Valuation of sustainable commercial buildings

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This article discusses issues related to the valuation of sustainable commercial buildings.

Summary

Valuation is critical to sustainability take-up in commercial buildings because the combined monetary value of the building and land, as identified in the valuation process, remains an important consideration for many stakeholders. These stakeholders include investors and owners who refer to the market value on behalf of their shareholders, as well as financiers who rely on the value for lending purposes.

This article examines the valuation of sustainable commercial buildings and why it requires a broader consideration of what constitutes value, compared with 'traditional' valuation processes. Definitions relevant to the valuation of sustainable commercial buildings are listed, and the importance of sustainable buildings to the broader property industry is emphasised. The article covers traditional valuation methodology and how sustainability is included in each of the valuation approaches. Consideration is given to the globally accepted definition of market value, and what the individual components of the definition refer to. The article outlines opportunities for incorporating sustainability considerations into the valuation process, and examines what the future direction for the valuation of commercial buildings may be.

By increasing knowledge about the approach to valuing sustainable office buildings, this article is designed to benefit three groups:

• It will equip valuers, financiers, investors/owners, and other stakeholders with a better understanding of the varying levels of sustainability, and how sustainability affects the level of risk, and subsequently the value, associated with a commercial building.
• It will allow owners, investors and tenants to appreciate the role of a valuer, their exposure to liability, and their challenging task of assessing the current and future risk, and subsequently the value, of a sustainable commercial building.
• This higher level of understanding should mean that the benefits of sustainability will be fully reflected in the valuation process, therefore contributing to support for those developers and investors who are leading in the provision of sustainable solutions.
  
  

Definitions

A valuation is usually an assessment of the current market value of a property, based on a 'hypothetical sale' approach. According to the International Valuation Standards Committee (IVSC), market value is defined as:

'the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had acted knowledgeably, prudently, and without compulsion' (IVSC, 2005, p.27).

In other words, if a sale actually took place on a certain day (i.e. the date of valuation), how much in monetary terms would the sustainable commercial building and land actually sell for?

A professional property valuer is a person who possesses the necessary qualifications, ability, and experience to estimate property value for a diversity of purposes, including transactions involving transfers of property ownership, property considered as collateral to secure loans and mortgages, property subject to litigation or pending settlement on taxes, and property treated as fixed assets in financial reporting (IVSC, 2005). On request, a valuer who is competent in their designated property type (e.g. commercial buildings) is able to identify the current value of a property at a particular point in time, based on a hypothetical sale of that property (API & PINZ, 2006).  In other words, if a particular sustainable commercial building (and land) sold today in the open market, how much would it sell for? This essential information in the form of a valuation is consistently sought after by different stakeholders in the property market. For example, a financier or bank will only forward borrowed money when a secure mortgage has been taken over the property, although only to a maximum amount as designated in the valuation. Therefore, the assessed value of a commercial building is an essential element in the overall decision, which in turn is related to the highest and best use of the property.

It can be argued that sustainable features incorporated into a building must be related to the direct or indirect value of the building in a business context, especially as most commercial buildings are owned by businesses that are seeking to maximise shareholders' wealth. It must be remembered that the assigned market value of a sustainable commercial building is the valuer's interpretation of the market's perception of the value of the office building, not the valuer's perception of the value of the office building. This remains an important valuation concept.

The day-to-day operating expenses of a commercial building will be paid by the owner or the tenant, depending largely on the structure of the lease. Broadly speaking, there are two main types of leases:

• gross lease, where the owner pays the outgoings
• net lease, where the tenant pays the outgoings.

The lease structure, such as whether the lease is gross or net, will impact upon the valuation process. For example, if the lease is gross, then the owner (and the operating expenses and consequently the capital value) of the building will benefit from increased energy efficiency, as savings are passed directly to the owner. On the other hand, a net lease will provide no direct benefits to the owner, although the tenant will benefit from the lower operating costs. There is an element of market adjustment that occurs, where a building offering lower operating costs will often result in a lower gross lease amount. Other indirect benefits should also be considered in the valuation process. For example, a tenant with a net lease who rents space in a sustainable or energy-efficient commercial building, with associated savings in operating costs, may pay a higher rate per square metre for office space if the tenant can identify long-term energy cost savings. On the other hand, it can been argued that tenants will pay less for inefficient non-green buildings, due to the extra allowance needed for the extra direct and indirect costs (JLL, 2006).

Real estate valuers are required to have extensive education, training and experience before they are recognised as professionals, with the majority of valuation assignments focussing on market value (API, 2007). It is essential that a valuer keeps up-to-date with prevailing market trends and accurately reflects the effect of these influences on the value of sustainable commercial buildings. Sustainability has rapidly become an important influencing factor in the assessment of value, where each commercial building is directly and indirectly influenced by its level of sustainable features (or lack thereof). It is essential that valuation approaches, based on the assessment of market value on the date of valuation, consider the significance of sustainability. Although the concept of sustainability has primarily been linked only to lower operating costs, there are many other valuation components in a commercial building that are affected by its level of sustainability, including maintenance, depreciation and obsolescence, as well as the retention of future value.

The importance of valuation to sustainable commercial buildings

• Why valuation is important?
• Drivers of sustainability considerations in valuation
  • Tenant demand
  • Investor demand
  • Government specification of sustainability in leasing contracts
  • Socio-economic change, including adoption of CSR
  • Lower operating costs and increased accountability
  • Increased performance measurement
  • Improved rating systems
  • Retention of staff
• Barriers to acceptance of sustainability considerations in valuation
  • Lack of knowledge about the effect on value
  • Limited discussion in valuation circles
  • Ability of valuation approaches to incorporate sustainability
  • Impact of individual sustainability inclusions
  • Quantifying the intangible aspects of valuation
  • Systematic nature of buildings
• Concepts of intangible value in valuation
  • Wider effect of buildings on the environment
  • Point of difference
  • Corporate social responsibility
  • Government legislation
  • Addressing long-term obsolescence

Why valuation is important?

Owners and investors in the property market make decisions about the future of a commercial (or income-producing) building in line with their individual objectives or goals, which most often are based largely on financial considerations. For example, this decision may be based on the goal of maximising both the level of rent (i.e. income less expenses) and/or the market value of their building. As the underlying goal of most organisations (as individual or collective owners) is to increase shareholder's wealth, then a building-related decision often seeks to either to make a higher return (e.g. increased final sale value) or to avoid a perceived cost (e.g. via lower operating costs). Therefore, a decision about incorporating sustainability into a commercial building equation must fit within these parameters. In most cases, the investor and/or owner must be able to understand and quantify such benefits to themselves and, importantly, justify to their shareholders why a certain level of sustainability has been adopted. Often this is undertaken by referring directly to the value of a sustainable commercial building.

It is accepted by most lenders that the valuer assumes a large proportion of the risk in a property transaction. The valuer will take all the necessary steps when assessing the current market value of the building, as opposed to relying exclusively upon the actual cost of construction, which can be higher for a sustainable commercial building. It is important to note that the actual cost will vary, depending on the amount of innovation and the cost of construction associated with the building. For example, if a borrower defaults on their loan repayments for a commercial building loan, then the property could potentially be sold at the hypothetical market value identified by the valuer. With regards to the risk component, the lender may seek to recover from the valuer (or their insurer) any monetary difference between the final sale price and the assessed market value identified by the valuer. In this scenario, the market value identified by the valuer will limit the funds available to the owner/investor. It is important to remember that a sustainable commercial building must operate within the parameters of market value, rather than the actual construction cost.

The process required to undertake a traditional valuation of a commercial building is a relatively straightforward procedure that has changed relatively little over time. The underlying goal is to reflect the value of the building, by evaluating the present and future risks associated with the building as at the date of valuation. The primary steps are to confirm the level of income, deduct expenses, and then compare this return with recent market sales (via a market-derived capitalisation rate or via a discounted cash flow) to assess the overall capital value of the building.

However, sustainable commercial buildings are claimed to offer improved value through creation of both real and intangible benefits, and these benefits are not always easily incorporated into traditional valuation techniques. For example, it is possible that the additional costs of providing sustainable features in a commercial building, and the derived benefits, are not fully reflected in the valuation of sustainable buildings. At times, this may hinder the take-up of sustainability by owners, developers and investors.

It can be argued that there is a level of controversy in respect to the value of sustainability in commercial buildings. This has resulted in two schools of thought, as outlined below.

• It is the role of the valuer to recognise sustainable features in a building and then allocate that added value to the building; or
• Valuers will only recognise and value the sustainable features after they are recognised by the market, such as when higher prices are paid for commercial buildings with sustainable features (in comparison to a non-sustainable commercial building).

There is growing belief that, over time, sustainable buildings will become the 'norm' or benchmark, while those buildings without sustainable features will have accelerated levels of depreciation and obsolescence. It is also likely that these non-sustainable buildings will have a shorter building life, due to the effect of factors such as lower rents and higher vacancy rates. This trend will become clearer over the course of time.

At all times, it is important that valuers keep abreast of changing market perceptions. Sustainability is one area in which the market is changing and creating conditions for a rethink of traditional valuation considerations.

Drivers of sustainability considerations in valuation

Climate change has an increasingly high profile in wider society, and is perceived to be directly related to greenhouse gases and CO₂ emissions. It has been acknowledged that buildings are substantial greenhouse gas emitters, as they produce more greenhouse gases than all the cars on Australian roads (ABCB, 2001). Previous research concluded that although readily available means of reducing energy consumption currently exist, the 'business as usual scenario' will not deliver sufficient reductions to meet the Kyoto protocol (Australian Greenhouse Office, 1999; ABCB, 2001). Clearly steps need to be taken to promote wider acceptance and uptake of measures to reduce CO² emissions from the built environment. These factors have collectively increased the profile of, and demand for, sustainable commercial buildings.

Valuers seek to reflect the state of the market at the date of valuation, including recent trends in influencing factors, such as sustainability. This process must consider the views of all stakeholders in the marketplace and their changing perceptions about the value of sustainable commercial buildings. Climate change, droughts, and perceived social inequities are all bringing an increased focus on sustainability, and this in turn is influencing stakeholders in the commercial building industry. Some influential changes are discussed below.

Tenant demand

Increasingly, tenants are seeking sustainable accommodation, with many requiring particular ratings for the buildings they are to occupy and for their tenancy fit-outs. This is being driven by the opportunity for reduced operating costs (if the lease is net, where the tenant pays outgoings) and for wider benefits such as reduced employee absenteeism, lower staff turnover and a healthier working environment, as well as enhanced corporate social responsibility (CSR).

Investor demand

Increasingly, more investors in commercial buildings are seeking a 'point of difference' and are using sustainability to market their building. This has resulted in benefits such as associated increased demand, as many private and government tenants are increasingly demanding sustainable accommodation. Furthermore, this is accompanied by perceived higher CSR by shareholders of the company, as well as in the wider marketplace. For example, with gross leases (where the owner pays outgoings), the investor will benefit from lower running costs. In addition, a lower level of obsolescence in the building will ensure that it retains a higher future value.

Government specification of sustainability in leasing contracts

A distinct trend has developed where governments are continuing to set minimum criteria for leasing commercial buildings, based on a sustainability rating tool (e.g. based on a minimum Green Star rating). Green leases have also been developed for new accommodation, which set requirements for energy, water and waste performance (for more information on these government initiatives, see http://www.greenhouse.gov.au/government/index.html).

These requirements automatically limit the market for potential suppliers of accommodation to government agencies, who are traditionally perceived as premium tenants. In turn, this forces non-compliant buildings to compete at the middle and lower end of the market. Alternatively, non-compliant buildings can be upgraded to a higher level of sustainability. This situation needs to be factored into acquisitions, and companies such as Stockland and ISPT are leading the property market in this area.

Socio-economic change, including adoption of CSR

According to conventional supply and demand principles, tenants will most likely pay a premium for accommodation in a sustainable commercial building if it will provide direct and indirect benefits to their business, such as enhancing their corporate social responsibility (CSR). At the same time, building owners and investors will incorporate sustainability in their commercial buildings if there is an opportunity in the local market to achieve increased rents as a result of the higher demand for their accommodation. Alternatively, they will seek to avoid having their rent discounted if the accommodation is perceived to be non-sustainable. Owners and investors may also take other factors into consideration, such as the potential value of undertaking a socially responsible investment (SRI).

Lower operating costs and increased accountability

Today more than ever, shareholders are focused on the attitude of their company towards sustainability and what steps they are consciously taking, if any, towards decreasing their operating costs and addressing environmental concerns. Achieving lower operating costs will increase net operating income, which in turn will increase the overall value of the commercial building. In addition, many companies are actively undertaking and promoting sustainability in their day-to-day operations, as they have become increasingly accountable for their actions or lack thereof.

Increased performance measurement

There have been large advances in sustainable technology, and the availability of user-friendly rating tools has greatly enhanced the ability to measure the level of sustainability in a commercial building. For example, the Property Council of Australia (PCA) has incorporated sustainable features in their latest building matrix, which now allows different buildings with varying levels of sustainability to be compared.

Improved rating systems

The increased knowledge, and wider availability, of user-friendly rating tools has greatly enhanced the use of such tools in the marketplace; no longer is use of these tools restricted to only engineers and sustainability experts. These tools evaluate a broad range of building characteristics for different land uses, which in turn increases the reliability of the rating tools and improves the knowledge and perception of the intangible benefits of sustainability in commercial buildings.

Retention of staff

This aspect is a major reason why companies are seeking to provide the best available accommodation for their staff. At the same time that the labour pool is reducing, workloads have been increasing. Therefore, retaining staff is now a high priority, especially given the large investment required to attract and train new staff, and the loss of corporate knowledge that can result from staff turnover.

Barriers to acceptance of sustainability considerations in valuation

At times, the valuation profession has been relatively slow to react to the changing market acceptance of sustainability. There are a number of reasons why this has been the case.

Lack of knowledge about the effect on value

To date, there has been little quantifiable evidence produced about the relationship between different levels of sustainability and the value of a commercial building. Whilst this knowledge base is rapidly growing, in the past it has been difficult to know how much a stakeholder (e.g. an investor or tenant) will pay for sustainability with regards to a new or operating building.  This also has implications for accurately identifying differences between the actual 'cost' and the current 'value' of the building.

Limited discussion in valuation circles

Although sustainability has quickly been incorporated at varying levels in many commercial buildings, valuers have not been as quick to acknowledge and react to this pace of change.  This argument is supported by the relatively few industry articles and conference papers on sustainability and value. Most changes in the property market are more gradual and the valuation process usually has time to adjust; however, the amount of discussion between valuers on sustainability issues has recently increased and industry bodies are starting to react accordingly.

Ability of valuation approaches to incorporate sustainability

The primary approaches to valuation (income, market comparison and cost) have changed relatively little over time. Sustainability can affect the operation of a commercial building, and therefore has the potential to affect the value of the building in many ways. This must be reflected throughout the valuation process, which requires careful consideration of the direct and indirect effects of incorporating sustainability into a commercial building.

Impact of individual sustainability inclusions

The nature of property or real estate is that every parcel of land is unique, which complicates the role of the valuer when comparing commercial buildings in the marketplace, as individual buildings can vary substantially in terms of construction date, material and design.  Furthermore, the level of sustainability in each building can vary substantially (e.g. ranging from minor to major sustainable initiatives) and this can adversely affect the final assessment of value.

Quantifying the intangible aspects of valuation

Since the valuation of a commercial building is an assessed measure of value at a point in time, it must be measurable and be able to be defended in a court of law (if required). Although intangible aspects, such as lower employee absenteeism, can be an underlying driver for tenants agreeing to pay increased rent, at times the effect on value can be difficult to measure and reflect in a valuation. It is essential that the final valuation amount for a commercial building is quantifiable and based on measurable attributes, such as location, building type and the surrounding market. The valuer must retain detailed field notes to support the valuation and produce them if requested; such notes must be based on factual information from reliable sources. If the same sustainable commercial building was valued by different valuers, then the value should be similar, as each valuer should interpret the value of the building in the same manner. Therefore, identifying intangible aspects of sustainability — which can be difficult to measure — and arriving at consistent conclusions presents a significant challenge for valuers. It appears inevitable that as additional information about intangible value with regards to sustainable commercial buildings becomes available, valuation processes will benefit from being able to accurately incorporate this information into the final assessment of value.

Systematic nature of buildings

One of the fundamental challenges that valuers face when undertaking the identification and assessment of sustainability is that the elements that influence value are extremely difficult to separate, even if they are known. Often it is the synergy created by combining different factors (e.g. design, construction and/or facilities management) that provides the perception of sustainability in the marketplace, not the individual elements. Nevertheless, the challenge for a valuer is to identify and isolate these elements, and then to understand how they affect the risk and, importantly, the future cash flow with regards to the operation and value of the sustainable commercial building.

Concepts of intangible value in valuation

When undertaking a valuation, emphasis is placed predominantly on the financial income and expenses of the cash flow. However, it must be acknowledged that there are other considerations (besides financial) that will affect levels of supply and demand for a sustainable commercial building. As a starting point, the sustainable aspects of a building's value can be divided into two main groups:

• Tangible aspects (e.g. operating expenses, interest rates, maintenance costs and rent)
• Intangible aspects (e.g. corporate social responsibility (CSR), lower employee absenteeism, lower staff turnover, and increased ability to attract and retain tenants)

Whilst most of the focus in this article is placed on identifying and quantifying tangible or measurable aspects, the relevance of intangible aspects has become increasingly important.

Wider effect of buildings on the environment

Commercial buildings in Australia emit 12% of all greenhouse gas emissions (DSE, 2005) and therefore substantial pressure exists to correct this. Many stakeholders are aware of this problem, and this indirectly influences their broader decisions about a property. However, a particular building can have a lower effect on the environment due to factors other than operating energy usage (as per the normal perception). For example, a commercial building may be located closer to the labour market, resulting in associated savings in transport costs and reduced environmental effects such as smog. Alternatively, a building may have lower embodied energy due to the use of local construction materials, rather than imported materials. Whilst lower transport and embodied energy may not be accurately measurable in the marketplace or the final assessment of value, they may be attributes that stakeholders can identify and be willing to pay more for.

Point of difference

From a marketing perspective, sustainability provides an opportunity to market the commercial space as a point of difference from competitors. For example, an investor may promote their building as being at a certain level of sustainability, which in turn may distinguish the building from competitors. Alternatively, a tenant in a sustainable commercial building may identify closely with their office accommodation and may promote their business in this manner, such as with the use of a green lease. Whilst these marketing benefits are difficult to quantify in the valuation, they do exist and can affect the demand for a commercial building.

Corporate social responsibility

Another example of an intangible sustainable aspect is corporate social responsibility (CSR). An organisation's approach to CSR may affect its considerations about owning, building or occupying a sustainable building, because of perceived benefits to reputation, the health and productivity of employees, or impacts on the environment or society. This can, in turn, affect the perceived value of a commercial building due to lower costs from reduced resource use and reduced waste production. The valuer should be aware of the relevant CSR policy in place and its effect on value, if any. For example, it could be argued that a company with a transparent CSR policy would find greater acceptance in broader society, which in turn may be converted to higher demand by prospective shareholders.

Government legislation

Without direct intervention in the property market, the government (at all levels) would find it relatively difficult to influence the broader property market towards embracing sustainability. However, many government sectors have placed indirect pressure on the commercial building market by only leasing sustainable office accommodation. The effect has been two-fold for both investors and tenants. Investors seeking government tenants must now ensure that their commercial buildings can achieve the minimum government requirements, otherwise the buildings will compete in the non-government pool with associated lower prices. Tenants seeking quality sustainable accommodation in a commercial building will be competing with the government, which will most likely force up rents in the short-term, until more sustainable accommodation enters the market.

Addressing long-term obsolescence

The value of a commercial building will reflect its long-term earning potential and, importantly, its ability to resist the effects of long-term obsolescence (resulting in depreciation, which is a loss in value). All buildings are subject to varying types and levels of obsolescence, which is arguably unavoidable as the asset decreases in value. However, it can be debated that a commercial building that does not have sustainable features will also be subject to sustainable obsolescence to varying degrees, depending on factors such as how the market changes over time and its perception of the importance of sustainability. In order to limit the effect of obsolescence, many stakeholders are including sustainable features with a long-term view, although at times this is difficult to quantify in the assessment of value. For example, it is important to consider the likely profile of sustainability in five or ten years, and how long-term obsolescence over this period can be addressed in today's commercial buildings.

Impacts of sustainability on the valuation process

• Communication flows between the valuer and stakeholders
• Availability of information and lack of a centralised market
• Lag in the availability of information

Although there have been substantial advancements in sustainable technology and building processes, relatively little attention is normally given as to how the monetary value or market value of a property is affected by its level of sustainability, or to how the valuation process is actually affected.

Communication flows between the valuer and stakeholders

The importance of communication between all stakeholders about sustainability and commercial buildings can not be overstated. In this context, the role of the valuer is quite diverse and involves a different relationship with each stakeholder. The underlying goal is to quantify the relationship between sustainability and the value of a commercial building from a range of perspectives, such as from a tenant's or an investor's perspective. Considering their knowledge about commercial buildings and the market within which they operate, valuers are ideally suited to provide guidance about the relevance of sustainability. Figure 1 demonstrates how the valuer conveys varying levels of information to the four main stakeholder groups, namely tenants, investors, developers and contractors. It should be acknowledged that all four stakeholder groups are generally profit-seeking and can benefit from valuation advice. The model outlined in the figure below is applicable to the incorporation of sustainability into a commercial building, and the effect on the overall capital value and/or the operating expenses.

Availability of information and lack of a centralised market

The lack of a centralised property market creates a situation where information is not always readily available, and therefore property transactions can occur without the partial or full knowledge of the entire market until after the transaction has taken place (e.g. when stamp duty is paid and the information is released to the public by the relevant government body). This creates a situation where only certain parties are privy to the finer details surrounding a transaction, especially financial information such as leasing rates and tenancy details.

This lack of reliable, up-to-date and freely available market information further complicates the valuation process, as actual demand drivers can not be easily identified. Due to the competitive nature of the property market, the relevant stakeholders in a transaction (either a sale or lease) are often reluctant to release confidential details. Information about leases is not always recorded on the building's title, and therefore this information is only privy to the lessee, lessor and agent. For example, while a commercial building may have sustainable attributes that are not easily identifiable to the valuer, a tenant may agree to pay above-market rent for reduced operating efficiencies detailed in the lease.

Lag in the availability of information

Although a valuation is current only on the date of valuation, due to the nature of the property market there is usually a lag until all information about recent sales and current market trends is available to the valuer. However, with changing influences such as sustainability, it is critical to remain as up-to-date as possible, and this lag may complicate the availability of reliable information. For example, the sale of a property may take place 'off-market' between two superannuation funds; in this case, it will take months for the due diligence searches to be undertaken by the purchaser prior to the transfer, followed by an extended time period before information about the sale is released to the market (and the valuer) via the relevant government website. Therefore, relevant factors that were being considered by both parties at the date of signing the transfer contract (e.g. level of rent per m²) may have changed substantially, including the actual perception of a sustainable commercial building. The valuation process must operate regardless of this lag in the supply of accurate and reliable information.

Policies, regulations and standards

In Australia, valuers must be registered to operate in some areas (e.g. Queensland), but not in others where the industry is deregulated (e.g. Victoria). However, a client is likely to insist that their valuer belongs to a recognised industry body. In Australia, most valuers belong to the Australian Property Institute (API) and/or the Royal Institution of Chartered Surveyors (RICS). For example, API members conduct business in accordance with the Professional practice manual (API & PINZ, 2006), and direct reference should be made to this document for detailed information. The manual refers directly the International Valuation Standards Committee (IVSC) standards, which are directly relevant to the valuation of a sustainable commercial building. The left figure provides an overview of the IVSC standards.

In many countries and jurisdictions, there are guidance notes produced for valuing certain types of assets or properties (e.g. sustainable commercial buildings). It should be noted that in Australia such guidance notes are not mandatory (API & PINZ, 2006), although the API produces a series of guidance notes for members. Clearly, a sound argument exists for the development of a stand-alone IVSC guidance note on the 'valuation of a sustainable building'.

Valuation context and approaches

• Purpose and intended use of the valuation
  • Market value
  • Non-market value
• Highest and best use
• Factors of value
• Factors affecting real property values
  • Social forces
  • Economic forces
  • Government forces
  • Environmental forces
• Depreciation and obsolescence
• Valuation approaches
  • Capitalisation of income approach
  • Discounted cash flow approach

A valuation involves a series of complex steps that can only be undertaken by an educated and qualified valuer. The process of identifying value considers a large number of variables, as discussed below.

Purpose and intended use of the valuation

When a valuation of a sustainable commercial building is undertaken, the type of value can vary depending on the original request. Careful attention is required to understand the various types of value and how they relate to a sustainable office building. Whilst market value is the starting point for a discussion about value, consideration should be given to the relevance of other non-market valuation concepts. At all times, the type of value sought depends on the original request. This discussion is based on information in the Professional practice manual (API & PINZ, 2006).

Market value

This is the representation of value in exchange, or the amount a property would bring if offered for sale in the (open) market at the date of valuation, under circumstances that meet the requirements of the market value definition. It is critical that the valuer first determines the highest and best use, or the most probable use of the property, regardless of the existing improvement. This may be a continuation of the property's existing use or an alternative use, and is determined based on recent market evidence. Market value may or may not equal fair value (which is generally used for financial reporting purposes) — the valuer should indicate whether the building is valued using both market value and fair value definitions. Key references to the definition of market value are outlined in Standard 1 of the International Valuation Standards (IVSC, 2005).

Non-market value

At times, there is a requirement to assess the non-market value (e.g. for rating and taxation purposes). In such cases, the valuation process is not based on recent sales in the market.

Highest and best use

At all times, a valuation must be based on the 'highest and best use' of the property. This is defined as 'the most probable use of a property, which is physically possible, appropriately justified, legally permissible, financially feasible, and which results in the highest value of the property being valued' (IVSC, 2005). In other words, the existing use may not be the highest and best use. Careful attention must be paid to the initial cost of the improvement (e.g. a sustainable commercial building). With regards to sustainability, an important consideration is the relationship between the construction cost and the value of the building. Over-capitalisation occurs when the initial cost exceeds the amount that can be recovered by selling on the open market (Trigilia, 2002).

Factors of value

The economic value of a good or service is created in the mind of the collective individuals who make up the market (API, 2007). This has direct implications for sustainable buildings.

There are four interdependent economic factors that affect value:

• Utility — the ability of a product to satisfy human want (e.g. What level of sustainability is in the commercial building at hand? Is it too little or too much?)
• Scarcity — the present or anticipated supply of an item relative to demand (e.g. What actual level of demand is there for sustainable buildings?) 
• Desire — a purchaser's wish for an item to satisfy human need or an individual's wants beyond the essentials to support life (e.g. Are purchasers willing to pay for sustainability? If so, how much extra is a purchaser willing to pay for sustainable features?)
• Effective purchasing power — the ability of an individual or group to participate in a market, in order to acquire goods and services with cash or its equivalent (e.g. Does an investor have the resources to purchase a sustainable building?)
  
  

Factors affecting real property values

There are four basic factors or forces that affect property values (API, 2007), as discussed below.

Social forces

Social forces are mainly associated with population or demographic characteristics. With sustainable commercial buildings, social forces may relate to attitudes towards the location, construction or use of office buildings. They could also be linked to the high profile of sustainability in wider society and the indirect pressure placed on building owners and investors.

Economic forces

Commonly referred to as the relationship between supply and demand, economic forces relate to the ability of the population to satisfy its wants, needs and demands through its purchasing power. Relevant examples include employment, stock of available vacant and improved sustainable commercial buildings, sustainable buildings under construction, occupancy rates, current market rents, and existing construction costs. Economic and financial considerations are a major influence on sustainable commercial buildings in the market.

Government forces

The legal climate at any given time may overshadow the natural market forces of supply and demand. This may influence values via (a) provision of public services such as transport, fire and police protection, and rubbish removal; or (b) building codes and zoning, with special mention to those that obstruct or support land use. For example, many government agencies will only lease an office building that achieves a set minimum energy efficiency star rating.

Environmental forces

When valuing a sustainable building, the natural and man-made environment or physical forces must be analysed. Examples include primary transportation systems (e.g. main roads and airports), climatic conditions, and the nature and desirability of the immediate area surrounding a property. A building located in the middle of a central business district may be designed and constructed in a different manner to one located in a predominantly rural area.

Depreciation and obsolescence

The value of a commercial building will be affected by many variables over time. A starting point is the investment horizon for the investor/owner, where many sustainable attributes of a commercial building have a relatively long-term payback period. This will also influence decisions about what degree of sustainability to adopt, which is also related to the age of the building (if already constructed) and the respective levels of depreciation and obsolescence. The perception of prospective purchasers in the market towards sustainability is critical, as is the cost of maintenance and upkeep of the sustainable features (e.g. wood panelling, waterless urinals).

All office buildings are subject to obsolescence, which in turn causes depreciation or a loss in monetary value (Whipple, 2006). There are three main forms of obsolescence that affect a building's value (API, 2007) — physical, functional and economic obsolescence.

• Physical obsolescence — the 'wear and tear' from regular use and the impact of the elements (e.g. weather, climate)
• Functional obsolescence — flaws in the structure, materials or design that diminish the function, utility and value of the improvement (e.g. inadequate consideration of sustainability in the design phase)
• Economic obsolescence — temporary or permanent impairment of the utility or marketability of an improvement or property, due to negative influences outside the property (e.g. air-conditioning or heating system may use electricity and be expensive to operate)

There are other forms of obsolescence that may also have an effect. For example, legal obsolescence (e.g. due to the introduction of a new Act) may render use of a non-conforming building illegal, even though it may conform to the above-mentioned three forms of obsolescence. It can be argued that a new type of obsolescence has now emerged — sustainable obsolescence. In other words, a building can have increased obsolescence (causing a loss in value or depreciation) if it fails to meet the market's expectations of incorporating a level of sustainability. This can take many forms and can affect the design phase, the construction materials or the operational phase.

When referring to the value of a sustainable commercial building and its related land, the major component of value is usually in the building component. Hence the level of depreciation of the building will have an adverse effect on the value of the combined land and building. When undertaking the valuation of a sustainable commercial building, calculating the level of depreciation resulting directly from the level of obsolescence is important for estimating the future value of the asset (such as in a discounted cash flow). In this context, depreciation is defined as 'the charge made against income to reflect the systematic allocation of the depreciable amount of an asset over its useful life to the entity. It is specific to the particular entity and its utilisation of the asset, and is not necessarily affected by the market' (IVSC, 2005).

Valuation approaches

When valuing a sustainable commercial building, the primary valuation approach is the income approach. This method examines the income of the building and makes comparisons with recent market evidence, as well as considering other factors to derive a market value.

There are two main approaches to valuing a building via income: (a) capitalisation of net operating income (NOI); and (b) discounted cash flow (DCF). Both use relevant market information and refer to the IVSC (2005) definition of market value. Special care must be taken to identify the correct net operating income, as different property markets have varying levels of tenant incentives, which must deducted before the valuation can be conducted. It is essential to use the passing rent, which is based on the face (or advertised) rent, less an allowance for incentives (e.g. three months rent-free).

Capitalisation of income approach

The value of a commercial building is assessed by dividing (a) the net operating income (NOI) of the building by (b) a market-derived capitalisation rate.

Net operating income
The net operating income is calculated by summing all income produced by the building (gross income less incentives) less all operating expenses (e.g. savings in costs paid by the owner/investor due to sustainable features, maintenance, commissions to agents, statutory charges and incentives). The NOI is the actual money received by the investor. 

Capitalisation rate
The capitalisation rate is often referred to as the 'all risk yield' (ARY) and should reflect all future risk associated with the building. It is the relationship between the capital value of a sustainable commercial building and how much it will earn (NOI). In other words, the capitalisation rate refers to the return on capital (i.e. total value of the building).

The capitalisation rate or percentage (%) should encompass:

• market (or systematic) risk — the external factors that affect a building, such as the overall market for office buildings including interest rates and economic variables such as gross domestic product (GDP), demand for sustainable buildings, and the employment rate for white collar workers
• unique building (or unsystematic) risk — the factors that can be directly attributed to the sustainable commercial building itself, including age, design, construction materials, level of sustainability incorporated into the building, and location.

Most importantly, the capitalisation rate is not calculated, but is derived from recent sales of comparable property. For a sustainable building, this can be challenging due to the lack of comparable sales and the differences between each building. The relevant formula to find the capitalisation rate is:

Discounted cash flow approach

The discounted cash flow (DCF) approach is ideally suited for examining a pattern of regular or irregular income over time, and in many markets this is the approach that investors prefer (API, 2007). For example, if a sustainable building can offer benefits such as reduced operating expenses when energy costs are predicted to increase, then a DCF allows this to be shown over a medium to long-term time frame. Advances in technology have substantially assisted the DCF process (Dixon et al., 2005), as computer programs such as Microsoft Excel have allowed this complex analytical and sensitivity task to become a practical everyday valuation method, especially for dealing with direct and indirect expenses of a sustainable building.

The income of a commercial building is based on a series of cash flows (income and expenses) from different tenants. The complexity of a DCF is partly due to each tenant having different circumstances, including variations in:

• area (m²) being rented or leased
• level of rent payable (on a m² basis)
• lease commencement date
• end of lease date
• date when the level of rent has to be renewed
• level of contribution to building expenses (i.e. gross or net lease).

A discounted cash flow for a sustainable commercial building incorporates the differences between these tenants in detail, as well as projecting the cash flow over a long-term period (normally ten years), with the sale of the property at the end of year ten being based on year 11 income. Therefore, a forecast and associated assumptions are needed for income over 11 years, as shown in the left figure.

When valuing a sustainable commercial building, the major DCF sections to be noted are as follows (letters refer to the appropriate steps illustrated in the figure above):

• Actions by purchaser: The main steps are (a) the initial purchase (large capital outlay) for the building; (b) retain and operate building (receive income and pay expenses); and (c) sell building after ten years (capital inflow). 
• Year 11 forecast NOI: This is required to calculate sale price at end of year ten. 
• Actual cash flow: Commence by detailing on a day-to-day basis every cash inflow (d) less every expense (e). This will result in the net operating income for each time period (f).
• Discounted cash flow: Multiply the present value of each cash flow by a discount factor (g). This discount factor must represent all risks associated with receiving the future cash flow. The values must then be added together to give a present day sum of the cash flows (today's value) (h).

Important DCF variables
There are arguments both for and against the use of discounted cash flows when assessing the value of a building, although in many respects it is ideally suited for valuing a sustainable commercial building. A DCF is explicit and includes all financial details for a building over a long time frame. It also refers to forecasts and assumptions about many variables over the next 11 years, including the state of the market (e.g. vacancy rate and demand for sustainable buildings, level of rents and interest rates), the costs associated with maintaining the building (including the sustainability aspect), the effect of depreciation and obsolescence (e.g. functional, physical and economic), and the perception of the market towards sustainable commercial buildings (e.g. Is the level of sustainable features adequate to meet the market demand over the next 10 years?).

The main variables that will affect the assessed value of a sustainable commercial building using a DCF valuation method include:

• The discount rate: This is supposed to reflect risk associated with the building and will directly affect the level of net income. For example, a sustainable commercial building with more sustainable features may be perceived as having lower future risk, resulting in a lower discount rate and a higher overall value.
• The level of rents: What will tenants pay (per m²) for office or retail space over the next 11 years? For example, a tenant may pay more to lease space in a commercial building due to the benefits of being in a sustainable building. 
• Tenant renewal: Will tenants renew their tenancy or will they vacate at the first opportunity? Due to indirect benefits such as lower staff turnover and absenteeism, a tenant may be more likely to renew a lease in a sustainable commercial building.
• The vacancy rate: How much vacant space (%) will there be in the building during the DCF? For example, lower vacancy rates have been linked to sustainable buildings, due to the increased level of demand (including from many government bodies, which are restricted to sustainable accommodation).
• Operating expenses: How much will the building cost to run (e.g. heating, cooling, and maintenance)? For example, a sustainable building with increased energy efficiency will have lower operating expenses, which will result in a higher net income and often a higher overall value.
• Year ten sale price: What will the level of obsolescence be and how much will the property sell for after another ten years of operation? For example, a sustainable building should retain its value much better over the long-term in comparison to a building without any sustainable features.
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Incorporating sustainability considerations into valuation

• Relationship between sustainability and property values
• Quantifying the effect of sustainability on market value
• Modelling the wider market effect of sustainability on market value

A valuation must consider all factors that affect the value of a commercial property. The importance of sustainability has increased over time, and in today's marketplace it must be given full consideration when assessing value, as the level of sustainability (or lack thereof) of a commercial building can have a direct relationship to its value.

Relationship between sustainability and property values

Accurately identifying, fully understanding and then being able to quantify the level of sustainability in a commercial building has rapidly become an essential part of the valuation process. Consideration must be given as to exactly how the value of a property is affected by the level of sustainability, and how this is related to the business case for sustainability.
For example, a valuer may consider issues such as:

• Do the sustainable features cause the building to be associated with less or more risk?
• How is the level of sustainability reflected in the assessed value of the building?
• How is sustainability incorporated throughout the valuation process?

Rating systems for sustainable buildings have had to adapt to the changing needs of the marketplace, as 90% of the Australian commercial property market was designed prior to the introduction of accepted rating systems (JLL, 2006). Due to the vast differences between buildings (i.e. differences in design, construction processes and construction materials), it is not possible to use a matrix that suits every building and then model this against a level of assessed value. Rather, wider consideration needs to be given as to how sustainability aspects affect the value of a building, both directly and indirectly. Figure 4 broadly identifies some of the positive and negative effects of sustainability on building value (Boyd, 2005).

The degree to which an individual building is sustainable can vary largely, depending on a myriad of factors, including:

• the location of the building and the proximity of alternative buildings, as well as transport and surrounding services and facilities
• the architectural design and age of the building
• the perception of building owners (and tenants) towards sustainability
• the perception of the marketplace towards the environment and corporate social responsibility
• the prevailing cost of energy, construction and transport
• other factors that influence the financial decision.

However, there is a difference between the actual cost of different levels of sustainability and the perceived added value. In the US, it has been demonstrated that green commercial buildings (LEED certified) only cost 0.66% more (on average) than conventional buildings; and many of these projects achieve sustainable design within or close to their initial budget (Kats, 2003). Even so, there is a widely held perception that green buildings are substantially more expensive than conventional buildings. Furthermore, in commercial property markets that are generally risk-adverse (like Australia), the acceptance of green buildings can be limited because of reluctance in the property industry to accept new methods without proven results (Robinson, 2005).

It is increasingly likely that investors may consider paying a premium for assets with demonstrated sustainability potential that can be realised via cost-effective management or modification. On the other hand, owners who do not implement sustainable practices may find their buildings subject to a 'non-sustainability discount' by tenants over the next three to five years (JLL, 2006). Whilst it is not possible to accurately measure the effect of every sustainable aspect, consideration must be given as to how sustainability will influence the valuation process. It is important to consider the effect of sustainability on the foundation valuation principles, which in turn will dictate the highest and best use of the property, as well as the market value (API, 2007).

The various parts of an assessment of value affected by sustainability are listed below.

• Supply and demand: Standard economic theory dictates that the price of real estate or property varies directly, but not proportionately, with demand and inversely, but not necessarily proportionately, with supply. Therefore an increase in the supply of an item or a decrease in the demand for an item tends to reduce the equilibrium price.  The opposite conditions produce the opposite effect. This must be factored into the assessment of value for a sustainable commercial building, as there may be (a) limited supply; and (b) increased demand for sustainable accommodation. For example, there has been steadily increasing demand for sustainable buildings and tenants have been willing to pay more for these features. At the same time, there are a limited number of sustainable buildings currently in the marketplace, which also ensures that demand exceeds supply. In the future, this may change as more sustainable buildings enter the market.
• Competition: From a demand perspective, competition refers to the interactive efforts between two or more potential buyers or tenants to make a purchase or secure a lease. From a supply perspective, it refers to the interactive efforts of two or more sellers or landlords to effect a sale or lease. Sustainability attributes can increase competition via a competitive advantage, such as a building that can offer tenants a better quality of office accommodation (e.g. air quality) for employees, compared to a building with no sustainable features (e.g. poor artificial light only).
• Substitution: When several similar commodities, goods or services are available, the one with the lowest price normally attracts the greatest demand and widest distribution. With regards to sustainability, this relates to the original cost of the commercial building, and the trade-off between the cost of sustainable features and the availability of accommodation in an alternative (non-sustainable) building. On the other hand, it is difficult to substitute the benefits offered by a sustainable commercial building.
• Balance: Property value is created and sustained when contrasting, opposing or interacting elements are in a state of equilibrium. This relates to the relationship between different property components, as well as the relationship between costs of production (e.g. land, labour, capital and developer's profit/risk) and the property's productivity. It is critical that this balance is retained when evaluating the level of sustainability in a building. For example, it is possible to have too few sustainable attributes (e.g. an older building with zone air-conditioning) or too many (poor natural light in the centre of each floor due to existing adjoining buildings).
• Contribution: The value of a particular component is measured in terms of its contribution to the value of the whole property, or the amount that its value would detract from the value of the whole property.  It important to identify which sustainable aspects in a commercial building add value and how much.
• Surplus productivity: This refers to the net income of the land that remains when the costs of the other agents of production (e.g. cost of land and cost of construction) have been paid. If a sustainable building has been over-capitalised and too much money was spent on the initial construction cost, there will be no surplus productivity.
• Conformity: Real property value is created and sustained when the characteristics of a property conform to the demands of the market. It is critical to closely examine the market to determine if the sustainable commercial building conforms to market expectations; otherwise the value may be discounted if it is perceived as being 'too different'.
• Externalities: Factors external to the property (e.g. the surrounding real estate market) can have either a negative effect or a positive effect on its value. The high profile of sustainability and climate change has positively influenced the perception of sustainable commercial buildings.

Within the valuation process, it is essential that all relevant sustainable aspects in a commercial building are identified. However this can be complicated, due to the different types of buildings and their varying levels of sustainable features. Therefore each valuation must be approached on a case by case basis, so that the tenant or investor can examine both the direct and indirect benefits before making their decision.

Over time, obsolescence (especially physical, functional and/or economic obsolescence) can have an adverse effect on the future value of an income-producing building, as highlighted in the DCF approach section of this article. However, incorporating sustainability into a commercial building has the potential to achieve a high degree of future-proofing. The question 'Can I afford to have sustainability in my building?' has changed to 'Can I afford not to have sustainability in my building?' If correctly adopted, sustainable features have the ability, to varying degrees, to slow down depreciation and obsolescence in a commercial building over the long term.

Quantifying the effect of sustainability on market value

Due to the heterogeneous nature of property, where no two parcels of land and buildings are identical, there is no exact formula to rely upon when measuring the effect of sustainability on the market value of a sustainable commercial building (for more information on this issue, refer to the Factors affecting real property values section of this article). For example, buyers in a particular marketplace may have a relatively low awareness of sustainability, and this may be reflected in the level of demand.
A recent study of an Australian office building sought to quantify the relationship between sustainability criteria and value. The results of this study are summarised in the table below.

Example of links between sustainability criteria and value

	Percentage variable change	Percentage variable change	Percentage variable change
Input variable	Enhanced environmental features	Enhanced social features	Combined: environmental and social features
Construction cost	+5% to +7%	+3% to +5%	+8% to +11%
Initial rent (first year)	+3% to +5%	0% to 3%	+3% to +8%
Rental growth rate	+4% to +10%	+1% to +3%	+5% to +13%
Operating expenses	-4% to -10%	+1% to +3%	-3% to -7%
Capital expenses	-2% to -10%	0% to +1%	-2% to -9%

Source: Boyd, 2005

A study in the UK (Sayce et al., 2004) identified which variables in a valuation model may be affected by a sustainability factor (seethe table below).

Links between sustainability criteria and value (UK approach)

Sustainability factor	Conduit
Building adaptability	Risk premium, cash flow, rental growth, depreciation
Accessibility	Rental growth, depreciation
Building quality	Rental growth, cash flow, depreciation
Energy efficiency	Rental growth, risk premium, cash flow, depreciation
Pollutants	Rental growth, risk premium, cash flow, depreciation
Contextual fit	Rental growth
Waste and water	Rental growth, cash flow, depreciation
Occupier satisfaction	Risk premium
Occupier impact	Risk premium

Source: Sayce et al., 2004

These studies confirm that there are many facets of a discounted cash flow that can affected to a varying degree by different sustainable attributes when valuing a commercial building.  Due to the unique nature of each building, the changing nature of each variable in the assessment of value must be closely monitored and adjusted as required, depending on the level of sustainability that has been incorporated into the design and construction. The existing valuation approaches have the flexibility to adjust for sustainability, although reliance is placed on the valuer to identify and accurately reflect the effect of the sustainability features during the valuation process.

Modelling the wider market effect of sustainability on market value

To incorporate sustainability into the value of a building, it can be modelled within the context of the wider market and other influencing variables. Referring to the level of complexity, the capitalisation of income approach is relatively simple and 'implicit'. On the other hand, the discounted cash flow approach includes many variables and forecasts assumptions over an 11 year period, and in contrast is relatively complex and 'explicit'. These contrasting factors are important when relating the level of sustainability to the market's perception of sustainability when valuing a commercial building, since they can adversely affect the level of perceived risk in the building and consequently increase or decrease its value.
When undertaking the valuation of a sustainable building, it is critical that sufficient consideration must be given to (i) the level of perceived sustainable aspects that the building has (as perceived by a prospective purchaser under the definition of market value); and (ii) how this affects the value of the building after modelling via (a) the capitalisation of income valuation method; and (b) the discounted cash flow (DCF) valuation method.

(a) Capitalisation of income approach

The left table lists some examples of how perceived sustainable aspects may affect the overall market value of a sustainable office building when using the capitalisation of income valuation method. It should be noted that, due to the simple nature of the capitalisation of income approach, there are only two main variables that can be altered:

• net operating income (either increase or decrease)
• market-derived capitalisation rate (either increase or decrease).

Changing either of these variables can have an adverse effect on the overall property value.

(b) Discounted cash flow approach

The left table highlights how perceived sustainable aspects of a building can affect value using the DCF valuation approach. Due to the complex nature of an 11 year cash flow analysis, which considers all cash inflows and outflows, there are many variables that may be positively or negatively affected by ESD features. Nevertheless, there is a balance between increased sustainability and higher capital value (i.e. before over-capitalisation occurs). For example, if the building is perceived as having extreme ESD features, then a purchaser may discount the value of the building due to higher risk. On the other hand, discounted cash flow has the ability to reflect the long-term perspective of a sustainable building (e.g. reduced obsolescence, lower expenses etc.).

Likely future developments

• Changing perception of sustainability
• The definition of market value
• Changing relationship between cost and value
• Increased communication and information availability
• Undertaking explicit valuations

It is anticipated that certain emerging trends will affect the value of sustainable commercial buildings. Some of these trends are discussed below.

Changing perception of sustainability

The challenge for the valuation profession is to keep as up-to-date as possible with latest trends in the marketplace. Sustainability has evolved into a long-term trend, and must be immediately incorporated into the valuation process. However the pace of change is remarkably fast, as sustainability adjusts to market forces at varying levels in the marketplace. In other words, investors, tenants, facility managers, government and other stakeholders all have different perceptions of what a sustainable office building is, and each group has their own drivers for sustainability. Even so, sustainability both directly and indirectly affects practically all facets of a sustainable building and should be reflected in the assigned capital value.  It is important for stakeholders to discuss and agree upon their perception of sustainability in a building, such as whether different tenants and/or owners in the market will pay a higher amount for sustainable features.

The definition of market value

The definition of market value is at the cornerstone of every valuation. When valuing a sustainable commercial building the income approach (i.e. either capitalisation of income approach or discounted cash flow approach) forms the underlying foundation of the valuation report. Since a valuation is considered to be a 'hypothetical sale', it is critical that the valuer and stakeholders are all fully conversant and aware of all the circumstances influencing the perceptions and decisions of the market. At times, these perceptions change and must be reviewed before being incorporated into the valuation process.  At present, sustainability is at the forefront of such recent changes and this must be reflected in the final assessment of value. However, it is yet to be determined if the definition of market value will directly incorporate sustainability in a similar manner to other definitions (e.g. PCA building grade matrix).

Changing relationship between cost and value

Sustainability is an extremely broad concept and can affect a commercial building in different ways, including the difference (if any) between the initial cost and current value. Most importantly, 'sustainable' does not mean the same thing for every sustainable commercial building, due to the varying levels of sustainability available and the wide range of building types. On one hand, 'sustainable' can refer to reduced operating costs as a result of adopting enhanced energy efficiency measures. Alternatively, it can refer to a more expensive premium ESD building incorporating the latest technological advances in sustainability. Rather than focussing specifically on the actual construction cost, it is most often the current market value and/or fair value of the commercial building that is of most importance in the valuation process. An alternative scenario would be over-capitalisation, where the market will not pay for the initial cost of the sustainability-related improvements. Acknowledging the difference between cost and value is essential in the valuation process and must remain a priority for all stakeholders.

Increased communication and information availability

Changes to the communication process and a higher level of market transparency should occur in a similar manner to other countries. For example, detailed information about sales and leases is more freely available in the UK than it is in Australia. In this age of technology, it is important that information about sustainability is quickly and openly communicated to all stakeholders as soon as possible, including the valuation profession. This will remove much of the doubt and uncertainty surrounding sustainable commercial buildings and allow an assessment of value founded on a sound knowledge base and consideration of influencing trends. At present, there is relatively little financial information instantly available (i.e. on signing of the lease or transfer documents) in the open market about sustainable commercial buildings.

Undertaking explicit valuations

In the past, many valuations were implicit, in that the various influencing factors were not individually identified but rather collectively included in the final valuation figure. With sustainability, there is a distinct need to identify the influence on different value components of the commercial building. This process commences by quantifying the sustainable attributes of the building and assessing their effect on value.  This can be an extremely complex task, and therefore the valuation process may become increasingly explicit as further research leads to clearer quantification of value drivers (such as productivity improvements) and intangible benefits (such as enhanced reputation or employee health).

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