad furnished
kitchen. The
apartments are in
bad condition.
The apartments
have huge
balconies and the
basic structure of
the houses is in a
good condition.
Good overall
condition of the
object. Small floor
planes, which are
not modern
anymore.
The apartments
have a modern
standard of fittings.
The kitchens and
sanitary facilities are
very modern. The
property is in a very
good condition.
Conventional Valuation
Conventional Market Value
35,670,000 4,650,000 23,740,000 4,907,000 29,010,000 28,190,000
ESI
®
Valuation
CCRS Economic
Sustainability Indicator ESI
®
0.1 0.0 -0.6 0.2 -0.2 0.5
Correction Factor
[
%
]
0.66 0.00 -8.94 1.32 -2.98 3.30
Nominal Deviation from
Standard Valuation
[
CHF
]
235,422 0 -2,122,356 64,772 -864,498 930,270
ESI
®
Value [CHF]
3,590,5422 4,650,000 21,617,644 4,971,772 28,145,502 29,120,270
Apartment Building 7 8 9 10 11
Construction
Project
Location
South Switzerland East Switzerland West Switzerland East Switzerland Central Switzerland East Switzerland
Property Description Normal floor plans
and attractive living
rooms with chimney
and balcony.
Modern floor planes
with consequent
separation of living
and sleeping area.
The building is in a
good condition.
Heating system and
façade are
refurbished.
The apartments
have private
terraces or
balconies but
inefficient created
floor plans. The
overall condition of
the object is good
with small defects.
2 apartment
buildings with total
18 apartments in
favored location with
nice view.
Land ripe for
development, but
not overbuild yet.
Located in a
residential area with
good sun conditions
and good
connection to the
public traffic.
Conventional Valuation
Conventional Market Value
7,900,000 10,227,000 15,060,000 40,460,000 5,560,000 13,010,050
ESI
®
Valuation
CCRS Economic
Sustainability Indicator ESI
®
-0.2 -0.2 0.1 0.2 -0.1 0.5
Correction Factor
[
%
]
-2.98 -2.98 0.66 1.32 -1.49 3.30
Nominal Deviation from
Standard Valuation
[
CHF
]
-235,420 -304,764.6 99,396 534,072 -82,844 429,331
ESI
®
Value [CHF]
7,664,580 9,922,235 15,159,396 40,994,072 5,477,156 13,439,381
Avera
g
e CCRS Economic Sustainabilit
y
Indicator ESI
®
0.03
Average Correction Factor [%]
-0.73
Absolute Value of Added Nominal Deviation from Standard
Valuation [CHF]
5,432,306.65
Total Conventional Market Value [CHF]
218,384,050
Total ESI
®
Value [CHF]
217,067,431.45
Overall Change in Value [%]
-0.99
41
42
Figures
Figure 1: Property value as determined using the DCF method, both with and without ESI
®
-
Indicator
.............................................................................................................................. 1
Figure 2: Weighting of partial indicators.......................................................................... 44
Figure 3: Practical example: apartment building Central Switzerland ............................. 45
Figure 1: Property value as determined using the DCF method, both with and
without ESI
®
-Indicator Source: (Holthausen et al., 2009)
43
Figure 2: Weighting of partial indicators
44
Figure 3: Practical example: apartment building Central Switzerland
45
46
References
Appraisal Institute (Ed.) (1996) The Appraisal of Real Estate, Chicago, Illinois.
BFE (2007) Energieperspektiven 2035
BFS (2005) Szenarien zur Bevölkerungsentwicklung in der Schweiz 2005-2050.
Diederichs, C. J. (Ed.) ( 2006) Immobilienmanagement im Lebenszyklus: Projetentwicklung,
Projektmanagement, Facility Management, Immobilienbewertung, Berlin Heidelberg,
Springer-Verlag.
DiPasquale, D. & Wheaton, W. (Eds.) (1996) Urban economics and real estate markets,
Prentice Hall, Engelwood Cliffs, NJ.
EEA (2009) Transport at a crossroads: TERM 2008: indicators tracking transport and
environment in the European Union. IN AGENCY, E. E. (Ed.). Copenhagen.
Eichholtz, P., Kok, N. & Quigley, J. M. (2009) Doing Well by Doing Good? Green Office
Buildings. Quarterly Journal of Economics, under review.
Elkington, J. (Ed.) (1999) Cannibals with Forks: The Triple Bottom Line of 21st Century
Business, Oxford, New Society Publishers.
Ellison, L., Sayce, S. & Smith, J. (2007) (Socially Responsible Property Investment:
Quantifying the Relationship between Sustainability and Investment Property Worth.
Journal of Property Research.
Frank, T. (Ed.) (2007) Die Bilanzierung von ANlageimmobilien im internationalen Vergleich
(HGB und IFRS), Europäischer Hochschulverlag.
Fuerst, F. & McAllister, P. (2009) New Evidence on Green Building Rent and Price
Premium. Annual Meeting of the American real Estate Society. Monterey.
Gantenbein, P. (Ed.) ( 1999 ) Die Institutionen des schweizerischen Immobilienmarktes, Bern,
Paul Haupt Verlag
GdW (2008) GdW Branchenbericht 3: Wohntrends 2020.
47
Hoffman, A. J. & Henn, R. (2008) Overcoming the Social and Psychological Barriers to
Green Building. Organization & Environment, 21, 390-419.
Holthausen, N., Christen, P. & Meins, E. (2009) Risiko- und chancenbasierte Integration von
Nachhaltigkeitsmerkmalen in die Immobilienbewertung Modellentwicklung zur
Gewichtung des ESI-Indikators. Zurich, CCRS.
International Valuation Standards Committee (Ed.) (2005) Market Value Basis of Valuation.
Kats, G. (2003) The Costs and Financial Benefits of Green Buildings: A Report to
California's Sustainable Building Task Force.
Kubli, U., Lüscher, A., Salvi, M., Schellenbauer, P., Schellenberg, J., Moser, P., Rey, U. &
Bischoff, C. (2008) Wertvoller Boden - Die Funktionsweise des Bodenmarktes im
Kanton Zürich. Zürich, Zürcher Kantonalbank und Statistisches Amt des Kantons
Zürich.
Lorenz, D., D’Amato, M., Des Rosiers, F., Elder, B., Van Genne, F., Hartenberger, U., Hill,
S., Jones, K., Kauko, T., Kimmet, P., Lorch, R., Lützkendorf, T. & Percy, J. (2008)
Sustainable Property Investment & Management - Key Issues & Major Challenges.
Lorenz, D. & Lützkendorf, T. (2008) Sustainability in Property Valuation - Theory and
Practice. Journal of Property Investment & Finance, 26, 482-521.
Lützkendorf, T. & Lorenz, D. (2005) Sustainable property investment: valuing sustainable
buildings through property performance assessment. Building Research and
Information, 33, 212-234.
Lützkendorf, T. & Lorenz, D. (2007) Integrating sustainability into property risk assessments
for market transformation. Building Research & Information, 35, 644-661.
Maier, K. M. (Ed.) (2004) Risikomanagement im Immobilien- und Finanzwesen: Ein
Leitfaden für Theorie und Praxis Frankfurt, Fritz Knapp Verlag.
48
Meins, E. (2009) Der finanzielle Wert der Nachhaltigkeit von Immobilien Ökonomie versus
Ökologie - Umwelteffizienz in der Immobilienbranche. Köln, Immobilien Manager
Verlag.
Meins, E. (forthcoming) Immobilienbewertung und Nachhaltigkeit. Die
Immobilienbewertung in der Schweiz - Entwicklung, Perspektiven und Auswirkungen.
Zürich, vdf-Verlag.
Meins, E. & Burkhard, H.-P. (2009) Der Nachhaltigkeit von Immobilien einen finanziellen
Wert geben - ESI Immobilienbewertung - Nachhaltigkeit inklusive. Zürich.
Miller, N., Spivey, J. & Florance, A. (2007) Does Green Pay off? , Burnham-Moores Center
for Real Estate, San Diego University / CoStar.
OcCC (2007) Klimaänderung und die Schweiz 2050 - Erwartete Auswirkungen auf Umwelt ,
Gesellschaft und Wirtschaft.
Pivo, G. & Fisher , J. D. (2009),Investment Returns from Responsible Property Investments:
Energy Efficient, Transit-oriented and Urban Regeneration Office Properties in the
US from1998-2008.
Prognos (2005) Synthese provisorischer Resultate Energienachfrage Szenarien III und IV.
RICS (1997) Commercial Investment Property: Valuation Methods. An Information Paper.
London.
RICS (2001) Commercial Investment Property: Valuation Methods. An Information Paper.
London.
RICS (2009) Valuation Information Paper 13 - Sustainability and commercial property
valuation. London.
Salvi, M., Horejájová, A. & Müri, R. (2008) Minergie macht sich bezahlt. Zürich, CCRS und
Zürcher Kantonalbank.
Sayce, S., J., S., R., C. & P., V.-R. (2006) Property investment: From Value to Worth.
49
Schäfer, H., Lützkendorf, T., Gromer, C. & Rohde, C. (Eds.) (2008) ImmoInvest -
Grundlagen nachhaltiger Immobilieninvestments, Stuttgart, Fraunhofer IRB Verlag.
Schwartz, O. (2006) Anwendung der DCF-Methode zur Immobilienbewertung. Zürich,
Center for Urban & Real Estate Management.
Shilling, J. D. (Ed.) (2002) Real Estate, Cincinnati, Ohio, South-Western Educational Pub.
Steinemann, M., Meins, E. & Guyer, M. (2008) Dokumentation zum Konsum Report
Schweiz. Zürich
Stoy, C. (2005) Benchmarks und Einflussfaktoren der Baunutzungskosten, Zürich, vdf
Hochschulverlag AG.
Stoy, C. & Kytzia, S. (2008) Utility costs: a survey of Swiss office buildings. Journal of
Facilities Management, 6, 120-131.
Szerdahelyi, B. (2006) DCF-Bewertungen unter Berücksichtigung der valuation uncertainty.
Zürich, Center for Urban & Real Estate Management.
Tegova -The European Group of Valuars´ Associations (2009) European Valuation Standard.
Sixth Edition.
The Appraisal Institute (Ed.) (1996) The Appraisal of Real Estate, Chicago.
Tochtermann, D. (2003) Bewertung von Immobilien. IN SCHALCHER, H.-R. (Ed.)
Immobilienmanagement. Zurich.
UBS (2005) Research Focus Immobilien. Zürich.
UNESCO & Earthscan (2009) The 3rd United Nations World Water Development Report:
Water in a Changing World (WWDR-3). Paris, London.
Union Investment (2008) Studie zum Immobilieninvestitionsklima in Europa, Chart-Band
Folgemessung, Frankfurt am Main/Hamburg, Union Investment.
USGBC (2002) Building momentum: National trends and prospects for high performance
green buildings. Washington, U.S. Green Building Council.
50
Wallbaum, H. (2008) Sustainability Indicators for the Built Environment - The Challenges
ahead World Sustainable Building Conference 2008. Melbourne, Foliente, Greg;
Luetzkendorf, Thomas; Newton, Peter; Paevere, Phillip.
WCED (1987) Our Common Future. New York, World Commission on Environment and
Development.
White, T. & Jenyon, L. (Eds.) (2003) Internationale Bewertungsverfahren, Wiesbaden.
... Their willingness shows they treasured their green living experiences (Chau et al., 2010) and the benefits of green residential development. Other research also indicates that increasing sustainability awareness impacts property prices (Meins et al., 2014). ...
... Razali and Adnan (2015) and Samari et al. (2013) added that besides energy efficiency and indoor quality, other environmental elements also include controlling waste and pollution, maintenance, and the house's environmental impact. Moreover, good lighting and illumination should also be considered (Meins et al., 2014). Besides, Bezzina and Laiviera (2016) mentioned that the water issue had been considered over recent years, with the presence of hydrological mismanagement and pervasive groundwater abstraction. ...
... Apart from that, the energy efficiency design of the dwelling is important for homebuyers. According to Meins et al. (2014), the safety and security measures related to people continue to gain significance as the public becomes more aware of the issue. Investors and homebuyers should consider preferences to ensure the developers invest in green features, focusing on their clients' financial constraints and lifestyles (Wira et al., 2013). ...
Article
Full-text available
Green residential buildings benefit their owners economically, socially, and environmentally. However, it is not known whether the buyers know the benefits that will be gained ,when they purchase this green residence: it could also be that they are just following the current trend. Therefore, this review was conducted to identify the motivations for green real estate investments in residential properties and propose a conceptual framework for future validation. In relation to that, both past empirical and conceptual studies were reviewed. A total number of 277 articles were found in several e-databases, searched with the following keywords: ‘green residential,’ ‘green real estate,’ ‘green building,’ ‘sustainable building,’ ‘driver,’ and ‘motivation.’ After the filtration phase, 26 full-text articles that are pertinent to the study were selected for review. The review revealed four variables that motivate property buyers or investor-owned to invest or purchase green residential property. These variables concern environmental degradation, financial returns, cost-saving, and social and environmental benefits. Therefore, an informed decision on the benefits received, especially for green residential properties, could affect the resident’s motivation towards the certified residential properties, encouraging more demand for green residential in the market and spurring more green and sustainable development. For further research, the proposed conceptual framework could be tested for model testing and validation.
... (product) or (building) or ("build environment") all text ("design for change") or ("design for adaptability") or ("adaptable architecture") or ("adaptable building") or ("building flexibility") or ("adaptive reuse") all text ("transformable structure") or ("transformable building") or ("building transformation") | 80 Altan et al., 2015Arge, 2005Beisi and Yingying, 2011Belausteguigoitia et al., 2011Brand, 1994Bruce et al., 2015Bullen and Love, 2011aBullen and Love, 2011bBullen and Love, 2011cConejos et al., 2016de Neufville, 2008Dhar et al., 2013Dovey and Fisher, 2014Eguchi et al., 2011Engel and Browning, 2008Engel and Reich, 2015Fawcett et al., 2012Fernandez, 2003Fletcher et al., 2009Georgiadou et al., 2012Gijsbers and Lichtenberg, 2014Gosling et al., 2013Greden and Glicksman, 2005Grover and Grover, 2015Halvitigala and Reed, 2015Hamraz et al., 2013Hassanain, 2006Hein and Houck, 2008Hertzberger, 2014Hunter, 2006Isaac et al., 2014Israelsson and Hansson, 2009Itard and Klunder, 2007Khan and Dhar, 2012 Shen, 2007 7 13 12 11 77 8 16 1 3 2 3 12 6 20 6 7 2 5 9 3 8 9 3 8 22 1 18 1 8 10 7 3 5 11 1 Langston et al., 2008Lin, 2011Mantab-uz-Zaman, 2011March et al., 2012Meins et al., 2010Nijs et al., 2011Paslawski and Rozdzynska, 2013Pinder et al., 2013 Remøy and van der Voordt, 2014a Remøy and van der Voordt, 2014b Remøy et al., 2011Ren et al., 2014Ross et al., 2016Saari et al., 2007Saghafi and Ahmadi, 2011Saigo et al., 2011Schmidt III and Eguchi, 2014Schwehr, 2011Slaughter, 2001Steadman, 2006 In the Introduction (see 4.1.), changeability is defi ned as the ability to comply with future change. ...
... x Meins et al., 2010 Flexibility and Polyvalence Can be improved through: -Sufficienctly wide aisles -Wheelchair accessible restrooms 292 x Nijs et al., 2011 Ideally, independency... is required, which achieves that building levels can be adapted separately, resulting in more freedom to change. ...
Thesis
Full-text available
The current usage of natural resources cannot be maintained forever – our resources are depleting. A substantial share of resource usage, and therefore the problem, is related to the construction sector. Meanwhile, there are signs that buildings are being demolished prematurely. This premature demolition of buildings is a waste of resources. This dissertation’s end goal is to contribute towards mitigating the problem of resource depletion. Changeability has been selected as the means through which to pursue this goal. This research aims to both understand design and to create support to help improve design, specifically regarding the topic of design for change in relation to sustainable resource usage. In Chapter 2, i.e. “Resource depletion, where is an intervention most effective?”, the topic of resource depletion is dealt with. Chapter 2’s aim is to rank areas of the resource system, according to how much of an impact can be expected from interventions in the area, in relation to the problem of depleting resources. Firstly, principles of Structured Analysis are used to model the process of resource usage, and, from this model, five intervention areas are defined. Secondly, these intervention areas are ranked in terms of effectiveness, through the use of Analytic Hierarchy Process. To be most effective, one must prioritize intervention areas as follows: (1) material inputs to the operation phase; (2a) process inputs to the operation phase and (2b) products’ longevity; (4) process inputs to the manufacturing phase; and (5) material inputs to the manufacturing phase. In this study, changeability is not pursued for the sake of changeability. Changeability is pursued for the sake of mitigating the problem of resource depletion. Chapter 2’s outcome can guide this pursuit of changeability in the right direction. In Chapter 3, i.e. “The evolution of ordinary houses, does it justify demolition?”, the topic of longevity in relation to change is dealt with. Chapter 3’s aim is to determine how the ordinary house, in the Netherlands, has changed throughout the last 100 years. This information is then used to discuss: to what extent the house’s evolution justifies demolition. A non-random sampling method is used to select 68 housing projects from the city of Nijmegen. These projects contain a total of 8270 housing units (≈10% of Nijmegen’s housing stock). Of each project, a standard housing unit is analysed in terms of: (1) length and width; (2) floor-to-ceiling height; (3) utilitarian rooms; (4) spatial layout; (5) type of structure; (6) roof structure; (7) insulation; and (8) separating wall’s thickness. Chapter 3’s outcome provides a first indication of to what extent a building’s longevity is determined by its design. This knowledge contributes to a more valid assessment of changeability’s contribution towards mitigating the problem of resource depletion. In Chapter 4, i.e. “How to set up criteria for evaluating a building’s changeability?”, the topic of changeability is dealt with. In Chapter 4, a method is proposed in which: (1) scenarios are developed to identify potential problems; and (2) evaluation criteria are based on design solutions to those potential problems. To support and guide the development of both scenarios and design solutions, changeability levels and types of design tactics are defined. A top-down approach is used to define changeability levels, while a bottom-up approach, i.e. the constant comparative method, is used to define types of design tactics. This research’s main contribution is that it provides a method for unpacking the black box of design for change. This method is presented in Chapter 4. In Chapter 5, i.e. “How adjustable is the Environmental Building?”, the application of the evaluation method, that has been presented in Chapter 4, is tested. To do so, the Environmental Building’s adjustability is evaluated by following the steps described in this method. Adjustability is the first of four changeability levels, as defined in Chapter 4. The Environmental Building has the ability to comply with changing requirements of the individual in terms of indoor climate conditions. However, it lacks the ability to comply with changing requirements of the individual in terms of space, privacy and interaction. Chapter 5 demonstrates that by using this method, specific strengths and weaknesses of the building’s design can be identified.
... "Sustainability and Real Estate Valuation: A Risk-Based Approach"; was conducted on behalf of the University of Zurich, the Center for Corporate Responsibility (CCRS) as a study by Meins et al. (2010); it is emphasized that the general definition of the value of a property is not included in the literature, whereas in practice the concept is spreading as the market value. As a result of the comparisons, it is stated that the experiences can be faulty in the rate of ± 20% to 30% of the real estate value and that this rate is more than ± 10% in Switzerland by Tochtermann (2003). ...
... As a result of the comparisons, it is stated that the experiences can be faulty in the rate of ± 20% to 30% of the real estate value and that this rate is more than ± 10% in Switzerland by Tochtermann (2003). It is identified that the reasons for the high level of errors are not the deficiencies of the method, but especially the lack of information, and the new market trends and the fact that the developments are not included in the valuation as a constraint [21]. ...
Chapter
Full-text available
Nowadays, the World seems to concentrate around two main subjects: the “Capital” and the “Environment”; in which the notions like the politics, finance, society, culture, and ecology are condensed to in terms of adding value to the real estate and to its genius logi. The main purpose of this study is to emphasize the necessity of maintaining the real estate development and sustainability in a structure that aims to invest nowadays as well as to the future in a holistic and interdisciplinary approach. For this purpose, the data flow required for a solid foundation of future forecasting; the information reflected the real and legal entities, which are the basic building blocks of investment/savings, is discussed over the capacity of expressing the returns of the sustainable built environment. In this study, the concept of design, construction, and valuation are discussed in the name of “value” with the sustainability and capital theories, in the academic environment, in international institutions, and in the asset markets. The liquidity of the real estate projects, which are considered to be a high return on investment despite the low liquidity, can be ensured through investment types. Keywords: sustainable property, real estate market liquidity, REIT, REIC, ΣSoCulTΞ, circular economy, capital, built capital, green capital, asset-backed securities, green bond, sustainability bond
... La littérature recense plusieurs défis pour l'évaluation immobilière (Meins et al. 2010) dont nous citons principalement la gestion de l'incertitude dans les estimations de valeurs de nombreux paramètres relatifs à la valeur immobilière ainsi que le manque de transparence et la subjectivité de l'expert. La résolution de ces défis impose le recours à des méthodes numériques permettant d'intégrer différentes variables et les simuler au sein d'un même modèle. ...
Chapter
This chapter presents the concept and approaches of real estate valuation, and discusses the main potentialities and applications of Building Information Modeling (BIM) and 3D Geographic Information Systems (3D GIS) in real estate valuation. It analyzes the challenges that come with integrating BIM and 3D GIS in the accurate determination of the value of a property. The value of a residential property is closely linked to the determination and integration of the inherent characteristics of the residential property. As a result of research into the identification of three- dimensional variables that influence the determination of residential value, the chapter proposes the following classification: variables based on 3D data sources, variables requiring 3D modeling, and variables based on a 3D environment. It illustrates, through examples of uses, how BIM and 3D GIS can contribute individually or jointly in 3D modeling and simulations of variables in real estate valuation.
... Lower long-term exposure to environmental or health problems Isa et al., 2014;Lee et al., 2014 Reduces cost overall cost Ahn & Kim, 2014;Lee et al., 2014Increases economic value Isa et al., 2014Kibert, 2016;Meins et al., 2010;Nurick et al., 2015;Olaleye et al., 2015;Shen et al., 2010;Tunji-Olayeni et al., 2018; Improves company's reputation Giannoni et al., 2018;Isa et al., 2014 A business strategy Giannoni et al., 2018;Tunji-Olayeni et al., 2018; Reduces the use of energy and water resources Danso, 2018;Hussin et al., 2013;Isa et al., 2014;Kibert, 2016;Omopariola et al., Hypothesis H0: There is no significant difference between the awareness level of building professional and non-professional stakeholders on the benefits of sustainable construction practices. ...
Article
Full-text available
Awareness of the benefits of sustainable construction practices has been acknowledged as the fundamental principle that underlies its implementation. This survey study examined the level of awareness of the benefits of sustainable construction practices among building construction stakeholders and the strategies for optimising the awareness level through the use of questionnaire. The Mann–Whitney U Test result revealed that there was significant difference in the awareness level of benefits of sustainable construction practices between building professionals and non-professionals, in spite of a general moderate high level of awareness; due to difference in the training background and experience of the professionals and non-professionals. The Relative Importance Index (RII) result further showed that these differences could be narrowed through the adoption of 12 strategies for promotion of awareness. For maximum optimisation, the study suggested that six high level importance strategies had to be operationalised. However, when these are not readily available or very difficult to apply, alternative medium-high level importance strategy could be adopted. Thus, since non-professional stakeholders such as clients and non-professional contractors do not have opportunity of learning as professionals, the study suggested that the professionals should engage in such strategies as community or professional group engagement and local partnership with the non-professional stakeholders so as to create an interface that would promote awareness of benefits of sustainable construction practices among the stakeholders. Similarly, relevant authorities, such as government agencies and regulatory bodies need to embark on other alternative strategies such as advertisement promotion, etc.
... Based on the review, the initial construct of the indoor environmental elements had listed nine (9) attributes, namely; i) thermal comfort (heating), ii) thermal comfort (cooling), iii) visual comfort (artificial lighting), iv) visual comfort (natural lighting), v) waste disposal, vi) building ventilation, vii) humidity level, viii) acoustic comfort and ix) level of cleanliness. The attributes were relatively compiled from the literature, the existing green rating tools, and some precedent studies concerning risk in building performance [19], [20], [21], [22], [23]. In the current study, the indoor environmental attributes are depicted as predictor variables of the impact on occupants' safety and health, which are social factors. ...
Article
Full-text available
This article presents a new idea to improve crucial ecological issues that arise due to the poor performance of indoor environments during the occupancy phase to ensure safe and healthy working conditions for building residents. Using the Delphi technique via a focus group discussion, the authors identified seven attributes that are associated with occupants’ health and safety, namely, cooling (thermal comfort), artificial lighting (visual comfort), natural lighting (visual comfort), acoustic comfort, waste reduction, ventilation, and cleanliness. We illustrate the use of Delphi in ensuring a safe and healthy working environment via two-round stages involving 22 respondents, which include building energy experts from green and environmental organizations in Malaysia. The first round confirms the suitability of the attributes while the second determines the individual priority weights of the attributes. Our method allows improving building residents’ safety and health by focusing on improving their indoor environment, where the top attributes are ventilation (30.3%), cleanliness (17.1%), and cooling (7.4%). This new method of effectiveness evaluation is based on the calculation of the individual priority weight, which is derived from the analytical hierarchy process. In this method, respondents are made to rate the importance of each attribute in pair-wise comparison during the second round. The results of this study aid in improving the indoor environment during the occupancy phase; these results can also be used for prioritizing elements that should perform well in the performance evaluation.
... According to Meins, Wallbaum, Hardziewski, and Feige (2010) the financial added value resulting from sustainability is not sufficiently taken into account in property valuation due to the tendency of valuations to postponement behind market trends. As stated by Kucharska-Stasiak and Olbi nska (2018) this attitude leads to sustainable building, the development of which depends not only on the market participants' awareness of sustainability issues and their readiness to embrace the concept of sustainable development, but also on the benefits that property owners and tenants can have from sustainable building, which should be reflected in valuations (Renigier-Biłozor, Walacik, Źróbek, & D'amato, 2018). ...
Article
Full-text available
Sustainable development of all the urban environment elements (including properties) is a very information requiring decision making process that absorbs data from many different fields. Since economic aspects of that kind of development are one the fundaments of the concept, property assessment procedures quite often support sustainable development. The current market value definition interpretation provided by valuation standards of international rage (EVS, IVS) and highest and best use of property (H&BU) have also become widely discussed and troublesome issues. The discussion is vital due to the fact of H&BU consideration in wider context, including sustainable development and sustainable value. The authors in order to improve clarity of the paper proposed a definition of sustainable value. The use of modified methods of sensitivity and scenario combined analysis as a solution enabling sustainable value quantification with the use of H&BU property assessment theory and practice was proposed. The obtained sustainable value coefficient, determined according to proposed methodology, enabled consideration of all the highest and best use tests. Additionally, it enabled consideration of sustainability context. It was described by maximal productivity of property strongly correlated with socio‐economic and socio‐cultural phenomena. Highlights • The concept of sustainable development involves much more than the “green” issue, thus can create an added value for real estate analysis (especially based on “highest and best use” assumptions). • Even though the “highest and best use” notion has been defined its' interpretation causes many ambiguities and problems. • “Highest value” is a condition that requires taking into account all the circumstances (physical, legal, financial and productivity) with maximum: return rate/developed area/increase of build‐up area. • Maximal productivity in highest and best use context means directly not to give any decreases in sustainable value or/and give possibility to increases the sustainable value in the future. • “Sustainable value” can reflect not only economic issues (reflected directly by property value) but can exceed its' meaning to a broader sense including sustainable development issues (social, political, environmental directions) at the same level.
Purpose The authors outline a framework that captures the channels through which physical climate risks could affect cash flows and pricing of income-producing real estate. This facilitates detailed consideration of how the future performance of real estate investments could be affected by such risks. Design/methodology/approach This is a literature-based investigation that draws on work commissioned by UNEP-FI (Clayton et al. , 2021a, b). It extends this work to consider in more detail the channels through which climate risks may impact property performance and the implications for the valuation community. Findings Recent empirical studies have identified more instances where pricing is reflecting both current and anticipated climate risks. Market valuations cannot properly incorporate climate risk without clear evidence that it is priced by market participants, but valuers can advise clients on the potential for future impacts. Research limitations/implications While inferences can be made from studies of residential real estate, more research on commercial real estate pricing and climate risk is required to assist valuers and their clients, as well as other stakeholders in the real estate market. Practical implications Differences between a Market Value and an Investment Value context are considered, and how valuers could and should account for climate risk in each setting is discussed with reference to existing professional standards and guidance. Originality/value The article synthesises a wide range of literature to produce a framework for the channels by which real estate values could be influenced by climate risk.
Conference Paper
Full-text available
The 27th EG-ICE International Workshop 2020 brings together international experts working at the interface between advanced computing and modern engineering challenges. Many engineering tasks require open-world resolutions to support multi-actor collaboration, coping with approximate models, providing effective engineer-computer interaction, search in multi-dimensional solution spaces, accommodating uncertainty, including specialist domain knowledge, performing sensor-data interpretation and dealing with incomplete knowledge. While results from computer science provide much initial support for resolution, adaptation is unavoidable and most importantly, feedback from addressing engineering challenges drives fundamental computer-science research. Competence and knowledge transfer goes both ways.
Conference Paper
Full-text available
In real-estate domain, sustainable valuation and sustainable procurement are gradually accepted by different institutions all over the world. A large amount of research shows positive relationships between buildings' sustainable variables and observed property market values. However, the sustainability criteria in property valuation process is still lacking support data and standard information exchange methods. To enrich the fundamental database for sustainability assessment in property valuation and improve information exchange among different actors, this research proposes a holistic data interpretation of the information needed for the integration of property valuation and sustainability assessment. A standard information exchange method is further explored by referring to Building Information Modelling (BIM) related concepts (IFC/IDM/MVD). In this way, the comprehensive quantitative analysis of sustainability-related information in property valuation becomes tangible, and the accuracy and efficiency of property valuation will be improved.
Article
Full-text available
This study provides some comparison data on Energy Star and Leadership in Energy and Environmental Design (LEED) -certified buildings versus non-Energy Star or non-LEED-certified office property in the United States using the CoStar database. These results are promising for the benefits of investment in sustainable real estate, energy savings, and for the green movement now sweeping our society. The payoff from wise green investment is easy to justify even if it is based on purely profit motivations.
Article
Full-text available
Responsible property investing (RPI) includes many facets such as investing in Energy Star labeled properties, investing in properties near transit stations and investing in properties in urban regeneration areas. This paper shows that investors could have purchased a portfolio consisting solely of RPI office properties over the past 10 years and had performance that was as good if not better on a risk-adjusted basis than a portfolio of properties without RPI features. This paper breaks down the way that various RPI factors impact income, property values, capitalization rates, price appreciation and total returns. One of the interesting results is that the impact of proximity to transit differs for the CBD and the suburb. This difference can be attributed to whether or not the value of being close to transit was already reflected in prices as was the case for the CBD but not the suburbs where the value of transit appears to have increased in importance over the past ten years allowing existing investors to earn above average returns. Energy Star rated properties had higher income and income growth over the past ten years. Investors were willing to purchase these properties at lower cap rates producing a premium in value over non Energy Star properties. Although we don't know the cost to developers of making properties qualified for the Energy Star labeled, the higher income from these properties combined with investors being willing to purchase them at lower cap rates suggests that the benefits may have outweighed any additional development costs. Finally, properties in or near urban regeneration zones had higher income and value although they did not outperform other properties because their higher income and value were already reflected in the price that investors paid for them. But developers would have benefited from the higher values if development costs were not greater for these properties. All factors considered, there does not appear to be any reason why investors cannot be socially responsible and still earn an appropriate risk-adjusted return. Since RPI can produce social and environmental benefits and fulfill fiduciary duties, it would be economically irrational in social welfare terms and ethically unjustifiable to not engage in Responsible Property Investing.
Article
Das CCRS hat zusammen mit einer Begleitgruppe mit Vertretern von Novatlantis, SEK/SVIT, Stadt Zürich, VeF und ZKB die Grundlagen für eine Bewertung von Immobilien unter Berücksichtigung der Nachhaltigkeit erarbeitet. Ein Ansatz für den Einbezug der wertrelevanten Nachhaltigkeitsaspekte bei bestehenden Bewertungsmethoden (ESI® Immobilienbewertung) liegt vor. Der ESI®-Indikator misst das Risiko eines Objektes, aufgrund langfristiger Entwicklungen an Wert zu gewinnen bzw. zu verlieren. Er kann sowohl in gängige Bewertungen einbezogen als auch als eigenständiger Indikator z.B. für strategische Zwecke verwendet werden. In einem ersten Schritt wurde der Indikator für Mehrfamilienhäuser und nun auch für Geschäftsliegenschaften spezifiziert (Büro und Verkauf). Ausführliche Praxistests haben die Plausibilität und Praktikabilität bestätigt.
Article
The green building movement has made tremendous achievements in the past decade. Technological advances in building systems and materials have made revolutionary possibilities in reducing the environmental impact of buildings. Economic achievements in price reductions have made these advances more feasible. And yet, adoption of green buildings within the construction and design fields remains low. The strongest barriers to a more rapid deployment of green buildings are now psychological and social. This paper surveys the form of these barriers, discussing them on three levels - individual, organizational, and institutional. The paper concludes with two categories of strategies for overcoming them: as entrepreneurial opportunities and a challenge for change. In this latter category, seven specific strategies are elaborated: issue framing, targeting the right demographic, education, structural and incentive change, indemnifing the risk, green building standard improvements, and tax reform.