integration of energy efficiency and lcc into property valuation … · paper for the 15th prres...

Paper for the 15th PRRES Conference, January 2009, Sydney

Integration of energy efficiency and LCC into property valuation practise- Transforming green features into values -Dr. rer. pol. Sven Bienert MRICSMaster of Business AdministrationCertified Real Estate Manager (Master by VWA)Certified Real Estate Manager (Master by VWA)Certified Real Estate AppraiserRICS Board member Austria

Supported by

Integration of energy efficiency and LCC into property valuation practiseContent

Why green

Research question

Green value definition & Null-Hypothesis

Fundamental problemsFundamental problems

Where to start?

Integration/Overview of value drivers

Surveys results

Recommendation / conclusion

© 2007 KPMG Financial Advisory Services GmbH, österreichisches Mitgliedsunternehmen von KPMG International, einer Genossenschaft schweizerischen Rechts. Alle Rechte vorbehalten. Printed in Austria. KPMG und das KPMG-Logo sind eingetragene Markenzeichen von KPMG International. 1

Recommendation / conclusion

Integration of energy efficiency and LCC into property valuation practiseWhy green - Worldwide properties are responsible for …!

17 % for fresh water consumption17 % for fresh water consumption

25 % for wood input

33 % for CO2 emissions2

40 % for material- and energy consumption

© 2007 KPMG Financial Advisory Services GmbH, österreichisches Mitgliedsunternehmen von KPMG International, einer Genossenschaft schweizerischen Rechts. Alle Rechte vorbehalten. Printed in Austria. KPMG und das KPMG-Logo sind eingetragene Markenzeichen von KPMG International.

Quelle: U.S. Green Building Council, Stand: 15.04.2008

4

Integration of energy efficiency and LCC into property valuation practiseWhy green - Directive 2002/91/EC, energy efficiency classes/energy certificates

HWBBGF,Ref ≤ 10 kWh/m²a

HWBBGF,Ref ≤ 15 kWh/m²aBGF,Ref





HWBBGF Ref ≤ 200 kWh/m²aBGF,Ref


HWBBGF,Ref > 250 kWh/m²a


Integration of energy efficiency and LCC into property valuation practiseResearch questions

1 H ill b ildi ifi i d 1. How will building energy certification and energy efficiency in general change the market in the sense of the investors’ and tenants’ willingness to pay for thermal-energetic quality?willingness to pay for thermal energetic quality?

2. How can property valuers process results stated in energy certificates? In other words,

hi h th d d lt f i ti lif l which methods and results of existing life cycle cost and energy efficiency evaluation systems are applicable or relevant for property valuation?

3. How can existing valuation methods measure the impact of energy efficiency? Which adaptations and guidelines need to be d l d t l i l d th t developed to properly include theses aspects when carrying out valuations in practice?


Integration of energy efficiency and LCC into property valuation practiseWhat is a Green Value? & Null-Hypothesis

Market value is the estimated amount for which a property should exchange on the date of

valuation between a willing buyer and a willing seller ....

1

Green Building is a property “that uses resources efficiently, reduce waste and provide superior indoor air

and other qualities.”

2

valuation between a willing buyer and a willing seller ....

Green Value is the net additional value obtainable by a greenbuilding in the market”

3

S G V l i i f th i t !4 So Green Value is a premium for the investor!4

Null-Hypothesis: There is no (positive) relationship between market value and green attributes can easily proved

t b

5to be wrong.


Integration of energy efficiency and LCC into property valuation practiseEnergetic sustainable properties promise…?

In figures (here LEED)...

an improved tenant retention

lower tenant fluctuation – longer term of o e te a t uctuat o o ge te oleases

increasing productivity and costumer satisfaction satisfaction

value creation exceeding initial costs

higher rents and purchase prices8-9 % Decrease of operating expenses

7 5 % I f th t k t llower operating expenses

grant of public support and tax benefits

7,5 % Increase of the current market value

6,6 % Increase of the ROI

3 5 % Increase of the occupancy rate 3,5 % Increase of the occupancy rate

3 % Increase of rent


6Source: U.S. Green Building Council, Date: 15.04.2008

Integration of energy efficiency and LCC into property valuation practiseIntegration of green attributes – three major obstacles (Or why markets failed)

Cognition Problem Solution Effect

CO2 reductionSaving limited resources Indirect social benefits

Society in general Positive/negative external effects of a

property but no sufficient market

“Limit of System”

Restrictions/penalties/public grants for negative/positive

external effects by Psychological benefits(improved health)

Tenant intangible

su c e t a etvalue impact

yGovernment

Wellbeing of employeeCorporate responsibilityOccupational health and safety

Tenant - intangibleRecognized claimed improvements but

limited market impact

“Limit of Focus”

Transparent communication of

(intangible) benefits and productivity gains

Productivity of core business

Tenant - tangible

p

Does it pay off? Financial figures “Limit of P ti

Occupational Costs (rent & operative

expenses) Other Lease Terms

Tenant - tangible Does it pay off?

and in more detail

Does “Green” pay off?

ge.g.:

NOI, ROI, YieldGDV, MLV etc.

Practise, Evidence

and Methods”


Methods

Integration of energy efficiency and LCC into property valuation practiseWhere to start? - Overview of international standard setters

IVSC - International Valuation StandardsInternational

Regional

I di

Association of Southwest Asian

Nations

Australia/New Zealand/South Pacific

Europe North AmericaSouth America

Other

Intermediate

To be formed

RICS(Red Book)

To be formed

TEGoVA(Blue Book)

Institute, Foundat.

(USPAP)

UPAV Africa Southwest Asia

Middle East

States

List to be formed

List to be formed

China

List to be formed

South Africa

Mexico

Others

United States

Canada

Eastern Europe

Other

United Kingdom

New Zealand

Australia

Malaysia

Thailand

Supplemental

Chinacountries

Germany

Austria

Indonesia

Vietnam

Professional Practise 1999

RICS Appraisal and Valuation

Manual(Red Book) WertV & WertR

American Society of Appraisers Principles of Appraisal Practice and

Code of Ethics

Appraisal Institute of

Canada Standards &

Ethics

Uniform Standards of Professional Appraisal

Practise & Code of Professional Ethics

SupplementalStandards

LBG & ÖNorm


t cs

Integration of energy efficiency and LCC into property valuation practiseWhere to start? – Global property valuation approaches

National „version“ of the International Method

International Valuation Methods

„Vergleichswertverfahren“

„Sachwertverfahren“

Direct Value Comparision Method

Replacement Cost Method

„Ertragswertverfahren“

Sonderfall: DCF-Verfahren“

Income Method

DCF-Method„Sonderfall: DCF Verfahren

Sonderfall: Residualwertmethode

Sonderfall: Pachtwertmethode

DCF Method

Residual Method (Development)

Profit Method

Methods for „special valuations“

Sonderfall: Pachtwertmethode (Management Properties)


Integration of energy efficiency and LCC into property valuation practiseWhere to start ? - DCF methods vs. income capitalisation approach

•Implicit growth modelStable income assumption over time

Income Capitalization Approach

•Implicit growth model

•Net income is constant over the residual life (expected growth is reflected in yield)

•Basis: present value calculation (rent ting

inco

me

•Basis: present value calculation (rent multiplier - simple capitalization)

•Yield: derived from the property marketRemaining economic lifeNet

ope

rat

Discounted Cashflow - Method

•Net income is not constant over the timeNon-Growth-Yield Growth-Yield

•Detailed forecast of the cash flow (10-15 years) a transparent description of future events

inco

me

10 Years

•Basis: present value calculation (discounting each years net income separately)

•Attention: Terminal value vs discounting

Net

ope

ratin

g


• Terminal yield - growth yield

• Discount rate - non growth yield

N

Remaining economic life

Integration of energy efficiency and LCC into property valuation practiseOverview of green value drivers (1/3)

Potential Gross Income • Annual rent the property is expected to generate• Leased and vacant rentable areas at market rent

-

Non-recoverableOperating Expenses

• Investor‘s operating expenses (administration, maintenance, vacancy & collection loss, etc.)

TotalNet Operating Income

• Remaining net income as return on capital

=

Deduction of NOI for plot • Interest calculation of the land on basis of the All Risk Yield• (German background: The land has a income in perpetuity.)

Building‘s Net Operating Income

• Net operating income remaining for the building

-

=

All Risk Yield(here: german“Liegenschaftszins”)

x

Year’s Purchase in perpetuity

• Multiplier on basis of the All Risk Yield and residual life of the building

Estimated Building Value without • Estimated value of the building without adjustment for particular

=

without appreciations/ depreciations characteristics which influence the value

appreciations/ depreciations

+/-

• Particular other characteristics which influence the value• For ex.: Over- vs. underrented situation

=

V l f h b ildi i h l d

Land value

+

Estimated Building Value • Value of the building without land

=

• Calculated by using the comparison approach


Market Value • Estimated value of property


Green feature Green impact Theoretical linkage: added value to owner?

Evidence of market impact

Recommendation for adjustment

Energy efficiency

Energy efficiency Public benefits •Only if tax savings / subventions etc. directly connected to the property

If applicable easy to assess. Adjustment of income (if clear regulation shows positive effect compared t P BUT lti f to Peers. BUT penalties for non-green might be more relevant in the future).

Intangible benefits for tenants (Improved

•Higher turnover rent if applicable.•Generally increased willingness to pay higher

Rare market evidence and difficult to isolate.

Adjustment of income (only if market impact tenants (Improved

occupant productivity, lower churn,Increased turnover etc)

Generally increased willingness to pay higher rent must be tested.•General lease agreements could be more favourable for owner.•Potentially lower vacancy and collection loss.•Potentially decreasing risk of economic obsolescence and therefore lo er ield

difficult to isolate. (only if market impact compared to Peers can be revealed).

Reduce vacancy and collection loss slightly

Reflect effect of potentially obsolescence and therefore lower yield.•Longer economic life.•Higher marketability leads to faster lease up, lower vacancies and lower fluctuation.

Reflect effect of potentially more favourable lease agreements accurate.

Source: KPMG but based on ideas from the RICS Green Value Report



Green feature Green impact Theoretical linkage: added value to owner?

Evidence of market impact

Recommendation for adjustment

Energy efficiency

Lower energy costs (for the tenant)

•Higher rent for new leases (but: bargaining and ending top-slice?)•Higher rent for “prestige”?L i ld f f t d t

Pure cost cutting effect will have an impact but regression etc. must be

i d t

Adjustment of income (notpermanently and not the whole delta and only if l t ll •Lower yield for future proved property. carried out.

„Prestige“ probably just a first mover bonus that will disappear soon

leases are actually negotiable)

(Adjustment in case of gross leases of course bigger!)

Yield impact crucial but hard to isolate. 10 to 20 BP were benchmarks in other markets.

Yield only if at least countrywide evidence can be stated.

Maintenance costs •Both way (higher and lower) might be the case depending on the technical level of the building

Adjustment of maintenance costs in both ways is possible

Other green features

Sustainable site development

Water efficiency

…

…. …. .... ….


Source: KPMG but based on ideas from the RICS Green Value Report

Integration of energy efficiency and LCC into property valuation practiseBut if you try to put the puzzle together in your market remember…!

Discuss/reflect relevance of 1

Be careful of redundancies.2

Discuss/reflect relevance of market state, use, location etc. in argumentation

Don't “make” the market, just reflect it!3

The market is not “always X %” – there are no general rules!

4

Remember that it is a difference to raise the value of 5 Remember that it is a difference to raise the value of Properties instead of cutting down a on values for Non-

Greens! Follow the market!

5

Find comparables!6 p


Integration of energy efficiency and LCC into property valuation practiseSurvey results

1. Sustainable buildings have a higher marketability (Sale and lease-up).2. A clear link between lower operating costs for the tenant and a potentially higher gross rent

passing for the owner is broadly accepted. Basically the interviewed experts agree that the adjustment of forecasted rents in an appropriate way to consider energy efficiency in the valuation process.

3. The adjustment of yields between Green Buildings and their non-Green Peers will not be a total shift but rather 10 – 40 BP according to most respondents and case studiestotal shift but rather 10 – 40 BP according to most respondents and case studies.

4. Adjustments of the economic life of the building and the expected maintenance costs are recommended only by a few of experts.

5. Concerning comparables experts expressed their worries that comps that are similar in LEED certification or similar in their results of the energy certified will be extremely limited in the same market area.

6. Attraction of Class-A-tenants is easier for Green buildings – with accordingly reduction of vacancy and collection lossvacancy and collection loss.

7. Green buildings tend to enable owners to negotiate also other more favourable lease terms (not only higher rents or instead of higher rents).


Integration of energy efficiency and LCC into property valuation practiseRecommendation / conclusion

1. Appraisers should share their experiences regarding sustainability in a transparent way. Especially comparable data should be collected and shared.

2. Appraisers need more impartial evidence of how green features contribute to the overall value.

3 Green labels and sustainability rating systems must more clearly address the language of 3. Green labels and sustainability rating systems must more clearly address the language of the appraisal community to be understood and transferred into monetary measures.

4. Valuations standards need to address the new topic of sustainable issues directly and help appraisers to process the information gathered correctly.

5. The financial benefits for all stakeholders must be transparent and allocated accordingly.6. Professional education is needed to assist appraisers to fully understand the potential

impact.7 In each (full) valuation report the green value contribution of the property should be 7. In each (full) valuation report the green value contribution of the property should be

discussed in a specific section of the report.8. Regulators and policy makers must improve the awareness of a market in transition further

and support internalisation of external effects further to reach a “fair” market value from a social perspective.

9. Support more research work to isolate the value drivers of green features further.10. In general we all must work as real estate professionals hard to tear don the barriers

“green” sometime still faces in our industry


green sometime still faces in our industry.

KPMG Real Estate GroupContact

´

SV Dr. DDipl. Sven Bienert MRICS Tel. +43 512 599 96-5321

Director Fax. +43 512 599 96-5021

e-mail [email protected]

Address Kudlichstraße 41-43

4020 Linz4020 Linz

Adamgasse 23

6020 Innsbruck

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integration of energy efficiency and lcc into property valuation … · paper for the 15th prres...

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