Valuing sustainability, but at what price?

Sustainability is a much used term in all aspects of modern life, particularly so in the real estate industry. With sustainable buildings playing an increasingly important role in the corporate social responsibility strategies of both investors and occupiers, sustainability is becoming a critical business issue.

As a valuation professional, I am particularly interested in the impact of sustainable development on value. For ease, it can be defined as that development which meets the needs of the present without compromising the ability of future generations to meet their own.

Valuers have a responsibility to their client to ensure that a valuation reflects the material factors that may influence value, of which sustainability is just one. In addition, as chartered surveyors, our Royal Charter also requires us as members to ‘promote the usefulness of the profession to the public advantage'.

For the first time the Rics's (Royal Institute of Chartered Surveyors) Valuation Standards now feature guidance on how valuers should factor in a building's sustainability credentials. The change incorporates the Rics guidance in the Valuation Information Paper 13: Sustainability and Commercial Property Valuation.

This places the concept of sustainability on a more formal footing for valuers and identifies key areas, which they must consider.

For a number of years, there has been a discussion between various schools of thought about the issue of potentially higher value for sustainable property, or, more recently, the risk of lower values for conventional property with a low green sustainability signature. A synopsis of the existing research evidence and case studies from Switzerland and Germany highlights that there is a growing body of international research evidence - mainly focusing on the office market segment - illustrating a particular link between energy ratings and rental value.

However, what has become increasingly evident is that strong legislation — including strict building codes, coupled with the public sector leading the way in demanding high performing-buildings — have been the main drivers of an added value for sustainability.

The principle that more environmentally friendly buildings are worth more is still a nebulous concept, more so given that this issue has been clouded by the downturn in global real estate markets. It is clear that occupiers and investors are starting to find green buildings more acceptable and valuers have to catch up with this.

In my opinion, however, there still remains a lack of specific guidance on the matter. What we have for now is an indication that we all should really be thinking about this in greater depth.

What is clear from various studies is that ‘going green' pays by significantly reducing the operating costs of buildings. As practical illustrations of this, various energy-efficiency measures involving the refurbishment of the heating and cooling systems are being implemented by the owners of the Empire State building in New York.

It is estimated this will lead to energy cost savings of $4.4 million (Dh16.15 million) per annum and its carbon footprint will be reduced by up to 38 per cent. In a similar vein, the owners of the iconic Miami Tower building in downtown Miami have recently replaced 1,000-watt light fixtures with new compact LED lights which has resulted in reducing electronic consumption by 89 per cent.

In London, the owners of the Barclays Building in Canary Wharf have implemented a 400 square meter wildflower green roof to help alleviate the urban heat island effect.

Personally I feel that it may be between three and five years before occupiers are willing to pay more for a green building, and only on the basis that real estate markets are by this stage in full upswing mode. Until the markets clearly demonstrate a clear correlation between a property's value and its green credentials, it will be difficult for valuers to put the RICS's new guidance into practice.

At this point in time, the relationship between sustainability and value may be a question of preference, which of course may not necessarily translate into price.

In the Gulf where we have a serious dependency on air-conditioning for a large part of the year, the sustainability conundrum is even more challenging.

The writer is the director of UAE valuations at Cluttons llc.