Energy Efficiency Into Property Valuation Construction Essay

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There are various different issues to the adoption of energy efficiency aspects within the practice of property valuation. On international level, terminologies of sustainable building, green and energy efficient buildings still are not very well defined. Such lacking definitions show that the concept of sustainability and energy efficiency within the real estate industry just started to evolve. This, however, represents only one obstacle.

The resulting effects from energy efficiency can be grouped into two categories. On the one hand, effects resulting from energy efficiency can be linked to technical features and can be connected directly to building components (e.g. technical effect: highly efficient components may lead to reduced heating expenses). In this case, differences regarding energy efficiency levels of buildings could be measured in monetary units and considered in form of surcharges or deductions. On the other hand, there is the effect linked to market aspects, which might come along from customer's changing expectations leading to the expected increase in demand for energy efficient buildings. This effect, up to now, cannot be calculated as relevant empiric data is still missing. So far only few studies have been carried out on the benefits of energy efficient buildings and most of them focus on the United States. Although these studies indicate that certified buildings tend to achieve on average higher rents, sales prices and occupancy rates than identical conventional buildings, such data is limited. This is due to the fact that voluntary and mandatory certification systems were introduced only recently.

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As reliable data of the statistics on energy efficient and green building premiums is still lacking, the market effects of energy efficiency are considered as unclear. This in turn makes it impossible to price in the effects related to energy efficiency on the basis of empirical information. As property valuers are committed to analyze changes on the market in an accurate way and to observe these changes until empiric data becomes available, pricing in the effects from energy efficiency based on personal assumptions would affect the market. Property valuers, however, do not make the market but look for market evidence. As long as it is unclear how the market will react on energy efficiency, property valuers are not entitled to price in speculations.

Another hurdle to the reflection of energy efficiency within property valuation practice is that one cause can involve various effects. There is potential risk to confuse causes and effects and price them in twice. For example, high quality thermal components may have positive effect on the building's effective age as well as energy efficiency level. This is something the property valuer must be fully aware of (Bienert et al. 2009).

Economic benefits such as lower operating costs, higher rents and sales prices can be measured in economic terms and most likely will become more and more evident with time as more comparable buildings and data will be available. However, energy efficiency offers more than just tangible benefits. Measuring and pricing in intangible benefits like preservation of the environment, enhanced productivity, well-being and satisfaction are difficult to assess. As property valuers must hold on to traditional valuation practice and have traditional views of what creates value, intangible benefits associated with energy efficiency are not considered within the concrete process of property valuation. Thus, energy efficiency, as such, does not penetrate into property valuation as it is still uncertain how to integrate the non-economic benefits into the concept of market value (Kimmet 2006).

According to Runde and Thoyre (2010), statistical studies based on extensive databases like the CoStar data set do not succeed to capture the slight variations between local markets. This means that energy efficient building characteristics, which are recognized in one market, not necessarily add value in another market. These slight differentiations between markets, however, are of importance within property valuation. Moreover, published studies are of limited sample size. In most of these studies only a small number of buildings was observed and compared. This may be due to the fact that real estate is a heterogeneous product, meaning that it is difficult to find comparable buildings as every building has unique characteristics. The limitation in sample size often leads to different results, which in turn harm reliability and data application.

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The sooner the Green Value is reflected and manifested in property valuation, the faster sustainable and energy efficient property investing will stimulate. Investors will be more willing to invest into energy efficient and green buildings, which are associated with additional costs. The certainty and evidence that the additional amount of money invested to achieve a more efficient building results in a higher property value, will influence investment decisions and encourage more significant investments.

=Most Practicable Integration of Energy Efficiency into the German 'Ertragswertverfahren'

Gross Income Modification

As of today, the most practicable way to integrate energy into the 'Ertragswertverfahren' is the consideration of extra income produced from renewable energy systems like solar Photovoltaic as part of gross income calculations.

Buildings provided with a Photovoltaic system can earn extra income by feeding electricity into the grid. In order to calculate income from renewable energy technologies it is necessary to know the amount of energy fed into the grid as well as the feed-in tariff. The feed-in tariff is a price determined by the government. It is paid to renewable energy producers over a long and fixed period of time (20 years in Germany) for supplying renewable energy. Such tariffs are regulated and implemented by politics in order to drive renewable energy further. The feed-in tariff is set for the different renewable energy technologies (Peters and Weis 2008) and represents profit to the energy producer. This profit respectively income, could be considered within income approaches. Therefore, the annual amount of energy fed into the grid is to be multiplied by the feed-in tariff in order to arrive at the annual income from renewable technologies. The building owner can derive all necessary data to calculate such extra income from the delivery contracts with the power supply company. The resulting annual income from renewable energy systems could be added to the remaining rental income produced by the property and this way increase annual gross income and property value (Bammer and Brunner 2012, p. 25). The main obstacle to the consideration of additional income from renewable energy technologies within the gross income calculation may be the extra time, which the property valuer will need to assess such additional income.

Figure 31: Gross Income Modification

Annual Gross Income

Rental Income Office Space

Rental Income Special Areas

Rental Income Advertising Space

Rental Income Parking Space

Income from Renewable Energy Technologies (Photovoltaic)

Author's Illustration after (Bammer and Brunner 2012)

Adjustments category Modification

Adjustments (surcharges and deductions) are made in order to take into account object specific or other value influencing aspects within property valuation practice. Up to now, income value is being adjusted for property specific aspects like defects and damages, the amount required for deferred repairs or rights and encumbrances. After these aspects have been taken into account there is the possibility to consider other value-influencing circumstances. At this stage of the income valuation process, the thermal quality of the building could be taken into account. In order to determine a surcharge or deduction for heating energy demand, the heating energy demand of the property under valuation could be compared to the heating energy demand of a reference building with defined reference values. The difference could then be calculated in monetary units and be either added or deducted under the adjustment category. The information on the energy heating demand for the building under valuation can be derived from the building's EPC. However, choosing an appropriate reference building and defining reference values still remain difficult. In addition, the specific heating energy demand presented in the EPC is based on a reference climate and requires transformation into the actual location's climate. Moreover, the values of reference buildings shall be published in a legally binding document like valuation standards in order to be accepted for property valuation practice (Bammer and Brunner 2012).

Although within European member states EPC's are available, their availability for properties of the same type is still limited and makes comparisons of energy efficiency levels among buildings difficult. In the future, a sufficient amount of property transaction evidence linked to EPC's will enable the valuer to form his opinion on whether the subject property is superior or inferior when compared to comparable sales (Bienert et al. 2011). Based on the comparative method, adjustments could be performed by comparing energy efficiency levels among buildings of the same type.

Conclusion

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Energy efficiency represents the most important aspect of sustainable development and can be connected to economic, environmental and social advantages. These advantages include tangible benefits like energy cost savings but may also be linked to intangible benefits like environmental protection, improved health and productivity of building users.

Published studies on the benefits of certified buildings on international and national level investigate the costs and financial benefits of environmental friendly buildings. The majority of these studies focus on voluntary certification systems (e.g. ENERGY STAR) in the United States. The very few studies on the benefits of mandatory energy certification within Europe tend to confirm study findings from the United States and conclude that energy efficient buildings achieve on average higher rental rates and sales prices as well as lower vacancy rates and operating expenses. Although these studies give a first impression on the added value from energy efficiency, they are of an insufficient number as that they could provide the evidence required by property valuers for market value estimates.

In order to investigate whether there is supply and demand for environmental friendly buildings on the market, the author took a look on the market for sustainable real estate investments. According to literature findings and surveys carried out by the world's leading real estate corporations, investors become more and more willing to invest into energy efficiency and occupiers become increasingly willing to pay a higher rent for environmental friendly space if energy cost savings are guaranteed. In spite of everything, sustainable property investments are not yet a mainstream as investors drastically overestimate construction costs for green and energy efficient construction. Therefore, investors still have to be convinced to invest into sustainability and energy efficiency by more evident financial benefits. According to published surveys, corporate occupiers are increasingly willing to pay a higher net rent for environmental friendly and energy cost saving space as they become increasingly aware of the related benefits. This in turn will lead to increasing demand for certified properties. Consequently, for investors it is of importance to demonstrate the reduction of total occupancy costs due to energy cost savings to tenant/occupier as this enables the increase of the rental income. In order to stimulate more significant investments, more evidence and thus further research on the financial benefits for both, occupiers and owners, is required.

As the concept of voluntary and mandatory certification within the building industry just started to evolve, measuring the extend of advantages (in monetary terms) associated with energy efficiency and the risk reduction potential still remains difficult due to insufficient amount of available data and evidence. Therefore, demonstrating that energy efficiency may impact property value and return rates to the benefit of the owner represents the main key factor towards more energy efficient investments and a more significant adoption of energy efficiency within the building industry.

Traditional income related valuation approaches are theoretically suitable to integrate and reflect energy efficiency within the valuation methodology. However, the insufficient amount of reliable data as well as lacking property transaction evidence still hinder the implementation of energy efficiency related aspects into the concrete process of property valuation. This is the case, as property valuers depend on evidence from property sales transaction but evidence proving the connection between building's energy performance and sales prices is not yet given due to limited sales transactions data. At the present time, it is too early to measure the extent to which energy efficiency will impact value. With time, however, this situation will change, as more market evidence will become available.

Taking into account that evidence of a higher market value of energy efficient buildings has potential to motivate investors to invest more into energy efficiency and thus stimulate the entire market for energy efficient investments, the property valuation profession should respond to energy efficiency related issues. Concerning this matter, first and foremost more research on the benefits of energy efficient buildings and its impact on value is required. A database on EPC's must emerge and existing databases like the CoStar database must evolve and expand further. A uniform format of the Energy Performance Certificate is needed to allow comparisons among buildings to a higher degree. Moreover, EPC's should provide more detailed information to property valuers. For example, in addition to required values based on a reference climate, EPC's could include required values for the actual location taking into account actual climate conditions (Bammer and Brunnder 2012).

The integration of energy efficiency aspects into valuation processes requires training and further education. Therefore, workshops and professional education is of vital importance in order to assist property valuers to understand the potential impact of energy efficiency on value. Study courses at universities and colleges, and among those especially courses on property valuation, should be supplemented with the new factor of energy efficiency. This way the audience will be provided with professionally grounded knowledge as well as tools and methodologies for practical application of energy efficiency aspects within property valuation practice. This will lead to a greater awareness, which in turn will contribute the higher security of energy supply and climate change.

Property valuers must be provided with guidance on how to factor in energy performance into property valuation. Therefore, there is the need that valuation standards address the new factor of energy efficiency and guide property valuers to process all gathered data in an appropriate way.

Finally, the property valuation report contains of a section called "Building Description" under which building components like thermal insulation, windows, doors, heating and cooling systems are listed. The introduction of a separate category describing energy related building features into the report would state the importance of energy efficiency and make dealing with this new topic easier and more understandable. For this purpose, a descriptive section called "Energy Efficiency/Sustainability" could be added as a subcategory under the section "Building Description". Due to the fact that energy efficiency and sustainability become increasingly important, a valuation report that does not cover these new aspects will be considered imperfect in the future. Especially at times like these when market evidence is limited a descriptive category will help property valuers to judge on whether the energy performance of the property under valuation is superior or inferior. Such a descriptive section on energy quality or deficits of the property under valuation will enable comparison between the building under valuation and comparables. This may influence decision-making processes and result in a higher level of transparency (Bienert et al. 2011a, p. 93). All the different barriers must be overcome before energy efficiency can become and integral part of property valuation practice and demonstrate the higher market value of such buildings.