Sustainability and real estate values: time for the agenda to move on?

Citation

Sarah Sayce, P. (2013), "Sustainability and real estate values: time for the agenda to move on?", Property Management, Vol. 31 No. 3. https://doi.org/10.1108/pm.2013.11331caa.001

Sustainability and real estate values: time for the agenda to move on?

Article Type: Guest editorial From: Property Management, Volume 31, Issue 3.

Some 14 years ago I was commissioned by the then Construction Confederation, a long-since defunct UK body, to undertake a project entitled “The Business Case for Sustainable Property”. Our brief, which we informed the client was not likely to yield positive results, was to find the evidence that there was a firm business case to construct “green” or “sustainable” properties. It was clear that the case was to be made in relation to construction in the light of perceptions that the lack of so-called green stock was a supply-side issue. Needless to say, given the date at which the paper was written, our results were that in hard financial terms, the link was not that obvious; instead we argued that the case should be created in terms of “soft” criteria – primarily on the demand side. This work fed into the publication by the Building Research Establishment the following year (BRE, 2000) which argued the case in terms of risk, reputation and the hope of future reward.

Since then, the literature, both professional and academic has burgeoned with seemingly ever stronger evidence that, in property investment terms, those properties which are labelled sustainable in some way[1] may be a superior investment in terms of likely rental performance and yield differentiation. Or so it seems on the surface; but a closer examination of the evidence would indicate that the evidence is perhaps not as conclusive as it might seem when taken in a wider perspective. Only four years ago empirical evidence of linkages was hard to find (Sayce et al., 2010) although significant progress had been made in terms of developing a theoretical case for value differentiation (see e.g. Boyd, 2005; Ellison et al., 2007). What empirical work that had then been undertaken was mainly restricted to studies in the USA where energy efficiency performance was beginning to be seen to be a differentiator in terms of rental, and more recently capital values (e.g. Eichholtz et al., 2010). More recently, the continued use of multiple regression methodologies has begun to strengthen the case for a “green premium” – or “brown discount” across other world regions, including Australia (e.g. Newell et al., 2011). However, one of the issues facing researchers pursuing this line of enquiry has been the lack of data in terms of a building's physical performance, even in an area of such critical importance as energy statistics.

Arguably this situation is easing, both as investment houses set up systematic processes to meet voluntary reporting standards such as under the Global Reporting Initiative but particularly as some data collection has become mandated, notably under the Energy Performance Certificates introduced across European member states (European Directive of on the Energy Performance of Buildings, 2002/91/EG). As the requirements for and use of reporting systems have grown, so they are supplying researchers with data on which to evaluate linkages. However, unlike the evidence from the USA, EPCs are not proving to result in differential pricing as clearly demonstrated both in the UK by Fuerst and McAllister (2011) and now within the useful contribution of Bond and Song within this Special Issue in relation to Sweden. Whilst Bond and Song conclude that the reasons for this could include both the low cost of energy compared to overall occupation costs, an argument that most certainly could be applied to the high value London office market and to a disregard of energy considerations by valuers, an additional factor is offered in explanation at least within the UK and this relates to the accuracy of EPC data.

Although EPC accuracy has not yet rigorously evaluated within the academic literature, impending UK legislation to link EPC ratings to an ability of otherwise to let a building[2], has brought into sharp focus that whilst originally regarded as a simple transactional requirement, and therefore something to be procured at least cost regardless of accuracy, EPCs may now have very significant effect. In turn this has revealed that some are wildly inaccurate with buildings rated at the lowest grade (G), upon reassessment using fuller date, being more accurately rated as high as C. Clearly where there is such a level of inaccuracy it would be inappropriate for valuers to include consideration of them when advising on value and, more importantly, for investors and tenants to base bid prices based upon them. In future, though, this will change as the legislation bites and the incentive to gain accuracy increases. Additionally the strengthening of guidance to RICS valuers worldwide due this year may focus valuers’ attention not only on energy but on a wide range of sustainability characteristics, notably water and waste management and propensity to flood[3].

In many ways the issue surrounding energy labelling, be it EPCs or some other measure such as Energy Star, relates to the level of market awareness and Eerikäinen and Sarasoja's paper argues that, at least in relation to Finland, a lack of sophisticated marketing techniques is holding back potential market differentials that should be, and in some sub-markets demonstrably are, achievable for green buildings. Interestingly, and refreshingly, this paper takes the arguments for sustainable property out of the realms of energy efficiency and certification, which has dominated the argument in recent years, back to a wider discussion of the health, well-being and reputational (image) matters and underlines that, despite all the work of the last decade there is still confusion about what constitutes a “sustainable” building. At first sight it might appear depressing that there is still not a universal understanding of what counts as sustainable, so perhaps it is timely to reconsider both the wider perspective and whether the agenda now needs to move beyond the quest for proof of premium or differential values.

In terms of the wider perspective, I particularly welcome two Australian contributions to this special issue. In the paper, values of built heritage, Armitage considers the importance of heritage in terms of their triple bottom line[4] importance to society and in their conclusion remind us that within its true sense sustainability is inextricably linked with notions of durability and stewardship: notions which in the past were inherently considered integral to estates management, but which have, since the growth of the institutional investment paradigm, been overshadowed by the pursuit of short-term financial returns expressed through levels of discount rates which force an approach to decision making which could be regarded as incompatible with Brundtland's definition of sustainable development (World Commission on Environment and Development (WCED), 1987), in which the needs of future generations are deemed of equal importance to those of today. Put simply, if the prevailing approach to assessing value is predicated on required return rates which discount the future heavily, then as a society we will always place importance on the current over the future. Consideration of heritage, however, expressed, is a timely reminder that such a decision making premise may be perceived as flawed by those forced to live with the consequences of the actions taken today.

The second contribution, that by Wilkinson on a conceptual understanding of sustainability in Australian Property organisations, through a contents analysis of an admittedly small sample of Australian property companies, reveals that there continues to be variance. In the conceptual understanding of sustainability; more importantly most organisations investigated saw sustainability in very person centred or anthropomorphic ways with little true consideration for wider ecological arguments which will be required to combat the imbalance between the estimated planetary carrying capacity and resource demand. Whilst this is hardly surprising given that the research and business agendas have concentrated narrowly on areas such as energy in which the legislative compliance imperative is growing ever stronger, the author makes the telling statement that “although we may hit our targets, we will miss the point”.

And it is with this sentiment that I raise the question: should the Agenda now move on? At the end of the day, the higgling of the marketplace will determine whether market values adequately reflect the risk/return ratios of investors and occupiers and governments will continue to intervene in ways that are politically acceptable to “nudge” behaviours. We will continue to develop knowledge but my concern is that nearly all the research coming through the real estate Journals is focused on the premise of existing economic models: in short it is argued, if only we can price sustainability in accurately to our investment and value modelling, business can proceed in the same ways as now – just with better more environmentally friendly buildings!

However, this is to ignore the development work in other related disciplines, notably environmental and welfare economics in which the development of arguments around eco-systems support and natural values is more advanced (see e.g. Ang and Van Passel, 2012); further notions of economies built on circularity are taking hold (see e.g. Preston, 2012). However, if built environment research and professional communities leave the initiative simply to an examination of market behaviours, we are indeed in danger of missing the point of how to reconcile the use of scarce resources in a truly sustainable way – and that should be an area in which we have an important intellectual and practical contribution to make. I therefore welcome the recent publication by RICS of Cowap's forward-looking contribution: from Market Value to Natural Value (RICS, 2012). This is an important initiative but far more is needed to develop inter-disciplinary understanding of how natural and built environment researchers, together with others from the world of, for example, human behaviour specialists can fruitfully work together with a view of inform governments and industry of ways to reconcile our three planet living with our one planet resources. Only then can we say we truly understand the concept of sustainability as it relates to property.

Professor Sarah SayceKingston University

Notes

For example through a certification system such as LEED or BREEAM both of which are multi-criteria voluntary systems aimed at assessing primarily environmental sustainability.

Under the Energy Act 2011, UK Government have introduced a requirement for buildings to achieve a yet to be defined Minimum Energy Performance standard based on an EPC rating by 1 April 2018 in order for them to be legally let.

The RICS has just completed their consultation on an upgrade of their Information Paper on sustainability and the valuation of commercial property (VIP 13) to a more strongly worded Guidance Note due for implementation later this year.

The Triple Bottom line was first put forward as an interpretive model of sustainability by (Elkington, 1997).