Valuation Issues

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Source: Knight Frank Research

A decision to invest in commercial offices is typically associated with the prospect of improved capital and rental growth. In addition, it is hoped that the investment asset will experience a low vulnerability to depreciation and obsolescence. The same principles hold true with investments in sustainable property, with the additional hope that any such asset may prove to be either cheaper, or at best cost neutral, compared to its non-green alternative, or at least provides an increase in value sufficient to offset any additional costs, such as higher plant costs. As green buildings typically incorporate the latest design principles, depreciation and obsolescence should have less of an impact than might be the case with a standard building.

Yet, traditional property valuation techniques are increasingly being seen as not able to reflect the wider range of sustainability issues and financial benefits that encompass green buildings, despite increasing pressures in the form of market-led drivers and top-down legislation.

This means that the wider spectrum of factors is currently not reflected in the marketplace. In addition, there is currently the added difficulty in the lack of comparable examples of sustainable offices in the market to draw upon. Furthermore, an increasingly important aspect of any office’s value is derived through the covenant strength of the tenant, which means that the attributes of the office building ‘value in use’ can be of lesser importance compared with the risk associated with the tenant defaulting on rental payments.

The challenge for valuers is to be able to take account and quantify any changes in stakeholder attitude. In other words, it is likely to become increasingly important to find effective ways to incorporate sustainability issues into their both valuation and appraisal processes.