Sustainable Property: A Premium Product?

1. Sustainable Property: A Premium Product? Sarah Sayce & Anna Sundberg Presented by Anoriza Mohd Aino ERES Conference 2009 Stockholm 24 – 27 June 2009 A WORKING PAPER

2. The Agenda • Understanding Sustainability • The Project • What’s Out There? – The Nature of the Sample • Linking Sustainability to Value: What is the Real Evidence • Conclusions

3. Understanding Sustainability

4. A Long History • Roots can be traced back to two seminal works: • Carson’s Silent Spring (1962) • Schumacher’s Small is Beautiful (1973) • Mainstreaming of TBL approach dates back to Brundtland’s Our Common Future (1987)

5. But Today • Widening recognition that sustainability is here to stay • Sustainability continues to form a major part of policy-making and regulation worldwide • Corporate response seen through rapid growth in CSR and environmental and social reporting • Theoretically, this should translate through markets to increased demand and value of property assets

6. Sustainability and Property • Sustainability concerns gaining pace within industry • But markets slow in reacting • Perceived Barriers include: • Limited understanding of the benefits • Inflated costs involved in building and fit-out • But research nowadays to improve this

7. Sustainability and Property • Recent research suggests that the cost argument may not be the case (Cyril Sweett, 2009) • Commentator claim many benefits to be had: Investors • Higher returns Occupiers • Operational savings • Well-Being and Productivity

8. But What is ‘Sustainable Property’? • Interaction between property and legislation/regulation • Over and Above Compliance • Founded on performance of buildings in relation to environmental efficiency • However, social impacts and occupant well-being now increasingly understood and considered

9. The Project

10. The Price Problem • Growing evidence and actions to show expectations that sustainability issues may underpin investment performance in future • Theoretical links discussed in a number of studies BUT • Does not answer the question: has the link between sustainability and value in property been established

11. Aims of the Project • Establish the extent to which, if at all, literature supports an observable link between sustainability credentials and prices in commercial property • Inform practice as to the strength of the current evidence base • Indicate future direction in respect of sustainability and value

12. So What Have We Done? • Comprehensive literature review • Commissioned academic peer-reviewed journal articles • Professional press reports • Research reports from real estate consultants • Conference papers • Collected through online searches and worldwide direct targeting of academics and professionals • In excess of 100 articles chosen for further consideration and analysis

13. So What Have We Done? • RPI literature generally excluded: • Only widely cited work e.g. Pivo & McNamara included • Commentaries on empirical studies discarded to avoid distortion • Most articles post 2000 • Environmental valuation theories generally excluded • Literature analysed against a set of criteria developed by Research Team and RICS Steering Group to develop quantitative findings

14. What’s Out There? – The Nature of the Sample

15. Literature Types • Predominant literature: Conference papers, Professional press and academic journal papers • Commissioned work mainly supported by industry (RICS in particular) • Suggests issue not of importance to in the drive for wider behavioural change

16. Literature Types • Significantly more conference papers than refereed journal articles • Emergent subject – protracted journal lead times • Care taken not to double count • Sustainability frequently reported in professional press • However, frequently publications based on anecdotal evidence and commentaries on work elsewhere

17. Publication Date • Growing awareness and consideration of value argument supported by findings • 2005 shows first signs of significance of value/sustainability field • Professional press earliest to discuss issue, with journal articles following later • Only over the past year have papers begun to test for empirical links

18. Country of Study • Potential skew acknowledged as only publications in English were considered but….. • Mostly originating from US/UK and Australia • Only 18% outside of these regions • Unsurprising due to transparent and mature investment markets in these areas ergo, data is available

19. Primary Audience • Most did not specifically indicate readership • Research Team judged audience on content and indications • Majority aimed at practitioners • Surprising few addressed professional bodies despite the key role they play in shaping opinion

20. Considering the Value Issue • Less than half had value as a key consideration, and even fewer solely tackled the contention • Mainly focussed on development costs and wider business case • However, no significant progression in the latter argument since Sustainable Construction Task Group (2000)

21. Type of Evidence • Very little transactional data found • Intention surveys (attitudinal) do not provide evidence of real value • Significant amount of literature presenting theoretical case

22. Sustainable Terminology • Central issue – what constitutes a sustainable building BUT • Many connotations and contested territory • No clear single definition emerged • Complications with ‘green’, ‘sustainable’ or both • UK and Australian mainly ‘sustainable’ with the US tending to use ‘green’

23. Sustainable Attributes • Characteristics behind the term more important that the ‘label’ • Energy efficiency seen as the major consideration for all • Little differentiation between what is meant by the terms • However findings show that those adopting ‘sustainable’ consider a wider range of issues

24. Sustainable Attributes • Characteristics behind the term more important that the ‘label’ • Energy efficiency seen as the major consideration for all • Little differentiation between what is meant by the terms • However findings show that those adopting ‘sustainable’ consider a wider range of issues

25. Rating Systems • Some studies link sustainability to rating systems e.g. BREEAM • But…Standards evolve and whilst relevant on issue it may not be on transaction • And…unable to pull on performance under individual criteria • However, major accreditation schemes still provide simplest surrogates • Authors rely on the method to link value but most recognise its shortcomings

26. Linking Sustainability to Value: What is the Real Evidence

27. Discussing Value • ‘Value’ used in literature in many ways • Seen by valuation community as ‘value in exchange’ as per the International Valuation Standard (2007) BUT • Market value is only one definition and value can reflect a range of monetary and psychological ‘values’ • A perfect market ‘should’ reflect these but property is seldom perfect • Despite this, the aim of the project is to examine evidence of how the market does behave not how it should

28. The ‘Added’ Value Links • Literature postulates many reasons for creating an ‘added’ value case for sustainable property • Many connections have been explored to support the contention

29. Capital & Rental Value • Most direct evidence – observed change in yields/rents • Three main categories of papers • Transactional Evidence • Perceptions & Opinion Studies • Theoretical Cases • Although all provide some evidence, transactional evidence is the firmest, but….

30. Transactional Evidence • Slim pickings – only three major studies • All large-scale studies based in the US • All claim some level of rental differentiation between certified and non-certified buildings • Miller et al (2007) – deemed inconclusive due to sampling • Fuerst & McAllister (2008) – important but could be ‘hot market’ • Miller et al (2008) – rental differentiation occurring but not tenants paying more for sustainability but tenants paying less for unsustainable

31. Real Evidence?? • Robust evidence emerging for offices in some areas of US that certification creates rent differential • Preliminary in nature • Only really a case for the US, not universally • Based on externally certifications e.g. LEED • Not consistent • No differentiation between levels • Based on initial lettings but ‘true’ sustainability is a test over time • Too few capital transactions for defensible conclusions

32. A Matter of Opinion • Opinion studies for a significant proportion of evidence base • Author Opinions • Literature/Market Experience Based • Surveys • Surveys by consultancies; Atisreal, GVAGrimley, JLL • GVAGrimley – sustainability now part of investment agenda but limited efforts to quantify • Atisreal (2008) – UK based study of 125 organisations • Likely to present lower risk, improved liquidity and potentially premium value

33. A Matter of Opinion • Corenet Global/JLL (2008) – global reach finding that over 60% would pay up to 10% premium for LEED/BREEAM • No indication of rating level required • Not actual evidence of differential • Lack of supply an issue – perceptions of premium could be founded on scarcity not intrinsic greater value • Dixon (2009) – UK leasing criterion • Although sustainability a desired factor, traditional selection criteria more predominant • All well and good but….the road to hell is paved with good intentions

34. Well in Theory… • Theoretical case presented by many – exploring relationships that should be emerging • Take the stance that occupational demand will change over time • Direct impact on rental values • Feed into value line via risk and depreciation • Attempts to develop a preliminary quantification of the impact of certain criteria on investment worth • The potential to reflect sustainability in valuation methods, mainly DCF, commonly tackled • Critical role of valuation profession in influencing the market

35. Well in Theory… • Investor side has been widely investigated theoretically • ‘Future Proofing’ – performance moving forward • Risk to future income flow, depreciation and liquidity • Funding and finance effects • Universal investor (Pivo & McNamara (2005)) • Whilst not resulting in a price differential today, seen as reasons for future • Changing occupier behaviour • Increasingly stringent legislative environment

36. The Occupier Case • Worth more simply based on the occupier business case • Improved employee well-being and productivity (Kats, 2003) • Operational costs - lower outgoings ergo tenant can pay more rent (Robinson, 2005) • Dependent upon two key factors: • Valuers perceiving such qualities as sufficiently tangible to reflect in valuations • Tenants understanding and having sufficient evidence of these advantages • Business case more readily proven in the owner-occupier sector • Balancing initial outlay with whole-life cost benefits

37. Too Narrow?? • Value recognised in literature as that within transactions BUT • Widely accepted that buildings have significant economic buildings on a larger scale to ‘external stakeholders’ • Emerging RPI initiatives may shift investor response to the third party interests • Only then may we see these feeding into market practice and exchange value

38. Conclusions

39. Conclusions • A seeming abundance of literature – but very much ‘he said she said’ • Boils down to very little • Undisputable that sustainability is increasingly important • Although still perhaps a luxury rather than essential • ‘Business case’ still a major foundation for pricing sustainability • Intention is not actuality • Dearth of transactional data – but emerging in some markets (mainly US) • No substantive evidence of direct value differential, only rental premium

40. So…does sustainability command premium value • Paucity of transactional data to support the case • What constitutes a sustainable building? • Still no firm understanding and consensus • Rating systems as surrogate all well and good but major limitations • Early evidence that the theoretical case is beginning to manifest in US office markets For other markets, the evidence is not yet there