One of the most frequent and challenging questions I am asked by property investors is ‘are sustainable buildings more valuable’. This is, after all, the holy grail for many within the industry. If it is possible to demonstrate that sustainability adds value to an asset then surely this must prove beyond doubt that sustainability should be a crucial part of property investment and development?
And so, we have seen many valiant attempts to link sustainability with value. The majority of these use EPCs and building ratings (BREEAM, LEED etc) as the ‘measure’ of sustainability and set out to demonstrate a link with asset or rental value. As many of these studies are undertaken by organisations keen to promote sustainability not surprisingly they claim that sustainability does add value, some as much as a 28% premium. A smaller number argue that there is no causal link at all. Some say that we should no longer talk about a ‘green premium’ that sustainable buildings can attain, but instead, a ‘brown discount’ for those buildings that do not meet increasingly more demanding sustainability standards. All of the studies have been constrained by lack of comparable data and hence can be undermined if one delves into the detail.
As a result, much effort has been expended to improve the quality and quantity of sustainability data. The parameters for measurement have been more clearly defined by initiatives such as the Global Reporting Initiative’s Construction and Real Estate Supplement (CRESS) and there are more benchmarks to enable investors to compare the performance of their assets. In addition, sustainability is making its way into the mainstream valuation process, through, for example the RICS Valuation Information Papers.
As sustainability has become more embedded within building design and management, the debate has moved on. Ironically the more we measure, the harder it is becoming to isolate sustainability factors and their impact on value. Instead we talk about sustainability being one of the features that defines a building as ‘prime’ with the associated value that brings. And so, sustainability has become truly integrated into the valuation process - mission accomplished?
Far from it. Why? Two reasons.
Firstly, the truth is that these somewhat academic debates take place largely divorced from the reality of investment management where decisions to acquire, develop or dispose of assets remain largely untouched by sustainability issues. It is still relatively rare to find an investor who will tell you that they have turned down an acquisition or, indeed, disposed of an asset because of its poor sustainability attributes.
Secondly, the definition of ‘sustainability’ remains a shallow one, limited largely to environmental issues and to those risks that can be identified and managed - EPCs and BREEAM ratings only scratch the surface of what sustainability truly means for property investment. With sustainability comes uncertainty – the exact nature and impact of risks is still unknown, particularly strategic risks – very few property investors truly understand the implications of operating in a low growth, low carbon economy, let alone in a sustainable economy. How will this affect the objectives and structure of funds, the assets in which they invest and the locations they will invest in?
We have made a huge amount of progress towards identifying, measuring and managing some of the key ‘technical’ environmental sustainability issues, but we have yet to engage fully with the strategic implications of sustainability for property portfolios. Fundamental to this is a re-examination of what we mean by value, how it is created and measured. How do we shift property investment towards long-term value creation measured by environmental and social capital as well as financial capital produced? This may seem to be a utopian question, but as we begin to come to grips with the fall-out from a global financial crisis, what better time to dig a bit deeper into the true meaning of value?