Role of sustainable development on value

Sustainability is a much used term in all aspects of modern life, and particularly 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. Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Valuers have a responsibility to their client in ensuring 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 Valuation Standards now features 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 an ongoing discussion between various schools of thought about the issue of potentially higher value for sustainable property, or, more recently, the risk of lower values/obsolescence 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 link between in particular 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 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 over the past years. It is clear that occupiers and investors are starting to find green buildings more acceptable and valuers have to catch up with this, although there still remains in my opinion a lack of specific guidance. What we have, for now, is an indication that you should really be thinking about this in greater depth.

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. It may be a question of preference which of course may not necessarily translate into price, and in the Gulf with a serious dependency on air conditioning for a large part of the year, the sustainability conundrum is even more challenging.

Jonathan Fothergill is the Director of UAE Valuations, Cluttons LLC