Valuing Sustainability (English)

Valuing
Sustainability
Co-funded by the Intelligent Energy Europe

programme of the European Union
June 2016
Participation in this course
Create higher quality valuation reports.
will enable you to
Prevent errors and mispricing of assets.

Save time & costs through improved
knowledge of relevant information sources.
Improve competitiveness and extend

consulting competences.
More specifically
it will HELP YOU To
Recognise the impact of sustainability on the

wider real estate market and the valuation
professionals critical role with regard to
market transformation.
Gain a holistic understanding of the

importance of buildings in relation to climate
change and energy targets and its relevance
for managing risk for your clients.
More specifically
it will Provide you with
A number of benefits and opportunities of

energy efficient/sustainable buildings to
enable you to articulate the business case in
conversations with your clients.
An overview of current sustainability-related
guidelines, guidance and requirements for
valuation professionals and respective
approaches for integrating energy
efficiency/sustainability considerations in
valuations.
It is important
To note that
This course is aimed at valuation professionals

with entry or intermediate level of knowledge
of the impact of sustainability on property
valuation.
Valuations professionals work in potentially

very different contexts, i.e. in large firms or
as single practitioners and that this can have
an impact on how far they can implement the
recommendations that form part of this
course in their daily practice and in
conversations with their respective clients.
It is ALSO important
To note that
There may be national and local variances in

valuation practice that might not be reflected
in detail.
Valuations for more complex assets with
higher investment volumes may require
different more in-depth approaches than
those outlined.
For regularly recurring valuations for
corporate accounts, the extended due
diligence process recommended as part of this
training is not appropriate.
Table of content
1. Introduction
2.
3.
4.
5.
Rationale & Business Case

Energy performance
Key information sources
Integration into valuation methodologies
and valuation reports
6. Conclusions
INTRODUCTION
Learning objectives
This section covers the following content/issues:
Overview of existing guidance

Role of valuation and valuation professionals
Identification of new challenges for valuation
professionals
Justification of valuation professionals
consideration of the topics of energy
efficiency and sustainability
INTRODUCTION
Learning objectives
This section will enable you to:
Understand valuation professionals

responsibility/role in relation to the issues of
energy efficiency and sustainability.
INTRODUCTION
Why valuation
professionals are
crucial in
market transformation
Valuations are carried out in

almost any phase of the
property life cycle.
Valuation professionals are
information managers in often
highly non-transparent
property markets.
Arguments used in negotiations
between transaction parties are
usually based on advice given
by valuers acting on both sides.
INTRODUCTION
Why valuation
professionals are
crucial in
market transformation
Valuers do not make

the market but their
advice and the nature
and scope of their
services influence
property market
outcomes
.
INTRODUCTION
Valuing sustainability
is not rocket science!
It is about applying quantitative

evidence and qualitative
judgement to new valueinfluencing features and
improving market efficiency by
providing accurate information
to the market place.
Valuing sustainably is an
opportunity and NOT a threat
to the valuation profession!
INTRODUCTION
But what does that

mean for
your daily practice?
The lack of empirical validation

and appropriate comparable sales
information requires valuation
professionals to apply qualitative
judgement to determine the
extent to which sustainability
features impact on value.
You will have to decide to what
extent a well-informed buyer
would account for them within
the propertys local market.
INTRODUCTION
But what does that

mean for
your daily practice?
Qualitative judgement is
needed in all valuation
assignments for most building
features. Sustainability
features are no exception to
this.
However, to provide a
transparent valuation service,
valuation professionals are
required to explain their expert
opinion on both the benefits of
sustainable design and risks of
conventional design.
INTRODUCTION
Your existing
sustainability
related guidance
INTRODUCTION
RICS Red Book (2014)

Sustainability as a
potential driver and
risk factor!
As commercial markets become more

sensitised to sustainability matters, so
they may begin to complement traditional
value drivers, both in terms of occupier
preferences and in terms of purchaser
behaviour.
Therefore valuers are advised to:

[] assess the extent to which the
subject property currently meets
sustainability criteria and arrive at an
informed view on the likelihood of these
impacting on value, i.e. how a
well-informed purchaser would
take account of them in making
a decision as to offer price, [].
Source: Royal Institution of Chartered Surveyors (RICS), 2014,
RICS Valuation Professional Standards January 2014, Valuation
Practice Statement 4, p. 59
Table of content
1. Introduction
2. Rationale & Business Case

3. Energy performance
4. Key information sources
5. Integration into valuation methodologies
6. Conclusions
RATIONALE & BUSINESS CASE
Learning objectives
This section covers the following
content/issues:
Recognition of the role and importance of

buildings
Information on energy and climate change
targets and their potential impact on the
building sector
Benefits and opportunities of energy
efficient/sustainable buildings
Learning objectives
Understand the importance of these

developments/issues for valuation
professionals daily practices
Explain the relevance of sustainability to your
clients
Your (market)
environment
is changing
Climate change:
flooding, extreme weather,
droughts
Environmental risks:
air, water and soil pollution
Resource scarcity:
energy carriers, land, water,
materials
Consumers and end-users
increasing environmental
consciousness and changing
value-systems
Key influencing issues:
... as is your clients'

business climate
Corporate Social Responsibility

(CSR) policies
Sustainability reporting
obligations
Responsible/sustainable
property investment strategies
Why improving
the energy
performance
of our buildings is
important
According to IPCC, buildings account

for:
~ 32 % of total global final energy

use!
~ 19 % of energy-related GHGemissions!
~ 33 % of black carbon emissions!
With a business as usual scenario, these figures could

double by 2050!
International, EU
and national
policy measures
for buildings
International level
Increasingly stringent global

climate and energy saving targets
EU policy focus on improving
energy efficiency in buildings
sector
EU Energy Performance of
Buildings and Energy Efficiency
Directives
International, EU
and national
policy measures
for buildings
National level
Introduction of Energy
Performance Certificates (EPCs)
Financial benefits and incentives
(subsidy programmes)
One-letter
improvement in the
EPC rating can
make all the
difference!
Source: Bio Intelligence Service, Ronan Lyons
and IEEP, 2013, Energy performance certificates
in buildings and their impact on transaction
prices and rents in selected EU countries, Final
report prepared for European Commission (DG
Energy), p. 15.
Managing risk and

future-proofing
assets:
from green premiums
to brown discounts
Example: Rental price differences

for MINERGIE-labeled flats in
Switzerland
In Switzerland, sustainable/energy
efficient building practices are
becoming the norm in new
construction.
Going forward it is expected that
current price premiums for
sustainable buildings will turn into
brown discounts on price for the
conventional building stock!
Managing risk and

future-proofing
assets:
from green premiums
to brown discounts
Example: Rental price differences

for MINERGIE-labeled flats in
Switzerland
Source: Salvi, et. al, 2010, Der Minergie-Boom unter der Lupe,
Center for Corporate Responsibility and Sustainability,
Universitt Zrich
Sustainability as a
credit risk
assessment
criteria
Example: TEGoVAs European

Property and Market Rating
Lists 4 criteria classes:

Market (national, regional)
Location
Quality of the property
cash flow
Property
Property class sub-criteria:
Architecture / type of construction
Fitout
Structural condition
Plot situation
Ecological sustainability
Profitability of the building concept
Energy performance of a building

is already influencing financial conditions!
Option 1
the carrot
Higher mortgage loan

amounts and favourable
interest rates for
energy-efficient lowcarbon buildings
Option 2
the stick
Lower mortgage loan

amounts and
unfavourable interest
rates for inefficient
high-emission buildings
Table of content
1. Introduction
6. Conclusions
ENERGY PERFORMANCE
Learning objectives
This section will cover the following
content/issues:
Typical energy use of residential and office

buildings
Basic elements of understanding of the
energy performance of buildings
Content and key elements of energy
performance certificates (EPCs)
ENERGY PERFORMANCE
Learning objectives
Read and understand EPCs

Be aware of energy performance features when
undertaking a site visit / building inspection
ENERGY EFFICIENCY PERFORMANCE
Why a specific focus

on energy?
Energy consumption/demand
and associated emissions are
the most tangible
(measurable) sustainability
features
Most robust empirical
evidence base available
Due to the introduction of
EPCs, energy data is most
readily available
Client awareness is higher
than with other sustainability
features
Energy consumption directly
links through to operational
costs
2%
5%
Examples for typical

energy use in buildings
heating
6%
domestic hot water
15%
cooking
lighting
72%
Single family dwelling and

office building in Poland
household
appliances
12%
heating
20%
cooling and
vatilation
14%
lighting
22%
office equipment
other
32%
ENERGY PERFORMANCE
What are the key

factors affecting a
buildings
energy
consumption?
Construction date & type

Air tightness
Level of Insulation (roof, walls)
Heating Ventilation Air
Conditioning (HVAC)
Hot water system
Occupier behaviour
Building Management/Control
System
Renewable Energy Sources
Tell tale signs of

energy performance
What you need to look
out for
Construction type and date?

Insulation of roof and walls?
Condition of building envelope?
External?
Internal?
Any visible damage?
Any signs of humidity?
Type, age and quality of

windows?
Type of shading system (if any)?
ENERGY PERFORMANCE
Tell tale signs of

energy performance
What you need to look
out for
Type and age of:
Heating systems?
Heating/cooling source?
Lighting system?
Building control system?
Level of compliance with current

regulation?
EPC?
Available?
Date?
Recommendations?
Renewable energy source (solar,

wind, ground heat pump)?
ENERGY PERFORMANCE
The energy
performance
of a building
can be described
through
(EPC) Energy efficiency class

(A, B, C, etc.)
Examples of Energy Performance
Certificates from across the EU
ENERGY PERFORMANCE
The energy
performance
of a building
can be described
through
Degree of compliance with legal

requirements (e.g. 20% below the
national minimum standards)
Final energy demand/consumption
expressed in kWh/ma or l/ma
Energy consumption level

Technical parameters of the
building envelope and HVAC
Systems
ENERGY PERFORMANCE
Why are there

differences between
calculated demand
and actual
consumption
levels?
Differences in type of use,

building envelope, building systems
Faults within calculation
model/calculation errors
Quality of construction process
Real climate
Type/intensity of use
Change of tariffs used for

metering
Measurement errors
Table of content
1. Introduction

1. Conclusions
KEY INFORMATION SOURCES
Learning objectives
This section will cover the following
content/issues:
Concept of a widened scope of information

needs and related information sources
Presentation and explanation of possible
information sources to meet widened scope
of information demand
KEY INFORMATION RESOURCES
Learning objectives
Identify and extract relevant (buildingrelated) information from various sources

Understand and assess the quality of various
information sources
Extended information
requirements for
valuation professionals
Valuers are advised to collect

appropriate and sufficient
sustainability data as and when it
becomes available for future
comparability even if it does not
currently impact on value. Only
where market evidence would
support this should sustainability
characteristics be built into a
report on value.
Source: RICS, 2013, Sustainability

and commercial property valuation,
RICS Professional guidance, global,
Royal Institution of Chartered
Surveyors, London, p. 5
KEY
KEYINFORMATION
INFORMATIONRESOURCES
SOURCES
In addition to energy
data, to value
sustainability you have
to collect information
regarding
Energy Consumption
(Drinking) water Consumption
Risks to local environment
Building flexibility and adaptability
Building accessibility
User comfort and indoor air
quality
RICS Sustainability Checklist:

Inspection & Investigation
What is/are the buildings:

Location
Site
Consideration
Building
Documentation
Energy asset rating (if one exists)?

Energy performance (consumption of
non-renewable resources during
use)?
Carbon emissions?
Source of energy sources available
and/or used?
Services in relation to age and
efficiency and future life
expectancy?
Potential for energy renewal

usage?
Likely risks to the local
environment through emissions,
etc.?
Water consumption during
operation?
Water conservation or installation
of measures to promote water
use efficiency?
RICS Sustainability Checklist:

Inspection & Investigation
What is/are the buildings:

Location
Site
Consideration
Building
Documentation
Waste reduction facilities (e.g. onsite waste segregation for

recycling)?
Likely resilience to the consequences
of climate change (e.g. storm
damage, maintaining usability if
temperature change ensues)?
Barrier-free accessibility to and
inside the building (e.g. for disabled
users)?
Safety under extreme conditions

(such as fire and tempest)?
Health impacts in relation to
building materials and building
specifications (daylight/natural
ventilation, etc..)?

KEY
KEYINFORMATION
SOURCES
Your key
information sources
for energy consumption
Energy performance
certificates (EPCs)
Green/sustainable building
certificate/label/rating
(BREEAM/LEED, etc.)
Planning Documentation
Due Diligence Reports
Field inspection/personal
investigation
KEY
KEYINFORMATION
SOURCES
Your key
information sources
for energy consumption
Utilities bills/annual utilities

cost accounts
Information from Facility
Management
Contracting agreements and
energy performance
guarantees
Field inspection/personal
investigation
Treating your clients

lack of data as a
potential additional
risk factor
In undertaking their investigations,

the valuer should also ask their
clients to provide data (e.g. on
energy performance).
If clients are unable (or unwilling) to
provide data, then this should be
treated as a potential additional risk
factor.
Table of content
1. Introduction
5. Integration into valuation

methodologies and valuation
reports
6. Conclusions
INTEGRATION INTO VALUATION METHODOLOGIES AND VALUATION REPORTS
Learning objectives
This section covers the following content/issues:
Definitions of value and respective approaches

for integrating energy efficiency and sustainability
considerations in valuations
Suitability of different valuation methods
and their input parameters for integrating
energy efficiency/sustainability considerations
How to adopt a holistic approach for building
descriptions within valuation reports
Learning objectives
Compile a widened list of value-relevant building

characteristics and attributes
Understand how to translate available
information/data into specific valuation input
parameters
Prepare extended/improved valuation reports
Valuations based
on Market Value
For valuations based on Market Value,

valuation input parameters need to be
marked-derived.
If sustainability features are identified

and recognised as having an impact on
value, they should be built into the
calculations only to the extent that a
well-informed buyer would account for
them, as evidenced from an analysis of
the market.
Valuations based
on Investment
Value (worth)
For valuations based on Investment Value,

valuation input parameters are investor
specific, i.e. they are determined to reflect
the investors expectations and
preferences.
The extent of integrating sustainability

issues depends on subjective investment
objectives (which may well be shaped by
strict sustainability requirements).
Therefore, factors not yet reflected in
Market Value but which may influence an
investors decision-making should be
considered and built into the calculations.
Energy performance
of a building can
directly link through to various
value-relevant factors!
Energy performance of a building can directly link through to various value-relevant factors!
Marketability/
Lettability
Marketing speed
Letting time
Reductions/discounts due to
modernisation/refurbishment
backlog
Technical life span

of a building
Useful economic
life span of a
building
Taxes, subsidies, speed of

achieving planning permit, etc.
Level of operating
costs
Achievable rent
level
Additional income/revenue due

to supply of surplus energy to
third parties
Image
(of building and
owner)
CO2 taxes
Degree of obsolescence/
deprecation rates
Wider sustainable
building features
linking through to value
estimates
Wider sustainable building features linking through to value estimates
Sustainable building features (examples)
Energy efficiency
Reduced impacts on
the environment
Increased
functionality,
serviceability,
durability and
adaptability
Ease of conducting
maintenance,
servicing and
recycling activities
Increased comfort
and
well-being of
occupants
Resulting effects
Improved marketability, lower vacancy risk

and higher stability os cash-flow
Higher rental growth potential
Property loss prevention benefits and lower
business interruption risk
User / occupant productivity

and health gains
Reduced compensation costs and risk of
litigation caused by Sick-Building Syndrome
Market Value / Worth

Mortgage Lending Value
Lower operating and maintenance costs
Assumed impact of
sustainability credentials
on key valuation input
variables
Assumed impact of sustainability credentials on key valuation input variables
CONVENTIONAL BUILDING
SUSTAINABLE BUILDING
CONVENTIONAL BUILDING
SUSTAINABLE BUILDING
- Growth component
+ Marketability
+ Other property
risks
+ Environmental /
health impacts
+ Depreciation
+ Marketability
Costs of finding
new tenants
Maintenance
Costs of finding
new tenants
Market Rent
+ Depreciation
Operating costs
attributable to
tenants
Operating costs
attributable to
tenants
Risk Premium
Risk Premium
+ Environmental /
health impacts
- Growth component
Maintenance
Management
Management
+ Other property
risks
Net Income
Net Income
Risk-free rate
Risk-free rate
IMPACTS ON RISK PREMIUM
IMPACTS ON CASH FLOW & NET INCOME
Figure modified from: ITO, M. , 2009, Embodiment of added value for Green Real Estate,
Paper presented at Tokyo Workshop 2009 on urban Cap and Trade Towards a Low Carbon Metropolis
Key challenge
Translation of energy
as a single sustainability feature
Key challenge: translation of energy as a single sustainability feature

Valuation methods
Factors determining Energy Performance
Floor area /cubature
Type and extent of

renewable energy usage
Efficiency of heating and
other building equipment
Comparable Sales Method
Costs for building

components/materials
Replacement Cost
Approach
Achievable Rent
Income Approach
Heating Costs
Heat insulation of building

envelope
Energy source
Building Characteristics
Energy consumption
CO2-Emissions
Energy
Performance
Risk
Market
Value
Compliance with legal

requirements
Label / Certificate
Image / Marketability
Market adjustments
Source: NUWEL, 2011, Nachhaltigkiet und Wertemittlung von Immobilien Leitfaden fr Deutschland, sterreich und de Schweiz , Published by: CCRS, Center for Corporate Responsibility and Sustainability , Universitt Zrich
Valuation
methods
Depending on the valuation

methodology, you have to translate the
sustainability features in different way
Different valuation methods have
different valuation-input
parameters/adjustment screws
(e.g. comparable sales, costs, rents,
yields, depreciation rates, etc.)
The application of different valuation
methods is associated with different
information requirements/demands
Consequently, there are several

possibilities of feeding energy efficiency
and additional sustainability considerations
into the valuation process!
Adjustment Screws
Comparable sales method
Adjustment Screws: comparable sales method
Lower/higher operating costs for

building owner
Fewer/more maintenance backlogs
regarding energy standards
Explanation:
Higher comparable sales for

sustainable buildings
Lower comparable sales for
conventional buildings
: Observed comparable sales
Lump-sum adjustment due to

higher/lower market acceptance
: Correction factors (e.g. to adjust for differences in location, building

permissions, layout, conditions, energetic quality, etc.)
: Weight of adjusted comparable sales
: Market correction factor (shall be applied only when value influencing

circumstances cannot be considered within the other valuation input
parameters)
Source: Lorenz, D. and Ltzkendorf, T., 2011, Sustainability and Property Valuation
Systematisation of existing approaches and recommendations for future action,
Journal of Property Investment & Finance, Vol. 29, No. 6, pp. 644676
Practical
recommendations
for comparable
sales analyses
Follow your traditional approach of

comparable sales analyses but
extend/widen the scope of your
investigation and enquiry to cover
additional, potentially valuerelevant factors.
Check to what extent your
comparable sales information
already includes energy efficiency
and other sustainability-related
information.
Contact your local/custom
transaction information data
provider and actively ask for
additional sustainability-related
information.
Practical
recommendations
for comparable
sales analyses
Determine whether the

sustainability-related
characteristics and quality
attributes of the property are
below, above or equal to the local
market average.
Assess the position of the
property in the competitive
market place with regard to the
propertys sustainability features.
This assessment can be based on
both, quantitative and/or
professional judgement.
Practical
recommendations
for comparable
sales analyses
Investigate the extent to which a

deviation from the local market
average justifies adjustments to
comparable sales data.
If comparable sales data in your local

market is insufficient, investigate
comparables from outside your local
market (i.e. comparable
markets/regions in your country).
Exploit additional sources:

publications, case studies, press
releases, etc.
Consider using the evidence

presented in this document for
advising clients and for justifying
adjustments /corrections to
comparable sales data and other
valuation input factors such as useful
life spans and obsolescence/
depreciation rates.
Practical
recommendations
for comparable
sales analyses
Cooperate with other valuers and real

estate professionals to improve your
quantitative evidence base as well as
your qualitative judgement of local
market sentiment with regard to

energy efficiency and other
sustainability features as potential
value drivers and risk factors.
Adjustment Screws
Investment method
Adjustment Screws: Investment method
Changes in market participants

preferences
Lower share of operating costs for
tenants
Ease of conducting maintenance
and servicing activities
Lower repair costs
More stable cash flow
Improved marketability
Shorter vacancy periods
Image/reputation gains
Other factors
Improved competitiveness
Rising energy costs
Sustainability Hype
Longer useful economic lifespans

Longer compliance with increasingly
stringent environmental legislation
Explanation:
GI: Gross rental income per year
OCT: Operating Costs non attributable to tenants
ri Risk free rate
rp Risk premium
g Growth rate
d Depreciation
(ri + rp - g + d) All Risks Yield (ARY)
Source: Lorenz, D. and Ltzkendorf, T., 2011,

Sustainability and Property Valuation Systematisation
of existing approaches and recommendations for future
action, Journal of Property Investment & Finance, Vol.
29, No. 6, pp. 644676
Practical
recommendations
for the investment
method approach
Follow the same fundamental process:
Assess the position of the subject

property in the competitive market
place with regard to the propertys
sustainability features as well as its
performance characteristics
(consumption values, level of
operating costs, comfort levels, etc.).
Practical
recommendations
for the investment
method approach
As a new business routine, ask your

clients about additional information on
the subject property.
This includes:
Planning documentation; inventory

records
Energy performance certificates
Availability of green/sustainable
building certificates/labels/ratings
Annual statements/accounts of utility
costs
Consumption values
Practical
recommendations
for the investment
method approach
Contact facility managers as they

usually have track records of
consumption values and operating
costs; (they usually also have data on
vacancy rates and tenant
turnover/retention times!).
Ask local estate agents/brokers

about differences between
energy efficient/sustainable and
conventional buildings with regard to
absorption rates, marketing times
and/or rates of sales.
Investigate whether there is evidence

in your local market (or in comparable
markets) for green/sustainable
premiums and/or brown discounts with
regard to rents and yields
Practical
recommendations
for the investment
method approach
What is the structure of green lease

agreements in your country?
What are (if any) typical

arrangements to share costs and
benefits of energy efficiency
retrofits between landlords and
tenants?
How does the rental profile of the

subject property compare to this?
Does your choice of risk premium and

growth rate appropriately represent
the propertys risk/opportunity
profile (particularly judged against
the evidence/rationale presented in
this course)?
Practical
recommendations
for the investment
method approach
Are there signs of evidence in your

local (or comparable) markets for
faster obsolescence of conventional
buildings?
Does your choice of the deprecation

rate (or of the remaining economic
life span) for the subject property
appropriately reflect the regulatory
risk of non-compliance with
increasingly stringent environmental
legislation?
Is there legislation in place (or

planned) within your country to ban
landlords from renting poorly
performing buildings?
Practical
recommendations
for the investment
method approach
Quantify the potential
modernisation/refurbishment
backlog due to poor energy
performance, i.e. the refurbishment

costs for energy efficiency retrofits
and renewable energy installations.
Consider the potential of renewable

energy sources on site; this might
include additional revenues from
renting roof areas (solar power)
and/or energy infeed.
Adjustment Screws
Replacement cost approach
Adjustment Screws: Replacement cost approach
Slightly higher replacement cost

Longer useful lifespan
Fewer maintenance backlogs

Improved functionality
Special technical building equipment
Lump-sum adjustment due to
higher market acceptance
Explanation:
RC: Replacement Costs

:
=
Depreciation factor due to age (linear depreciation)
D: Depreciation due to building damages, defects, maintenance backlog

OVC: Other value influencing circumstances (e.g. functional obsolescence,
environmental obsolescence, etc.)
LV: Land Value

: Market correction factor (shall be applied only when value influencing
circumstances cannot be considered within the other valuation input
parameters)
Source: Lorenz, D. and Ltzkendorf, T., 2011, Sustainability and Property Valuation Systematisation of existing
approaches and recommendations for future action, Journal of Property Investment & Finance, Vol. 29, No. 6, pp.
644676
Practical
recommendations
for the replacement
cost approach
Investigate the extent to which your

national construction cost data
provider has information on
replacement costs for energy
efficient/sustainable building types
as well as for energy efficiency and
renewable energy features and
equipment. Actively request such kind
of cost data.
Consider life cycle cost analyses as an

appropriate tool for comparing/
considering refurbishment measures
needed for curing different forms of
obsolescence.
Practical
recommendations
for the replacement
cost approach
Provided that your national

depreciation tables / useful economic
life expectancy tables do not yet
reflect energy efficient / sustainable
buildings, make adjustments on a
qualitative basis.
If necessary, consider carrying out

cost-benefit analyses for certain
types of energy efficiency
measures/renewable energy
installations.
Adjustment Screws
Discounted Cash Flow (DCF)
Adjustment Screws: Discounted Cash Flow (DCF)
Change in market participants

preferences
Lower share of operating costs for
tenants
Green lease
Ease of conducting maintenance
and servicing activities
Shorter vacancy periods
Lower expenses for

modernisation/revitalization
Lower property risks (not yet
explicitly taken into account in
modelling of property cash flow
Explanation:
n: time frame in years
GIe: Gross rental income
OETz: Operating expenses non attributable to tenants
ME: Marketing expenses
Improved competitiveness
OE: Other expenses (e.g. modernisation, etc.)
Rising energy costs
OI: Other income (e.g. advertising on building facade, etc.)
Sustainability Hype
: Discount rate
Longer useful economic lifespans : Gross rental income in year n
Longer compliance with stringent : Operating expenses non attributable to tenants in year n
environmental legislation
: Risk free rate
: Risk premium
g: Growth rate
d: Depreciation
More stable cash flows
Lower sales risks
Image/reputation gains
Potential for increases in rents
( )
:
( + +)
time frame
Terminal Value of the Building at the end of the
Practical
recommendations
for the Discounted
Cash Flow (DCF)
Provided you have enough information to

model annual cash flows, DCF gives you
the opportunity (and greater flexibility)
to account for a broad spectrum of
sustainability-related benefits/risk
through subtle adjustments to valuation
input parameters in a transparent way.
Carry out quantitative sub-financial

analyses (e.g. Cost-Benefit Analyses,
Health/Productivity Benefit Analyses,
Life cycle costing) as an additional
information source for the
specification/adjustment of DCF input
parameters.
Practical
recommendations
for the Discounted
Cash Flow (DCF)
Carefully consider the choice of the

exit capitalisation rate since all
potential longer-term benefits/risks
need to be reflected here.
Try to address as many

income/expense considerations
within the cash flows and not in the
discount rate (increases
transparency).
Consider carrying out sensitivity

analyses/Monte-Carlo-Simulation in
order to avoid the impression of
unrealistic levels of precision.
RICS best practice for

valuation reports
Provide:
RICS best practice for

valuation reports
A clear description of the sustainability-related

property characteristics and attributes that have
been collected, which may, where appropriate,
include items not directly reflected in the final
advice as to value
A statement of the valuers opinion on the

relationship between sustainability factors and
the resultant valuation, including a comment on
the current benefits/risks that are associated
with these sustainability characteristics or the
lack of risks.
A statement of the valuers opinion on the

potential impact of these benefits and/or risks
to relative property values over time
Source: Royal Institutions of Chartered Surveyors (RICS), 2014, RICS Valuation Professional Standards January 2014 Valuation Practice Statement 4, p. 59-60
Extended
building descriptions
as part of improved
valuation reports
Location and market

environment
Cash flow/quality of cash flow

Physical characteristics and
attributes
Performance/quality
characteristics
Sustainability should not be

treated as an add-on!
How to structure the information about the physical characteristics and attributes of
the building in valuation reports
Technical equipment
Heating and cooling system (HVAC-part1)

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

Energy sources (others)
Building description A (volume &

surfaces)
Size (m) per zone of use
Volume (m) and surface/volume-ration (m/m)
External surfaces and orientation (walls,
windows) (m) by type
Internal surfaces (m) by type
Ceiling/room height
Size/type of rooms (e.g. open-plan office,
cellular office)
Width of doors and corridors
Size of facilities/rest-room regarding barrierfree accessibility
Ratio between usable (effective floor area and
traffic (common) area
Building description B
(construction & products)
Construction type
Carrying structure and foundation
Load bearing reserve
Type of external walls/envelope
Type of windows and glazing
Type of internal walls
External surface materials
Internal surface materials
Other materials and products
How to structure the information about the physical characteristics and attributes of
the building in valuation reports
Technical quality
Society
Cultural & Social

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

quality
Functional
Quality
Environmental
Quality
Economic
Quality
Functional quality
Environment
Economy
Serviceability (fitness for

purpose, usability)
Space efficiency
Environmental quality
Economic quality
Life cycle costs
Aesthetic quality
Urban design quality
Cultural value
Health & well-being
Indoor air quality
Comfort (thermal, visual,
acoustic, olfactory)
User safety
User participation and control
Accessibility (to and inside the
building)
Energy performance
Resource depletion
GHG-emissions & GWP
Other impact on the global &
local environment incl. Risks to
the local environment
Land use change & sealing
Water consumption
Wastewater
Waste (construction & user
related)
Practical recommendations
for valuation reports
Begin with an extended/improved

description of the property
Practical
recommendations
Ask clients about certain types of

performance information (e.g. on
energy, water, etc.)
Do not feel obliged/expected to
generate/gather all
sustainability-related information
yourself; if clients cannot deliver
the requested information, this
shall be disclosed in the valuation
report and treated as an
additional risk-factor.
Practical
recommendations
Disclose information sources

used and declare data
quality/reliability (e.g. energy
consumption values are based on
an EPC done by an expert in the
year 2010).
Describe how the relevant
sustainability-features of the
property (or the lack thereof)
impact on value.
Disclose adjustments to single

valuation input parameters in
the valuation report.
Include the following for more

complex properties/valuations:
Practical
recommendations
Risk-documentation:
Graphical illustration of
sustainability-related risks
and opportunities of the
property.
Sensitivity-analysis/
Monte-Carlo simulation:
Illustration of how changes in

both, underlying assumptions
and framework conditions
may impact value (at the
valuation date and over the
longer-term).
Table oF contents
1.
2.
3.
4.
5.
Introduction
Rationale & Business Case
Energy performance
Key information sources
Integration into valuation methodologies
6. Conclusions
CONCLUSION
No straightforward or automated
formula to account for sustainability
issues in valuation exists.
Final words
The extent and approach of

reflecting sustainability in value
estimates strongly depends on:
The underlying definition of value
Property type
Regional and local market conventions
Regional and local market conditions
Availability of comparable evidence
Note: New ways of gathering,

processing and presenting property
related information are required!
Energy efficiency and

other sustainability
features must be
considered in the
valuation process in
order to
CONCLUSION
Meet professional general duties and

requirements
Reflect changing market conditions
Avoid mispricing of assets (i.e. valuing
conventional buildings too high and
sustainable ones too low)
Comply with professional
organisations (e.g. RICS) and
jurisdictions (e.g. Germany)
mandatory valuation requirements
Exploit new business opportunities
About RENOVALUE
The Project
The use of property valuation is an

essential aspect of the property
lifecycle and directly influences
financial decision making that is why
encouraging the consideration of
energy efficiency and renewable energy
needs to start here.
Being able to demonstrate the business
case to prospective buyers, sellers,
lenders and investors is prerequisite to
accelerating the market transition
towards Nearly Zero Energy Buildings
(NZEBs).
About RENOVALUE
The Project
Yet the ability to demonstrate this

business case for sustainable buildings
is exactly what is missing at present:
many valuation professionals lack both
the skills and the knowledge to
consistently take energy efficiency and
renewable energy issues into account
when advising their clients.
RenoValue aims to fill this knowledge
and skills gap by developing training
material for practising valuation
professionals on how to factor energy
efficiency and renewable energy issues
into valuation practices and how to
advise their clients accordingly.
Partners
Funded By
RenoValue is funded by the Intelligent Energy
Europe Programme of the European Union and is
managed by the Executive Agency for Small and
Medium sized Enterprises (EASME)
The content of this document does not

reflect the official opinion of the
European Union. Responsibility for the
information and views expressed lies
entirely with the author(s).
Website
www.renovalue.eu
Contacts
Twitter
@renovalueEU

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Valuing

Co-funded by the Intelligent Energy Europe

Participation in this course

Create higher quality valuation reports.

will enable you to

Prevent errors and mispricing of assets.

Improve competitiveness and extend

it will HELP YOU To

Recognise the impact of sustainability on the

Gain a holistic understanding of the

it will Provide you with

A number of benefits and opportunities of

This course is aimed at valuation professionals

Valuations professionals work in potentially

There may be national and local variances in

Rationale & Business Case

Overview of existing guidance

Understand valuation professionals

Valuations are carried out in

Valuers do not make

It is about applying quantitative

But what does that

The lack of empirical validation

But what does that

RICS Red Book (2014)

As commercial markets become more

Therefore valuers are advised to:

2. Rationale & Business Case

RATIONALE & BUSINESS CASE

Recognition of the role and importance of

RATIONALE & BUSINESS CASE

Understand the importance of these

RATIONALE & BUSINESS CASE

RATIONALE & BUSINESS CASE

Key influencing issues:

... as is your clients'

Corporate Social Responsibility

RATIONALE & BUSINESS CASE

According to IPCC, buildings account

~ 32 % of total global final energy

~ 33 % of black carbon emissions!

With a business as usual scenario, these figures could

RATIONALE & BUSINESS CASE

Increasingly stringent global

RATIONALE & BUSINESS CASE

RATIONALE & BUSINESS CASE

RATIONALE & BUSINESS CASE

Managing risk and

Example: Rental price differences

RATIONALE & BUSINESS CASE

Managing risk and

Example: Rental price differences

RATIONALE & BUSINESS CASE

Example: TEGoVAs European

Lists 4 criteria classes:

RATIONALE & BUSINESS CASE

Energy performance of a building

RATIONALE & BUSINESS CASE

Higher mortgage loan

Lower mortgage loan

Typical energy use of residential and office

Read and understand EPCs

ENERGY EFFICIENCY PERFORMANCE

Why a specific focus