Integration of Energy Performance and Life-Cycle ... - Immovalue

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Integration of Energy Performance and Life-Cycle Costing into Property Valuation Practice

Authors:

Bienert, Sven

KPMG Austria

Schützenhofer, Christian

KPMG Austria

Leopoldsberger, Gerrit

Dr. Leopoldsberger + Partner

Bobsin, Kerstin

Dr. Leopoldsberger + Partner

Leutgöb, Klemens

e7

Hüttler, Walter

e7

Popescu, Daniela

TU Iasi

Mladin, Emilia-Cerna

TU Iasi

Boazu Rodica

TU Iasi

Koch, David

FH Kufstein

Edvardsen, Dag Fjeld

SINTEF

IMMOVALUE: Improving the market impact of energy certification by introducing energy efficiency and life-cycle cost into property valuation practice Contact:

KPMG Financial Advisory Services GmbH Dr. Sven Bienert [email protected]

Website:

www.immovalue.org

INTEGRATION OF EPC AND LCC INTO PROPERTY VALUATION PRACTICE

I. Table of Content I. TABLE OF CONTENT

1

II. GLOSSARY

4

III. INDEX OF FIGURES AND TABLES

6

1

MANAGEMENT SUMMARY

7

2

“GREEN VALUE”: AN ISSUE OF INCREASING IMPORTANCE10

2.1

Definition of “Green Building”

10

2.2

“Green Value” terminology

11

2.3

Standard Valuation Approaches

13

2.4

International Research - “Green/energy-efficient building achieve an added Value” 15

3

PUTTING AN ADDED EFFICIENT BUILDINGS

3.1

From qualitative towards a quantitative integration into valuation

3.1.1 3.1.2

Descriptive Integration of Energy Efficiency 21 Quantitative integration: General background concerning the valuation approaches 26

3.2

Income related Approaches

3.2.1 3.2.2 3.2.3 3.2.4

Widespread use of income approaches underlines the need for proper integration of green features 30 Derivation/modification of basic approach for integration 31 Developed versus opaque markets 36 Modified income approach applicable for opaque markets 37

3.3

Sales Comparison Approach

42

3.3.1 3.3.2 3.3.3

Derivation/modification of basic approach for integration Methodology for developed markets Methodology for opaque markets

42 46 46

3.4

Cost Approach

47

3.4.1 3.4.2

Derivation/modification of basic approach for integration Approach for “undeveloped/emerging markets”

49 51

4

RESULTS OF CASE STUDIES - PROPERTY VALUATION SAMPLES 53

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VALUE

ON

GREEN/ENERGY 21 21

29

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4.1

Overview on the main results of practice testing

4.2

Case Study A – “Community Center in the Ruhr Area”: Valuation based on the modified income approach 56

4.2.1 4.2.2

Key figures of the Property valuation Results from ordinary valuation

4.2.3

53

56 57

4.2.2.1

General description and explanation

57

4.2.2.2

Key valuation parameter

59

4.2.2.3

Ordinary valuation calculations and results

60

Results applying the modified methodology 4.2.3.1

61

Descriptive integration of aspects affecting buildings’ energy efficiency

61

4.2.3.1.1 Building equipment and appliances

61

4.2.3.1.2 Energy efficiency and other sustainable features of the property

62

4.2.3.1.3 Observable property market sensitivity and maturity for energy-efficient or sustainable properties 63 4.2.3.1.4 Application of the modified Valuation Method 4.2.3.2

64

Valuation calculation results of modified method

66

4.2.4

Description of key findings

67

4.3

Case Study B – “Vienna Offices Building”: Valuation based on modified income approach with a full life-cycle cost assessment 68

4.3.1 4.3.2

Results from ordinary valuation Results applying the modified methodology

68 68

4.3.2.1


69

4.3.2.2

Key valuation parameters

69

4.3.2.3

Technical characteristics of the valued property and of comparables

70

4.3.2.4

Results of LCCA

71

4.3.2.5

Valuation calculation results of modified method

72

4.3.2.6

Pitfalls within the process

74

4.4

Case Study C “Residential property in Iasi”: Valuation based on the modified sales comparison approach 75

4.4.1 4.4.2

Key figures of the property valuation Results from ordinary valuation

4.4.3

75 75

4.4.2.1


77

4.4.2.2

Key valuation parameter

80

4.4.2.3


80

Results applying the modified methodology

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4.4.3.1 Theoretical basis of the new methodology for sales comparison approach (ESP method) 82 4.4.3.2 4.4.4


84

Descriptive integration of aspects affecting buildings’ energy efficiency 4.4.4.1

85

Building equipment and appliances

85

4.4.4.1.1 Energy efficiency and other sustainable features of the property

85

4.4.4.1.2 Observable property market sensitivity and maturity for energy efficient or sustainable properties 86 4.4.4.2

Valuation calculation results of the new methodology

87

4.4.4.3


89

4.5

Case Study D – “Single-family House in St. Christophen”: Valuation based on the modified cost approach 90

4.5.1 4.5.2

Key figures of the Property valuation Results from ordinary valuation

4.5.3

90 91

4.5.2.1


91

4.5.2.2

Ordinary valuation calculation input

92

4.5.2.3


93


93

4.5.3.1


94

4.5.3.2

Modified aspects for report

94

4.5.3.3

Modified valuation calculation

95

4.5.3.4


96

IV. BIBLIOGRAPHY

97

Acknowledgement

103

Legal disclaimer

104

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II. Glossary AAP

Average Adjustment Parameter

ABGR

Australian Building Greenhouse Rating

AI

Appraisal Institute

AMM

Additive Mixed Regression Model

ANEVAR

Asociatia Nationala A Evaluatorilor Din Romania

API

Australian Property Institute

ASB

Appraisal Standards Board

Betr.KV

Betriebskostenverordnung

BIIS

“Bundesverband der Immobilien-Investment-Sachverständigen e.V.”

BIM

Building Information System

BLUE

Best linear unibiased estimator

BREEAM

Building Research Establishment Environmental Assessment Method

CAPM

Capital Asset Pricing Model

CASBEE

Comprehensive Assessment System of Building Environmental Efficiency

CBRE

CB Richard Ellis

CCRS

Center for Corporate Responsibility and Sustainability

CPD

Continued Professional Development

CREIS

Neumann & Partner CREIS Real Estate Solutions

CSR

Corporate Social Responsibility

DCF

Discounted-Cash-Flow

DGNB

“Deutsche Gesellschaft für Nachhaltiges Bauen”

DIN

Deutsches Institute für Normung e.V.

EEA

European Environment Agency

ECSD

Energy Cost Saving Potential

EPBD

European Energy Performance of Building Directive

EPC

Energy Performance Certificate

ERV

Estimated Rental Value

ESD

Ecological Sustainable Development

ESI

Economic Sustainability Indicator

EVS

European Valuation Standards

FCA

Full-Cost Accounting

GBCA

Green Building Council of Australia

GCV

Gross Calorific Value

GDV

Gross Development Value

Gif

Gesellschaft für immobilienwirtschaftliche Forschung e.V.

GWR

Geographically Weighted Regression

HWB

“Heizwärmeenergiebedarf”

IMT

Institute for Market Transformation

ImmoWertV

“Immobilienwertermittlungsverordnung”

IPCC

International Panel on Climate Changes

IRR

Internal Rate of Return

IVS

International Valuation Standards

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IVSC

International Valuation Standards Committee

KVP

Key Valuation Parameter

LBG

“Liegenschaftsbewertungsgesetz”

LCC

Life-Cycle Costing

LCCA

Life-Cycle Cost Analysis

LEED

Leadership in Energy and Environmental Design

MLF

Mortgage Lending Value

NABERS

National Australian Built Environment Rating System

NIY

Net Initial Yield

NOI

Net Operating Income

NTF

Norges Takseringsforbund

NYSERDA

New York State Energy Research and Development Authority

MAR

Market Adjustment Rate

OIB

Österreichisches Institut für Bautechnik

OLS

Ordinary least squares

ÖII

Österreichisches Institute für Immobilienbewertung und Bewertungsstandards

PINZ

Property Insitute of New ZealandRAF

RAF

Rent Adjustment Factor

RICS

Royal Institution of Chartered Surveyors

ROI

Return on Investment

RPI

Responsible Property Investment

SAP

SAP Aktiengesellschaft

TBL

Triple-Bottom-Line

TEGoVA

The European Group of Valuers’ Associations

TIAVSC

The International Assets Valuation Standards Committee

UK

United Kingdom

US/USA

United States of Amerika

USGBC

U.S. Green Building Council

USP

Unique Selling Proposition

USPAP

Uniform Standard of Professional Appraisal Practice

V

“Vervielfältiger” / Multiplier

VAT

Value Added Tax

VEA

Valuation Estimation Adjustment

VPA

Valuation Parameter Adjustment

WAF

Weighted Adjustment Factor

WAPEC

Weighted Adjustment for valuation Parameter Effecting Characteristics

WBCSD

World Business Council on Sustainability Development

Y

Yield

YP

Year’s Purchase / Multiplier

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III. Index of Figures and Tables Figure 1: The Valuation Process

15

Figure 2: Possible Structure of the Building Description Nowadays versus Future

22

Figure 3: Possible Structure of the Valuation - Nowadays versus Future

24

Figure 4: General approach for quantifying property valuation adjustment methodology

27

Figure 5: Theoretical linkages within the Direct Capitalisation Approach

30

Figure 6: Theoretical potential rent premium

31

Figure 7: Transparent vs. opaque property markets

37

Figure 8: Example of WAPEC for market rent (ERV)

38

Figure 9: Romanian Energy Performance Certificate

44

Figure 10: General Cost Approach

48

Figure 11: Process of integration in undeveloped markets

51

Figure 12: Example of WAPEC for Adjustment based on market evidence

52

Figure 13: WAPEC-scoring: Example office rent

64


83

Table 1: Results of published empirical non-European case studies

16

Table 2: Results of published empirical European case studies

18

Table 3: Possible Summary of the Output-Data of the EPC

26

Table 4: Main Operating Cost items

28

Table 5: Integration of technical and market effects

50

Table 6: Indicators to quantify markets awareness for energy efficiency

52

Table 7: Technical characteristics of subject property and comparables

71

Table 8: Operational cost according to cost categories for subject property and comparables (based on a comprehensive LCCA) 72 Table 9: Total recoverable and non-recoverable operational costs for subject property and comparables (in €/m2a lettable are; based on a comprehensive LCCA) 72 Table 10: Results of conventional valuation

81

Table 11: Results of the case study

87

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1

Management Summary

The IMMOVALUE Project This report summarises the main results of the Intelligent Energy Europe project IMMOVALUE: Improving the market impact of energy certification by introducing energy efficiency and life-cycle cost into property valuation practice. This project has been implemented between September 2008 and June 2010. As one of the largest single operating expenses, energy costs deserve great attention from banks, valuers, owners and property managers. Looking at income-producing properties, such costs often represent up to 30 % of the net operating income (NOI). Constantly rising energy prices amplify the need to focus on energy efficiency and a life-cycle perspective of the property in future. This background given the action aimed at securing and intensifying the market impact of energy performance certificates and life-cycle cost (LCC) approaches by strengthening the link between energy performance of buildings and property valuation. In doing so IMMOVALUE has been guided by the following objectives: •

Preparing methodologies and useful guidelines for the daily property valuation business thus ensuring energy efficiency and LCC aspects are properly included in the calculations carried out to derive market values.

•

Testing the drafted methodologies in case studies and getting support from key actors and decision makers in the real estate business.

•

Finally communicating and disseminating the project results to the “customers” of valuers, which are mostly financial institutions, banks and real estate companies.

Main results of IMMOVALUE •

IMMOVALUE offers well working modified valuation approaches that ensure the integration of energy efficiency, LCCA and partly other sustainability issues into property valuation.

•

The modified valuations approaches have been tested in 15 case studies taken from the real market and have been reviewed by well known experts. Therefore they represent the state of the art with respect to linking property valuation with energy efficiency and sustainability - not only in a descriptive way but also in quantitative terms.

•

IMMOVALUE results and methods are reflected in the actual Guidance Note for the integration of energy performance and LCC into EVS which has been prepared by the European Group of Valuers’ Association (TEGoVA) which is the publisher of the European Valuation Standards (EVS).

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Lessons learned: •

During the last years the interest of real estate industry in energy efficiency and other sustainability issues increased in general. Several recent studies in the US and Europe confirmed a certain willingness to pay for environmental features. However, there is a considerable gap between general acknowledgement of importance and practical integration of energy efficiency and LCCA into valuation practice. Practically all valuation reports deal with these issues only in a qualitative (descriptive) way and are not able to reflect the issue in quantitative terms.

•

The IMMOVALUE project contributes bridging the gap between theoretical importance and the practical application in integrating energy efficiency, LCCA and other sustainability issues into property valuation by offering modified methodologies which are based on standard valuation approaches but reflect energy efficiency and LCCA in a more transparent and quantitative way.

•

By means of 15 case studies (property valuations) IMMOVALUE demonstrated that the modified approaches work well and deliver reasonable results. In general the value impact, however, is limited. Only very energy efficient and sustainable properties would come up with a premium of 5-10 %. Higher value impacts depend on an increased market sensitivity towards energy efficiency and sustainability (i.e. if the markets do not only account for cost advantages but account also for better comfort levels, for better productivity etc. to be achieved in sustainable buildings).

•

In valuation practice it is the lack of data that sets limits for broad application of the modified valuation approaches. In most cases data on energy efficiency, LCCA and other sustainability aspects are very vague. Although prescribed by law EPC are still missing for many valuation processes, LCCA is practically not available at all. For a broad application valuers need reliable data bases on reference buildings (comparables) including not only data on building site, rent level and building equipment but also on energy efficiency and different operational cost categories. In addition valuers require training making them capable to interpret energy benchmarks, results of LCCA and other technical characteristics of the building in a correct way.

Structure of the following report The report summarises the main ideas and results of the IMMOVALUE project as follows: •

In a first part some background information on the importance of linking property valuation and green/energy efficient building issues in general and on existing studies in this field is given.

•

In the second part a detailed description of the modified valuation approaches which have been developed in the frame of the IMMOVALUE project follows. They include modified approaches for the income approach as well as for the sales comparison approach and the cost approach.

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•

Finally in the third part selected case studies are presented. They show that the modified approaches are quite easily applicable because they are strongly based on the usual standard valuation approaches.

More detailed information on the topics raised in this report can be found in the two main IMMOVALUE reports, which are both available on www.immovalue.org:

1

•

Report 7.2 - Methodologies for Integration of Energy Performance and Life-Cycle Costing Indicators into Property Valuation Practice;

•

Report 6 - Report on Pilot-Project Valuations and Survey Results.1

Please find the reports here.

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2

“Green Value”: An Issue of Increasing Importance

Key Facts and Findings •

The sustainability agenda is a wide-spread approach which one must examine using sophisticated methods. Whereas “energy-efficient” just refers to using less energy resources to provide the same level of service, “green” or “sustainability” encompasses further aspects such as building quality, thermal quality (e.g. indoor air quality, etc.), energy performance (e.g. energy consumption), carbon dioxide (CO2) emission, reusability of building materials, connection to local public transportation, social impacts (e.g. extended productivity), etc.

•

Green buildings always include a life-cycle perspective.

•

Regarding the “Green Value”, which one can defined as: “the net additional value obtainable by a green building in the market compared to conventional or non-green properties”, the formerly debated “Null-Hypothesis” (no impact of green building features on property values) can be already proven as being wrong due to various accepted scientific studies.

•

The core of the IMMOVALUE project mainly refers to possibilities of integrating energy performance and efficiency aspects derived from EPC and LCCA and therefore the report only represents a part of the total green value of a green building.

•

Two aspects need to be highlighted to avoid misunderstanding: First valuers do not make the market, the rather use market evidence. And second cost is not necessarily value.

To file the IMMOVALUE approach into the overall context of recent international discussion and publication regarding sustainability issues in the real estate industry, an introductory analysis by factoring the buildings’ energy performance aspects into the broader “framework” of sustainability and green building aspects is given below.

2.1

Definition of “Green Building”

To understand the widespread facets which define green buildings, one must establish a sense and sensitization for the meaning of what describes a green building. The recent number of existing definitions for green buildings shows the current uncertainty about the characteristics of a green or sustainable building. Efficient use of resources For example according to Kats (2003) a “green” or “sustainable building” “uses key resources like energy, water, materials and land much more efficiently than buildings that are simply IMMOVALUE

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built to code, …are cost effective and reduces operations as well as maintenance cost, …creates healthier work, learning and living environments, …contribute comfort and productivity”.2 In contrast, the report also discusses the significance of green or sustainable buildings in the light of broader aspects such as RPI or ESD, which go back to the widely accepted general definition of sustainability by Brundtland. In the late 80s, Brundtland3 defined sustainability as “a development that meets the needs of the present without compromising the ability of future generations to meet their own needs."4,5 Energy-Efficiency as part of a Green Building Beside these green buildings definitions, the term “energy-efficient building” is often used misleadingly as a synonym for green or sustainable buildings. While energy-efficiency only refers to using less energy resources to provide the same level of service, green or sustainability encompasses further aspects such as building quality, thermal quality (e.g. indoor air quality, etc.), energy performance (e.g. energy consumption), carbon dioxide (CO2) emission, reusability of building materials, connection to local public transportation, social impacts (e.g. extended productivity), etc. Therefore it is necessary to clearly differentiate between a building which is “just” energyefficient and a green building. Even if there is no common definition for “green” or “sustainable” buildings, there is a consensus in the building and real estate industry that green buildings minimise primary energy demand and consumption (conservation of energy) and therefore use resources such as energy more efficiently, which also leads to lower CO2 emission. Consequently, energy-efficiency is an essential feature of a green building.

2.2

“Green Value” terminology

In line with the ongoing debate related to the sustainability movement within the real estate industry, market participants questioned whether all aspects surrounding “sustainable” buildings could be properly reflected in the properties market value. Therefore the impact of green property features on property value is now the centre of attention. Even though research on this topic is just emerging, one can already rule out the statement that there is no correlation between properties’ market value and its green building features also called the so called “Null-Hypothesis”. The awareness for a market-proven added value of green buildings is growing due to a number of recent scientific papers and surveys. In this context the fundamental results e.g. by U.S.-American University of San 2

Kats, E., et al. (2003), p. V

3

Brundtland Commision (1978)

4

Digital report of Brundtland, G.H. (1987) available on http://www.un-documents.net/wced-ocf.htm

5

Brundtland’s definition contains two concepts – “the concept of ‚needs‘, in particular the essential needs of the world's poor, to which overriding priority should be given; and the idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs” IMMOVALUE

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Diego in cooperation with the CoStar Group6, or the University of California7, as well as by the Australian Green Building Council8 (GBCA) or the University of Melbourne9 and few European institutions such as the RICS in the UK, the Center for Corporate Responsibility and Sustainability10 (CCRS) in Switzerland or the German Institute for housing and environment (IWU) in cooperation with the department of housing in Darmstadt11 (Germany) – which constitute some market evidence for the impact of energy efficiency and green building features on property rents and values are of particular interest. Discount or premium - a question of time? Similar to the idea that there are various green building definitions, there is no commonly accepted “Green Value” terminology. After taking into account the findings from preceding explanations, the definition of RICS which describes the Green Value as the “net additional value obtainable by a green building in the market”12 compared to conventional or non-green properties, seems to be the most accurate one. This definition of green value is also in line with the terminology of the market value according to the IVSC (International Valuation Standards Committee), which is 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 a proper marketing wherein parties had each acted knowledgeably, prudently, and without compulsion.”13 Green Value as part of the Market Value Thus, the Green Value represents an integral part of the overall market value. It is essential to understand two fundamental principles before discussing Green Values: (1) “Valuers do not make the market” – Valuers do not “make” the market; they are looking for market evidence to use for a specific valuation. Therefore speculating what might happen in the future and attempting to price in something that has yet to occur is not useful. Some professionals think it might be appropriate to add a premium to a properties market value just because the EPC, or other green building assessment tools and labels such as LEED14, BREEAM15 or Energy Star are in place. This of course has

6

Cf. Miller, N., Spivey, J. and Florance, A. (2008)

7

Cf. Eichholtz, P., Kok, N. and Quigley, J.M. (2008)

8

Cf. Bowman, R., Wills, J. (2008)

9

Cf. Robinson, J. (2005), p.6

10

Cf. Meins, E., et al. (2008); and Meins, E., et al. (2007)

11

Cf. Amt für Wohnungswesen Darmstadt (2008)

12

RICS (2005), p. 2

13

IVSC (2007), p.27

14

“Leadership in Energy and Environmental Design“ established by the U.S. Green Building Council

15

„Building Research Establishment Environmental Assessment Method“ established by the UK-based Building Research Establishment Ltd. IMMOVALUE

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nothing to do with proper property valuation. Valuers cannot add premiums if the market does not support this premium with significant evidence. (2) “Cost is not Value” – The costs for constructing a green building or upgrading existing conventional properties to e.g. energy-efficient buildings do not necessarily lead to a Green Value and vice versa. This means that a green or sustainable property with identical costs of construction (and land) and identical certification (e.g. LEED, BREEAM, EPC), etc. can still have a totally different added value in different locations, just because the willingness to pay revealed by consumers in different markets might vary substantially. Therefore one need to keep in mind that evidence from other markets concerning price variations for green features might not be relevant. On order to remain consistent with the previously stated definition of green buildings and the green value terminology, one must explicitly state that the core of this report mainly refers to the possibilities for integration of energy performance especially the energy-efficiency aspects of a property and therefore only represents a part of the total green value. This is achieved through the use of EPC- and LCCA-data as well as other elements (e.g. investments for energy performance improvements, etc.) to acquire suitable indicators and input variables for property valuation while remaining flexible enough to leave room for the implementation of further green building features. In this context, one must mention that the rising concept of “Green Lease” arrangements is not studied within this report, even if such issues might have an impact on property valuation. In general, a green lease refers to an emerging concept that integrates ESD, CSR issues, etc. in the lease contract between owner and tenant of a sustainable/energy-efficient property. Green lease arrangements regulate various aspects mainly related to green or energy-efficient building standards, operational controlling and audit procedures related to energy performance measurements. It also relates to incentive and penalty clauses etc. due to agreed upon service and energy performance levels.

2.3

Standard Valuation Approaches

In general, property valuation is associated with the three main approaches: the sales comparison approach, the cost related approach and the income related approach all over the world.16 With the exception of some national particularities and different notations, all valuers use the same basic approaches. Further, one can differentiate the income related approach into the methods of direct capitalization and discounted cash flow (DCF).

16

Cf. Gelbtuch (1997): p. ix.

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Worldwide valuers use variations of the three basic valuation methods The direct capitalization approach uses the estimated achievable market rents less outgoings divided by a cap rate/yield to derive the market value.17 The DCF approach in contrast analyses the first 10 years of revenues and costs in detail on a yearly basis and assumes that the property will be sold after this holding period for a so called “Terminal Value”. The cash flows are calculated in detail for every single year of the holding period. Therefore, the valuer must estimate rental growth rates, inflation rates, occupancy rates etc. on a yearly basis.18 The essential advantage of the more complex DCF-Approach is that the assumptions are more transparent and detailed. In contrast to the above shortly explained income approaches the sales comparison approach uses sales data/transaction prices, which are comparable to the subject property being valued. In most cases the difficulty in applying this approach is the lack of existing comparable data.19 The cost approach is deriving the (depreciated) replacement costs of the property being valued taking into account the quality of fittings, the cost level of the region, the age etc. Figure 1 illustrates the entire valuation process. One should select the appropriate valuation method after a detailed preliminary analysis, data selection and collection.20 The calculation itself is therefore only one part of the whole process, which is documented in the valuation report. The valuation report communicates the different steps of the valuation process from the research and data collection to conclusion and final estimate of the market value. All applicable valuation approaches use data and information sources that feature market evidence to estimate the market value.21 Market evidence is essential for all approaches. The valuer is also dependant on market evidence to consider and quantify added values within property valuation due to enhanced energy-efficient features of a property. The following section will point out the most prominent published research results regarding the investigation of the terminology of an “added value” due to energy efficiency, respectively sustainability of real estate.

17

Cf. Appraisal Institute (2008b), p. 377 seqq.

18

Cf. Hungria-Garcia (2004): p. 19 et seqq.

19

Cf. Appraisal Institute (2008b), p. 300.

20

Cf. IVSC (2007), p. 170.

21

Cf. ibid p. 170.

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Figure 1: The Valuation Process22

2.4

International Research - “Green/energy-efficient building achieve an added Value”

Non-European research results Some organizations such as the Green Building Council of Australia (GBCA)23, the Royal Institution of Chartered Surveyors (RICS)24, the New York State Energy Research and Development Authority (NYSERDA)25 and economic scientists all over the world26 have produced a wide range of case studies to verify the effect sustainable features on property values. Most studies and scientific papers deal with the different available sustainability 22

Cf. IVSC (2007), p. 171.

23

Cf. Bowman, R., Wills, J. (2008).

24

Cf. RICS Valuation Standards Board (2008), Corps, C. (2005).

25

Cf. Institute for Market Transformation (2003).

26

Cf. e.g. Warren-Myers, G., Reed, R. (2009), Sayce, S., Ellison, L. (2003), Miller, N., Spivey, J., Florance, A. (2008), Lorenz, D., Lützkendorf, T. (2003 - 2008), Pitts, J., Jackson, T. (2008). IMMOVALUE

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certification systems like the American LEED, the British BREEAM or the Australian Green Star and their impact on values, which may be achieved due to a certain rating levels. These international well-known sustainability labels are going beyond the aspects of energyefficiency and therefore beyond what the IMMOVALUE project is primarily looking at. Still these international publications identify key variables as the main drivers leading to an added value, the so-called “Green Value” of a property in comparison to a non-sustainable respectively non-green peer group. Table 1 illustrates the different published potential key variables and the quantitative results of the empirical studies.27

Table 1: Results of published empirical non-European case studies

All above mentioned research results illustrate specific property markets outside the European continent. Therefore the following sections describe approaches that were established in Switzerland along with the consideration of energy efficiency within the German qualified rent tables. Swiss Valuation Model - ESI Valuation Instead of the above mentioned American and Australian research results the Swiss Center of Corporate Responsibility and Sustainability (CCRS) established a so called Economic Sustainability Indicator (ESI).28 ESI measures the properties risk to achieve an increase respectively a decrease of value on the basis of long-term future developments.29 CCRS uses the DCF-approach to include specific long-term risks as seen in a sustainability perspective. 27

Cf. Pitts, J., Jackson, T. (2008), p. 117.

28

Meins, E., Burkhard, H.-P. (2007); Holthausen, N., Christen, P. (2009).

29

Meins, E., Burkhard, H.-P. (2009): p. 4, p. 12.

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ESI identifies risks, which may occur between the date of sale (e.g. end of year 10) and the end of the economic lifetime of the building (e.g. year 35 or 40). So it isolates and values the uncertainty, which is not automatically included explicitly in the cash flow calculation of the so-called holding period of the property. Five groups of sustainability features could be identified to quantify ESI: (1) Flexibility and applicability (2) Dependency of energy and water (3) Accessibility and mobility (3) Security and (4) Healthiness and Comfort. They were operationalised, aggregated to ESI and quantified through a risk-based weighting model that implicates three main elements: scenarios, probabilities of occurrence and dimension. Hence the ESI reflects the property’s future risk, which one should consider within the estimation the exit cap rate of the DCF-approach. ESI was specified for multifamily houses, office and retail spaces. German Ecologic Rent Tables In Germany, landlords use rent tables (so called “Mietspiegel”) as the legal basis to increase net rents for residential floor area. Real empirical data updated over the years by surveys form the basis. Based on this instrument for a few cities so-called ecological rent table have been published. In 2003 the City of Darmstadt established the first ecologic rent table for the estimation of local comparable residential rented floor area.30 In 2008 the City of Darmstadt published a revised rent table and adjusted the impact of energy-efficient characteristics of buildings.31 In cooperation with the Institute of Living and Environment (“Institut für Wohnen und Umwelt”) in Darmstadt the first result of the research project was the statistical proof that buildings that featured good thermal performance (“gute wärmetechnische Beschaffenheit”) were able to achieve a rental-premium compared to energy inefficient buildings of up to 0.37 €/m²/pm.32 The aim of the cooperation between the City of Darmstadt and the Institute of Living and Environment was to investigate the impact of the thermo technical quality of residential buildings. The research was carried out during the preparation of the rent table for Darmstadt. The analyses resulted in a practicable and useful way of integrating the energetic characteristics into the qualified rent table with the aid of information out of the EPC.33

30

Amt für Wohnungswesen Darmstadt (2003), p. 3.

31

Amt für Wohnungswesen Darmstadt (2008), p. 3.

32

Knispel, J., Alles, R. (2003), p. 1.

33

Amt für Wohnungswesen Darmstadt (2003) and (2008).

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Table 2 summarizes the results of the Swiss research results and the German ecologic rent tables.

Table 2: Results of published empirical European case studies

Survey of Roland Berger In an online survey among 40 big real estate companies in Germany, Switzerland and Austria the consultant Roland Berger evaluated (among other issues) the willingness to pay for environmental/sustainability features of assets.34 70 % of real estate investors answered that they are willing to accept higher average investment cost of 8.9 % for sustainable buildings resp. refurbishment. On the tenants side the answers show that 86 % are willing to accept higher rents by average 4.5 % if the object is sustainable. Altogether the survey shows an increasing awareness and weight of energy efficiency and sustainability issues among real estate companies. However, one must stress that the results show only intentions and not realised transactions. IMMOVALUE survey on market trends IMMOVALUE implemented an own web-based survey to get an overview on the current practice of integrating energy-efficiency respectively LCC-aspects into current property valuation. Furthermore the results of the survey gave rough assessment of the valuation experts’ estimation about the future trends with respect to the importance of building certification and LCC for valuation purposes. The survey was communicated to about 1,000 valuation experts. At the end 153 respondents were taking part. 35 % of them were from Germany, 33 % from Romania and 25 % from Austria. The remaining participants came from United Kingdom, Norway, Sweden, Belgium, Czech Republic and the United Arabian Emirates. 71 % of the respondents stated that they are self-employed or employed valuers. The remaining 29 % are connected to the branches banking and investment, facility management and real estate agencies.

34

Roland Berger Strategy Consultants (2010)

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The main results can be summarised as follows: More than 50% of the valuers that assume a market response to energy efficiency and other sustainability criteria put premiums on energy-efficient buildings by adapting parameter such as the market rent, the maintenance costs or the yield, etc. Almost 57% of the respondents state that the income related approaches, the direct capitalization and the DCF approach are the most appropriate valuation approaches to incorporate the aspects of energy-efficiency and other sustainability characteristics. Furthermore it could be figured out that almost 57% of all interviewees are already considering the topic within the descriptive part of the valuation reports and another 34% is thinking about it due to the actuality and the rising importance of the topic. Following bullet-points summarize the main trend and opinions of the survey respondents: •

93% agree or strongly agree that energy-efficient/sustainable buildings will generate a higher market value

•

95% agree or strongly agree that the importance of the topic will rise in the future, but soonest in 2 respectively until 5 years

•

77% agree or strongly agree that the importance to incorporate energy-efficiency into property valuations was rising already in the last few years

•

66% agree or strongly agree that the adaptation of valuation standards is necessary.

Critical remarks - The applicability of the recent research results Although researchers were able to find some empirical evidence, all of the mentioned nonEuropean results are not quite significant because of the small sample sizes in comparison to the national and internationally reviewed markets.35 Muldavin states that the results must be handled critically in the assessment of the applicability of the several above-mentioned studies, particularly those which rely on the CoStar data set.36 The established Swiss valuation methodology which uses the ESI was tested within real case studies. The results certify the credibility and practicability of the methodology.37 However it remains to be seen whether this approach is applicable due to specific adaptations for certain European indeed for international property markets. Thus, the process may require further testing. Moreover the valuation method used to include the issue of sustainability was only the DCF-approach. It might be more interesting if the ESI valuation is applicable for the other valuation approaches. Furthermore, the scoring is only empirical to a certain extent, and therefore market based. Qualitative surveys and analysis demonstrate that experts and market participants expect a premium or a discount based on the degree of sustainability and the respective certifications of the properties. However, due to the lack of data and comparable information, no one is able

35

Warren, C. (2009), p. 8; Muldavin, S. (2008), p. 4 et seqq.

36

Muldavin, S. (2008), p. 11 et seq.

37

Meins, E., Burkhard, H.-P. (2009), p. 18.

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to give a clear indication about the quantitative mid- and long term impacts of sustainability on a national or international level. Nevertheless, one can identify some of the linkages within the several valuation methods where property valuers and the market participants from all over the world expect the effects which may arise in the near future due to the sustainability discussion.

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3

Putting an added value on green/energy efficient buildings

3.1

From qualitative towards a quantitative integration into valuation

Besides the question of how valuers can encompass quantitative considerations, the valuer may use the descriptive parts of the report to specify and demonstrate the energy efficiency of the property being valued, and form that basis, perform further calculations. Due to the issue of necessity to integrate sustainability features in a qualitative manner the RICS recently published a Valuation Information Paper No. 13, which deals with the topic of “Sustainability and commercial property valuation.” They stated the previously mentioned point that “[often] it may be difficult for [sustainability factors] to be quantified; nevertheless it may fall within the remit of the valuer to provide some qualitative comments” on these issues.38 This quote means that in the event that the market and its participants recognize that energy efficiency and/or sustainability characteristics have an impact on the market, the valuer must inform and prepare advice relating to these special issues.39 Actually, if the market already recognises the importance of sustainability aspects then the inclusion of the quantifiable aspects of sustainability seems indispensable. 3.1.1

Descriptive Integration of Energy Efficiency

A valuation report provides the documentation of the valuation process and argumentation for the selection of certain input parameters that the valuer used in the calculations for any property valued. The valuation report is therefore incomplete if it does not cover the aspects of energy efficiency and sustainability issues in the future.40 If the valuer cannot isolate quantitative market evidence in the case of not-transparent markets, the superior (or inferior) energy performance of the subject property must be addressed by the valuer in the descriptive part of the valuation report. Such information regarding the existing energy qualities/deficits of the subject property when compared to its peers may support customer’s decision making processes41 and increase transparency. In most cases, valuers use a proprietary valuation report that contains a separate chapter with the description of the building components. This chapter, named “Description of the Building,” may contain up to 4 subsections (see left side of Figure 2). In general, the building components (e.g. thermal insulation, type of windows/doors, heating/cooling installations) that are directly or indirectly related to energy consumption by users are already included in the valuation report per se. The question arising in this context is

38

RICS (2009): p. 3.

39

Ibid.

40

Cf. Scherr, H. (2009): p.1 et seq.

41

RICS (2009), p. 3.

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how valuers can approach sustainability or simply the energy efficiency of the property in a more easily understood and replicable way.

Figure 2: Possible Structure of the Building Description Nowadays versus Future

One could reasonably include the description of the building and all its energy related features within the chapter “Further Information”. However, in order to underline the importance of the buildings’ energy aspects or sustainability issues the valuer should create a separate subsection that could be named “sustainability/energy efficiency”. The introduction of a separate chapter, however, does not detain the valuer from also addressing sustainability issues in the other chapters of the building description. Separate chapter for sustainability recommendations This separate chapter should include the definition of energy efficiency/sustainability in the context of properties and therefore the three main columns of the Triple Bottom Line model: the environmental, economical and social features. The definition of sustainability for commercial buildings published within the Valuation Information Paper No. 13 of the RICS may be helpful in this context. 42 „[A sustainable] building [...] minimise [s the] environmental impact through all parts of the building life-cycle and focus [es] on improved health for their occupiers [...]. [...] Sustainable buildings should optimise utility for their owners and occupiers and the wider public, whilst minimising the use of natural resources and presenting low environmental impact, including their impact on biodiversity.“43 Furthermore, there is an increasing number of sustainability assessment codes/tools already in use like BREEAM, LEED, Green Star, DGNB etc. When one applies such codes to the property under investigation, the code provides the valuer with important information about the sustainable quality of the property.44 Besides the building description, one can estimate some quantitative adjustments of some valuation parameters like e.g. the market rent or the maintenance costs of an office building. 42

Cf. RICS (2009), p. 5 et seq.

43

Cf. RICS (2009), p. 6.

44

Ibid p. 6.

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The argumentation regarding the adjustment and its extent is highly correlated with the corresponding estimation of the particular valuation parameter itself. Therefore one must explain the adaptation within the descriptive chapter. The following example is given to facilitate better understanding: Valuation of an office building with very low primary energy consumption: the EPC exceeds the national requirements of the comps. The valuer is going to adapt the market rent, i.e. estimates a premium. The structure of the valuation chapter within the valuation report and the estimation of the market rent might be adapted as shown on the right-hand side of Figure 3. Lacking market evidence requires good argumentation and description The need for proper argumentation and description is particularly true if little market evidence exists. The lack of market data increases the necessity for further information on sustainability and energy efficiency effects in order to meet the awareness of the market participants.45 In this case the descriptive portion if the report is more relevant to argue that the subject property is “future-proof“ to a greater degree when compared to the rest of the market. Another opportunity for the valuer to reinforce his or her decision to set a premium may be e.g. to illustrate the rising energy costs during the last decades, especially in the context of the worldwide decreased of natural energy resources as well as the advantage of the building being valued using alternative energy sources such as photovoltaic.46 Highlight advantages and disadvantages, their middle- and long-term effects to underpin the adjustment of valuation parameters At the very least, the valuer must show what advantages and disadvantages may arise due to the building components that are liable for the thermal quality of a building and the impact on the future usability of it. In this context, the valuer must assess and discuss some of these aspects: (1) The floor area in the terms of usability and the possible impact on the overall running costs.47 (2) Insulation, its special features (e.g. heat bridges, type of windows, etc.) and the continuity of them in terms of durability, regional and legislative building standards. (3) Type of energy source with regard in the grade of carbon emissions and the secure of it is continuity. 48 (4) Water efficiency, especially in locations with scarce water supply, using grey water, recycling of water, etc.. 49 45 46

Ibid. p. 15. Cf. RICS (2009)

47

Ibid, p. 9

48

Ibid, p. 12

49

Ibid

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(5) The ability to replace and or perform remedial maintenance on the building components50 (e.g. the upcoming economic effort to replace an oil running heating system against a pellet heater to reduce operating costs due to rising energy costs). This list contains only a few possible examples. In principal, the valuer is able to use the existing building components in comparison to national and/or international building standards to illustrate which possibilities are given and can be used to upgrade the building and its facilities as the ongoing awareness of energy efficiency and/or sustainability of buildings improves. As illustrated, documentation of market awareness as well as the verification of the parameter market rent, yield, etc. may be extended with separate chapters like “Awareness due to Energy Efficiency/Sustainability” and “Adaptation due to Energy Efficiency/Sustainability”.51

Figure 3: Possible Structure of the Valuation - Nowadays versus Future

One of the most important aspects when one assesses sustainability is the level of energy performance of the building, i.e. its annual energy consumption and GHG emissions associated the energy the building uses. Such information is now included on a mandatory basis by European EPC’s. One can measure accrued energy costs via from the energy consumption and the tariffs. Further, LCCA may give additional guidance regarding the extent of the accruing energy costs during the whole lifetime and the influence as well as the dimensions of upcoming maintenance costs and special renovation necessary throughout the lifetime of the building.

50

Ibid, p. 11

51

Cf. RICS (2009), p.11

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The report should discuss the following sustainability aspects (preferably in a separate chapter): (1) land use, (2) design and configuration, (3) construction materials and services, (4) location and accessibility considerations, (5) fiscal and legislative considerations and (6) management and leasing issues.52 The next chapter will gather some possible figures and information that the valuer could integrate into the valuation report if the EPC of the building being valued exists and is made available. EPC supports the integration of energy efficiency in the descriptive part When the building EPC is available, the valuer must carefully analyze the information provided within this document. Furthermore, the valuer should check who issued the EPC not only to make sure it is an official document but also to ensure the credibility and correctness of the data published within.53 Thus in order to perform this function, the valuer should be informed about the format and content of the EPC as well as the national system that supplies (by local or international experts) and registers EPCs (local authorities, national database). The valuer can use information from the EPC that can be correlated with the national standards over the time, such as: (1) Overall energy quality expressed as an energy mark (0-100) or energy grade (A to G), (2) Different annual energy demands/consumptions at final user (final energy) or total annual energy demand/consumption at the source (primary energy), (3) Costs of the required energy needed to operate the whole building over one statistical year, (4) Level of energy loads in comparison to the current standards in use, (5) Year of construction: What were the energy related standards at that time? For example, what was the thermal quality required at that time for the building envelope? (6) Age and quality (efficiency) of the technical equipment and (7) Recommended measures for improving the buildings’ energy efficiency (construction and equipment) and associated annual energy savings and investment costs.54

52

RICS (2009, p. 8 et seq.

53

Cf. Scherr, H. (2009), p.2 et seq.

54

Cf. Hofer et al. (2009), p.17.

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The valuer should be able to assess the energy quality of the subject property in comparison to the current national energy standards or a given group of comparables based on the information provided by the EPC in different formats in each EU country. Table 3 illustrates one possibility how the valuer can use and aggregate EPC information dependent on the existing main types of energy.

Table 3: Possible Summary of the Output-Data of the EPC

3.1.2

Quantitative integration: General background concerning the valuation approaches

Besides the qualitative integration of energy efficiency aspects via explanatory notes, the main challenge will be reflecting these findings in adequate, quantitative and profound numerical figures that are suitable for the subject property. The following approximation technique was chosen in order to find appropriate methods that valuers can use to handle the buildings’ energy performance and other related aspects. (see Figure 4). As already mentioned in previous chapters, the scope of this report primarily focuses on the integration of energy performance information (EPC, LCC, etc.) into property valuation and therefore reduces the complexity through blinding out the more holistic sustainable or green building aspects (e.g. ESD, RPI).

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Scope of IM M OVALUE


Reduction of complexity

Relevance / Systematisation

Theoretical Linkages to Property Valuation

M arket proof

Recommendations for adjustments

Green feature

Green impact

Linkage to Valuation Approaches

Evidence of market impact

Practical changes of valuation methods

Energy efficiency

Public benefits

Income related Approach -… -… -…

Intangible benefits (for the tenant/ow ner)

Tangible benefits (for the tenant/ow ner)

Other green building features

Chapter 6.4.3 -… -… -…

Sales Comparison Approach -… -… -…

Chapter 6.4.4 -… -… -…

Cost Approach -… -… -…

Chapter 6.4.5 -… -… -…

-|| -

Avoid Redundances and be aware of Interdependences

Typical Property Valuation Approaches in Use

Figure 4: General approach for quantifying property valuation adjustment methodology

First, the valuer must quantify the key tangible and intangible impacts of a buildings’ energy performance in order to be able to quantify the possible linkages to each of the three basic property valuation approaches (cost, sales comparison and income approach). It is also important that the valuer avoids redundancies as well as be aware of interdependences. Operating cost as major link between valuation and EPC/LCCA Usually one assumes the adjustment of potential gross income – based on the expectation of increased rents in case of lower (recoverable) operating cost and vice versa – to be a major leverage for the reflection of energy performance resp. LCC of a building within property valuation (see the following chapter 3.2.2). In order to use this leverage, it is necessary to go beyond the usually rather rough figures on operational costs used in current valuations and come up with solid forecast of future operating cost – differentiated into recoverable and non-recoverable cost. The information available from the EPC and a LCCA serve as a transparent and traceable basis for such a forecast. The forecast of operating costs applicable in property valuation mainly includes the following cost elements:

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cost item

description

Building related facility management costs

Costs for regular and routine activities such as cleaning, inspections, caretaking, management of planned service contract, products or materials used for mentioned activities

Utilities - energy, water, sewage

Costs for energy such as fuel for heating, cooling, power, lighting as well as water and sewage costs

Repairs and replacement of minor components

Replacement of major system and components

Refurbishment

relevance from an EPC/LCC perspective A precise analysis of costs for cleaning is necessary with respect to the building façade, since different façade systems (with highly different energy performance) may also show high discrepancies in cleaning cost. In addition the cost for inspection and caretaking will increase with increased complexity of the technical systems in the building. Cost for energy can be derived from the EPC – using a careful “interpretation” of the figures from the EPC (see in detail below)

As a simplification maintenance costs are often calculated as a fixes share of construction cost. In reality, however, maintenance costs are not a direct function of construction cost but depend to a high Regularly maintenance costs degree on the complexity of the technical defined by value size of area, system and on other building characteristics. contract term LCCA can derive solid figures on expected maintenance cost from comparisons with buildings with the same characteristics (at least in some building elements that are assumed to be “cost drivers”) For a solid forecast of replacement cost the Costs to keep the performance SLP approach is very helpful. Also in this of building elements including case comparisons with buildings that use design and project similar technical solutions for “critical” management such as elements – such as shading systems, ventilation systems etc. – produce traceable exchange roof or facade cost assumption in this field. Costs to improve the In the context of property valuation this cost performance of a building elements plays a role mainly in those cases including design and project where a refurbishment is needed because of management, such as new lacking functionality of the old system. chillers or boilers with higher energy efficiency Table 4: Main Operating Cost items

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3.2

Income related Approaches

Key Facts and Findings • In general the following valuation parameters within the income valuation seem to be adequate for an adjustment related to green or energy performance aspects: (1) Potential gross income (2) Operating expenses (3) Lease terms and tenant retention (4) Remaining economic life-time (5) Yield / Cap rates • Main green value drivers can be classified in tangible benefits (e.g. lower energy costs, maintenance costs, etc.), intangible benefits (e.g. improved occupancy productivity, lower churn rate, etc.) and public benefits (e.g. tax savings, subventions, etc.). Modification of basic approach seems to be achieved most likely by adjustment of the potential gross income, the applied yield and the buildings‘economic lifetime. • An appropriate way to quantify the degree to which the property market seems to be already influenced by green or energy-efficient building developments could be provided by applying a newly developed scoring model – the so called WAPEC (Weighted Adjustment for Valuation Parameter Effecting Characteristics) as illustrated below: Degree of M arket Influence Medium

Significant Criteria 1 Criteria … Criteria n

+/- 66-100%

X

Criteria 1 Criteria … Criteria n

+/- 66-33%

Neutral X X

Criteria 1 Criteria … Criteria n

+/- 33-0%

Average Adjustment Market Adjustment Valuation Estimation Parameter (AAP) rate (MAR) Adjustment (VEA) +/- … % +/- … % x x +/- … %

Weighted Adjustment Factor (WAF) in %

• The result of the easy-to-handle scoring model is an adjustment factor in percent that a valuer can use to adjust the market data of comps for the subject property being valued. The WAPEC-model gives guidance for the valuer to process his thoughts regarding the integration of energy efficiency and other sustainability issues into his valuation in a structured and transparent way.

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The income related approach and all its variations are based on the expectation of future rental income, which implicates that these approaches are used for income producing properties such as offices or other commercial buildings. Due to the fact that this approach is the most important valuation approach worldwide, one must pay special attention when quantifying adequate adjustments to link energy-efficient property features to this approach in order to achieve acceptance. 3.2.1

Widespread use of income approaches underlines the need for proper integration of green features

In contrast to the cost or sales comparison approach, the income approach offers a broader range of possibilities for the integration of energy performance information and indicators from e.g. the EPC and their market implications. As it is illustrated in Figure 5 using the example of the direct capitalization approach, one can achieve such adequate adjustments by modifying the potential rental income, the operating expenses, the applied yield or adjustments for other value effecting characteristics.

Figure 5: Theoretical linkages within the Direct Capitalisation Approach

One can further address similar adjustment possibilities within the Discounted-Cash-Flow approach. In comparison to the direct capitalization approach, the DCF-approach offers more IMMOVALUE

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holistic ways to reflect the impact of energy-efficient building features within the potential rental income and the operating expenses. 3.2.2

Derivation/modification of basic approach for integration

In general, the income related approach express forecasted and discounted revenues more or less. The appraiser uses the estimated rental value (ERV) based on market-data and currently available rental information in order to determine the gross potential income of the property being valued. The motivation for integrating the EPC at this point of the valuation process relies on the fact that the energy efficiency level of a building might influence the tenants’ willingness to pay in the long run. The following potential linkages are specified to show the range of possible valuation adjustments within the income related valuation approaches in order to provide the reader with an overview of how valuers might quantify and integrate such factors into property valuation. Adjustment of the potential gross income First and foremost, if tenants have to pay a lower energy bill then they might be willing to spend the delta on the actual paid rent (here the potential gross income).55 The basic hypothesis behind this assumption is the fact that that tenants benchmark their total occupancy cost rather than just the rental payment (see Figure 6).

This hypothesis is strengthened by the expectation that in gross rent-orientated property markets where evidence of rental changes due to optimized energy-efficient buildings should be forced more rapidly than in net rent-orientated markets because of the direct monetary benefits for the property investor or owner.

Total occupancy costs (for tenant)

Conventional building

Recoverable operating expenses

Rent = gross income to owner

Highly energy-efficient building Recoverable operating expenses Reduced energy costs

Δ = max. potential rent premium to owner

Rent = gross income to owner

Figure 6: Theoretical potential rent premium

55

Eddington, C., Berman, D., Hitchcock, D., et al. (2009), p.3

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However, tenants will probably bargain. Therefore the reduction might only lead to a reduction in overall occupancy costs for the tenant but not necessarily to a higher rent for the landlord. Furthermore, energy efficiency can also, to a certain extent, influence the non-recoverable operation expenses ( the costs that cannot be passed on to the tenant) due to the fact that energy-efficient buildings might achieve longer economic lifetime, increase tenant retention and therefore reduce vacancy rates and imply lower maintenance costs. Also, higher demand for energy efficient buildings might lead to a higher tenants’ willingness to pay just because these buildings are more “prestigious/desirable”, while rents for buildings of a poor thermal quality tend to decrease. In this case the question is for how long the tenant might want to pay this premium, since every new product or idea will lose its “bonus” over time. Also, it is very important that one consider the fact that all of the above mainly refers to new lettings / new tenants. During the term of a rental contract there will probably only be a few cases where the chance to increase the rent just because the thermal quality has been improved. In a lot of countries more obstacles of this kind might arise. There could, for instance, be laws in place which prevent the owner from increasing the rent for new leases if the house has a certain age no matter how much the owner invested in sustainable features. To what extent the net rental income will increase compared to non-green/non-energyefficient comps is not predictable on a general level. The market will set “new” prices for energy-efficient buildings and inefficient buildings. Furthermore, one must consider a number of different factors, e.g. the location of the building: Retail units in top-locations tend to be leased at a higher price and show lower vacancy rates, regardless of the thermal quality. On the other hand, in times of oversupply for “standard” buildings, energy efficiency will play a crucial role in marketability. Both arguments reflect the fact that the relevance of energy efficiency will be dependent on different factors like market state, vacancies, location, usage etc. However, since most markets today do not reflect good results concerning energy savings in the sense of higher revenues, valuers should not estimate this fact pro-actively by pricing in assumed reactions of the market. A fundamental principle behind this is that an appraiser must reflect the market and current state but must not influence it. As long as nobody knows how the new transparency achieved by EPCs will affect the market, valuers must observe and analyse market behaviour. The fact that the rental income reflected in the valuation process today must also account the future rental growth which might be linked to energy efficiency might also be viewed at “tricky”. This leads to another possible adjustment, the yield, since rental growth within the income approach (except DCF-Models) is incorporated in the yield applied (see adjustment of yield).

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Adjustment of lease terms In general, the lease agreement should be discussed in connection with the rental income that results based on these agreements. However, the simple direct capitalization approach fails to reflect certain lease terms in the valuation process. Since these might be influenced by green building features respectively green lease terms, this is therefore a strong argument for the application of more advanced techniques like DCF when it comes to: (1) Shorter lease up periods, (2) Tenant retention, or (3) Longer leases. Long rentals are in some cases - for the government or big companies - a substitute for the higher rents they can avoid when leasing energy-efficient buildings. Adjustment of the non-recoverable operating expenses and vacancies The potentially lower vacancy rate will lead to higher overall revenues and could therefore be discussed in connection with the rental income (see adjustment of the potential gross income). Moreover this will lead to a lower vacancy and collection loss which ranges e.g. in Germany and Austria for ordinary buildings between 3 % and 4 % of the potential gross income. Since these expenses reflect the fluctuation and overall quality of tenants, these aspects must be influenced. Indeed, the possibility of attracting class-A-tenants with a good economic background and a chance to increase the probability of renewal of lease agreements are often stated arguments for green buildings. This hypothesis is based on the assumption that the marketability of buildings of a high thermal quality will (probably) increase in the future (while that of buildings of a poor will decrease) - this leads to lower (higher) vacancy rates. Again, the amount of reduction will be market driven and cannot be a general result. Since other operating expenses that might be discussed in this section only refer to the nonrecoverable expenses, there is little left where one could identify a positive impact on. While the costs for vacant units (which are likely to decrease anyway) should be lower, but administration costs will probably remain unchanged. The effects we discussed above mainly refer to changes on the demand side of the market. The introduced approaches are based on the assumption that the availability of the energy certification will raise consumers’ awareness regarding the energy efficiency of buildings and consequently shift consumers’ demand. On the other hand there are effects in context of energy certification, which do not result from the market-side but from the technical quality of properties. Maintenance costs are an example for a technical influence and refer to the expenses of keeping a property in a good state of repair. The idea of adjusting the maintenance costs in context of energy certification is that e.g. buildings in a good efficiency level are in top-condition and therefore cause lower maintenance costs. Or, as the other side of the coin, cause higher costs because of sophisticated technical equipment like heat pumps or solar heating systems. IMMOVALUE

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Maintenance costs must be derived from the qualities and the condition of the technical equipment, independent from the energy certificate or energy efficiency itself. Therefore, the introduction of the energy certificates itself will not change anything. On the other hand, one should mention that an energy certificate provides a significant amount of data that could be useful for the derivation of the “correct” maintenance costs. Thus, a more detailed calculation of the maintenance costs using LCCA will become more important in the future. Probability of (re)letting An important issue already reported by different real estate market players is the fact that letting of sustainable assets is, on average, easier when compared to conventional buildings. In the DCF methodology, one can model periods of (re)letting in detail, thus giving an additional value to those assets which show longer letting periods, quicker reletting and shorter periods of vacancies. Adjustment of the remaining economic life In comparison to the Anglo-Saxon income approach, where just a yield/cap rate is used to express a years’ purchase (which encompasses the remaining economic lifetime implicitly), the German or Austrian income approach uses a so called “Liegenschaftszinssatz” / ”Kapitalisierungszinssatz”, which reflects the remaining economic lifetime explicitly to estimate a specific multiplier (“Vervielfältiger”). The remaining economic life of a building is the period of time for which one can expect in the future. This life can be further extended by carrying out several refurbishments or reduced due to insufficient maintenance etc. However, the potential changes due to energy-efficient building characteristics are impossible to measure at this stage. Since properties which offer an up-to-date (high) standard are to some extent more “future-proof,” one can expect that the remaining economic lifetime is longer as opposed to conventional comps. But it is also necessary to mention that - assuming a comprehensive market change will take place in the upcoming years - there will be a potential influence from the market side, but relating to non-green/non-energy-efficient properties. To give an example: if one assumes that buildings of a certain poor thermal quality are not marketable in the future, the result would manifest in the form of a reduction of the remaining economic life caused by the demand-side of the market. Adjustment of Yield If the effects are related to the overall risk and not already reflected in the rent or other aspects, then it may be appropriate for the valuer to make an adjustment of the applied yield concerning these long-term effects. The derivation of the yield is one of the most important parts when one applies direct capitalisation as well other, non standardized approaches like e.g. the discounted cash flow method. The idea of integrating the energy certification at this point of the appraisal process will affect transparency concerning energy efficiency and ultimately change the demand side of the market to some extent. Buildings of a good thermal quality will have a lower risk IMMOVALUE

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concerning marketability while buildings of a poor thermal quality will probably suffer. The attribute “future-proofed” against rising energy costs and economic obsolescence results in a lower risk profile and therefore a lower yield. This argument is not redundant to higher income, since the likelihood of a better growth prospect needs to be reflected in the yield even so if at the present, the income profile has not changed to a great extent. On the other hand the appraiser must of course avoid redundancies in his valuation. Finding the “right” yield is the crucial point for every valuation and in a lot of European countries the applied all risk, terminal, equated, equivalent and so on yields are potentially the most vulnerable part for the valuer - on the other hand it’s “his professional judgment” and therefore the explanation is just his “market feeling.” We have analysed valuations for assets worth more than 6 Billion Euro of various valuation companies and no matter how profound the market research performed, the best explanation for the yield is in most cases just the net initial yield for three comparables (without a proper definition for the NIY in most cases). The point is that there is still a huge gap between theoretically profound calculations of yields and practical application as well as available market data. This leads to the fact that even if green/energy efficiency features were priced in by adjusting the yield, we must realize that for appraisers, this will be very difficult to accomplish in valuation practice. Furthermore, the possible adjustment of yields seems to be less then preferable because of a lack of market evidence in light of the fact that energy-efficient building features on property yields might be overestimated. In the case of DCF calculations, it has been suggested that only the terminal yield should be adjusted, because the discount rate does not encompass e.g. growth rates of energy costs, etc. implicitly. Implication for comparables A fundamental task when one performs a good property valuation is to find enough comparable data – not only when applying the sales comparison approach – and analyse this data to derive input figures which could be used within the valuation of the subject property. The essential rule to ensure that the outcome is correct is therefore: do compare apples with apples! Comparables must have the same building characteristics in terms of location, technical equipment, condition etc. and also with respect to the green-features such as the typical energy efficiency level of comparable properties. However, with the introduction of yet another aspect which needs to be comparable, valuation will inevitably become far more complex. The solution could be to use statistical analysis to a certain extent. Unfortunately such advanced analytic tools require a high level of market maturity and transparency (so-called “developed markets”), which in general is not the case. Regardless, the following subchapters try to establish appropriate and practical methods that valuers can use to handle energy efficiency within property valuation in a quantitative manner in line with the common existing valuation standards. Nevertheless, one must recognize that there is a difference between a valuation in transparent markets (developed market) and situation where just rare market data (opaque markets) is observable. IMMOVALUE

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3.2.3

Developed versus opaque markets

The quantification of adequate numerical figures for the value impact is dependent on the property markets’ transparency (developed vs. opaque property markets). Taking this perception into account, the IMMOVALUE project developed different approaches for developed as well as opaque (“undeveloped”) markets. In transparent property markets where market evidence for the value impact of energyefficient buildings and related data in great numbers with high validity, econometric and statistical methods (such as hedonic pricing models (OLS) and regression analysis) can be applied to derive the quantitative impact factors for the relationship between properties’ energy performance and markets’ willingness to pay for it (e.g. quantitative impact on various green value drivers such as rental income, operating expenses, applied yield or remaining economic life-time). Due to the fact that the advanced econometric methods (semiparametric models, penalized least squares (PLS), spatial effects, Splines) go beyond the scope of ordinary day-to-day property valuation practices and therefore require (1) a huge sample of totally transparent and comparable information and (2) statistical know-how, it is recommended that national property valuation committees and associations (such as e.g. RICS, BIIS, ANEVAR, NTF or ÖII), who have access to such information, should assure access to such analytic results for the specific property market and property type. These valuation impact factors provided by national organisations could then be used directly within the income related approach by valuers and serve as a benchmark for them. In opaque property markets one cannot apply advanced statistical methods as it is hard to find reliable evidence of the value impact of green or energy-efficient buildings. Still, it is, however, useful to quantify the degree to which the property market seems to be already influenced by green or energy-efficient building developments. Valuation practice moves prevailingly in opaque markets (see Figure 7). This is even truer when information on energy performance or other operational cost related information is needed. Therefore the modified income approach for the opaque market is the most important one when the question of applicability in valuation practice is at stake. The following chapter describes the modified income approach which has been developed in the frame of the IMMOVALUE project.

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56

Figure 7: Transparent vs. opaque property markets

3.2.4

Modified income approach applicable for opaque markets

In the case of an opaque property market and the related lack of market evidence and information, alternative ways to derive and handle energy efficiency and sustainability aspects within the valuation process are required. An opaque market can be a market where all comps are non-efficient or a market where sales and rental data is not fully available to the public. So far there are no ascertained approaches or guidelines available that describe how valuers could methodologically include energy/environmental performance even if the necessary market evidence were available. To establish the linkage to property valuation in a useful way it is essential that one comprehend that in an opaque market the key to quantifying the value impact of buildings’ energy performance relies on the degree to which the market appears to have already been influenced by said technologies. Scoring model to guide the valuer and provide a structured process A scoring model could be one possible and appropriate way to quantify the extent to which an opaque market focuses on energy efficiency as well as energy-efficient buildings respectively. The idea of using scoring models or profiles is not new; these tools are already used within

56

Jones Lang LaSalle (2008), p.11

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the valuation processes for different tasks – (e.g. adjustment for quality of location57) and therefore can be seen as generally accepted techniques to handle intangible effects. Easy to handle adjustment factor for daily business Therefore, the so-called “Weighted Adjustment for Valuation Parameter Effecting Characteristics” (WAPEC) was developed for the daily practice of valuers. By isolating the importance of energy efficiency (and potentially other sustainability aspects) within a specific property market due to various predefined aspects and characteristics the appraiser can derive an indication to which degree energy efficiency and/or other related issues already affect the property markets. This indication is expressed through the so-called “Market Adjustment Rate” (MAR), which the valuer can use to describe the quantity of the markets’ attention and willingness to pay for energy-efficient buildings. The valuer needs to fill in a scoring model that addresses different aspects like price elasticity, economic (market) conditions, consumer awareness, etc. The MAR ranges from “neutral” (0 %) to high impact” (100 %). It is important to understand that the developed scoring model is not a complete and full enumeration of all green aspects and therefore the valuer can still adapt and apply the method for every single green-value-driver. The following scoring model (Figure 8) shows how valuers are able to reflect the potential changes for the estimated rental value (ERV ≈ market rent). Significant adjustment

Key Valuation Parameter Market maturity Market rent

Medium adjustment

- high price elasticity - high awareness of tenants for sustainability and energy efficiency - om nipresence of green building issues in the m edia

Opaque (Emerging) Market --> Premium for energetic building (primarilly in emerging market)

-…

Low adjustment -…

neutral -low price elasticity - tenants do not pay attention on sustainability and energy efficiency at all - m edia does not recognise green buildings benefits at all

- high m arket sensitivity for operating expenses and energy costs (especially in gross rent-orientated property k general t ) - good econom ic

- m ajority of property m arket is not willing to pay rent prem ium for green buildings - suffering econom ic situation

conditions -…

-… - building does not achieve energy perform ance standards/codes - m arket postulate green building standards/codes

--> Discount for nonenergetic building (mainly in further developed markets)

-…

- building achieve green building requirem ents

-…

- m arket does not postulate green buildings - no effect on occupier dem and

- high obsolescene and potential loss of occupier dem and -…

Market adjustment rate (MAR) x Average adjustment parameter (AAP)* x Valuers estimation adjustment (VEA)* * = --> Weighted Adjustm ent Factor (WAF)

-…

+/- 75-100 %

+/- 50-75 %

+/- 25-50 %

+/- 0-25 %

x [% ] --> AAP derived from m arket evidence / valuers expectations due to replicable argum entation or estim ation

+/x

[% ] --> Valuers estim ation adjustm ent due to probability of occurrence, uncertainty, etc. regarding the AAP

+/= +/-

[% ] --> = MAR x AAP x VEA Key Valuation Parameter (KVP) x

[€/m² p.m]

Valuation Param eter Adjustm ent [VPA] [€/m² p.m.] =

Figure 8: Example of WAPEC for market rent (ERV)

57

See also Kleiber, W., Simon, J., Weyers, G. (2002), p.1241; Real Estate Norm Netherlands Foundation (1992), pp.2 IMMOVALUE

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Operational cost differences set the margin In addition to the verification of the MAR by applying the scoring model, valuers must also quantify the maximum range of willingness to pay for energy performance or other sustainability issues. In a rational property market one can describe this using the “Average Adjustment Parameter” (AAP). If only energy efficiency is accounted for the AAP (given in percent of the evaluated parameter at market level), can be maximum as high as the annual “Energy Cost Saving Potential” (ECSP) in percent derived by applying the ratio of the gap between the expected cost for energy consumption of a reference building (comparable group of properties) and the property being valued (subject property), to the annual rental income. The reference building in this case refers to the mean of comparable buildings at the date of valuation. The approach can be expressed in the following equations: ECSP =

∑ (Eref ,i × pe ,i ) - ∑ (Esub ,i × pe ,i ) i =1

i =1

rM × 12

(1)

where: Eref ,i - final energy consumption of specific energy carrier i of reference building (e.g. average of comparables) [kWh/m² a] Esub ,i - final energy consumption of specific energy carrier i of the property being valued

[kWh/m² a] p e ,i - average price for energy carrier i [€/kWh]

rM - observable market rent of the comparable properties [€/m² p.m.] When setting the energy prices one can use the actual prices as well as expected prices, depending on whether there is an assumption that energy price increases would outreach average price increases.58 As this procedure of estimating the AAP still implies uncertainty regarding the probability of occurrence, valuers have in addition option when applying another adjustment factor called “Valuation Estimation Adjustment” (VEA), which expresses the probability of occurrence as an expected percentage. If valuers have estimated the MAR, AAP and the related VEA accordingly, the “Weighted Adjustment Factor” (WAF) - expressing the degree to which market rent for the subject property has to be adjusted (compared to the comparables) - can be quantified by simply multiplying these variables. WAF = MAR

× AAP ×VEA

(2)

where:

58

A more detailed description on how the calculate energy costs based on energy performance figures given in the EPC please download the IMMOVALUE project report about Methodologies. IMMOVALUE

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MAR - states the valuer’s estimation of the property market maturity regarding the degree of

energy efficiency and other aspects that already affect the property market. AAP - is derived from market evidence (if existing) or the valuer’s expectations due to

replicable argumentation or estimation. VEA - expresses the valuers' estimated adjustment due to the probability of occurrence,

uncertainty, etc. regarding the AAP. The valuer can then apply the calculated WAF to the key valuation parameters (in this case the observable market rent per m² per month) in order to derive a numerical “Valuation Parameter Adjustment” (VPA). An example how the explained adjustment can be applied in practice is illustrated in Case Study A. Concluding, one might note that the calculated saving potential is not representative due to the fact that the energy consumption of the subject and the comparable buildings are influenced and dependent by the occupiers’ behaviour of usage and therefore can differ from the actual energy consumption. While, this might be the case, one should also note that in accordance with renowned valuation standards, valuers always assume that the owner or occupiers of a property act, maintain and use a property in a proper manner (idea of “highest and best use”59). Further one should understand that if data availability allows, it is advisable to go beyond the pure energy cost and include the other relevant operating cost elements such as costs relating to cleaning, inspection, maintenance, replacement etc. (see in detail chapter 0), to determining the AAP. Using an LCC approach one can derive the “Operating Cost Saving Potential” (OCSP) expressed along the lines of the approach described above:

OCSP =

∑ (OC ) - ∑ (OC ) i =1

ref ,i

i =1

sub ,i

(3)

rM × 12

where: OCref operating cost element of a reference building (e.g. average of comparables) OCsub operating cost element of the subject property i

certain operation cost category (e.g. maintenance, cleaning, energy consumption etc.)

rM

observable market rent of comparable properties[€/m² p.m.]

Summarising the proposed approach consists of two parts: (see also Figure 6 on page 31).

59

Cf. IVSC (2007), p.79

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•

First, the potential rent premium must be assessed by analysing operational cost differences between the subject and comparables. This is based on the assumption that lower operational costs can be transferred to higher rents - but only to a certain degree!

•

The market conditions need to be assessed in order to derive the extent to which rents can be increased due to lower operational costs. The valuer can perform this in a structured and transparent way by applying the score-card developed in the frame of this project.

Valuers need easily applicable LCCA tools in order to calculate cost differences. Therfore, appendix A of the IMMOVALUE project report about Methodologies includes several examples of LCCA models applicable to the calculation of operational costs of buildings.60

60

A more detailed description on how to calculate cost differences please download the IMMOVALUE project report about Methodologies. IMMOVALUE

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3.3

Sales Comparison Approach

Key Facts and Findings

• The methodologies proposed for use in the sales comparison approach are based on the idea that the Energy Saving Potential of a building (ESP) represents a feature to be taken into consideration in valuation procedures. The ESP is the difference between the annual energy demand and the annual reference energy demand of the building. Both information can be extracted from the EPC. Calculation of each and meaning of the reference energy demand depend on national procedures for energy assessment within EPC. • The proposed methodologies consider costs of ESP, adjusted in accordance to market trends, as the main factor in calculating the added value generated by energy efficiency. • The proposed methodologies require that the buildings used in the valuation procedure have an EPC, which may lead to pitfalls in implementation due to lack of data. • The proposed methodologies are useful in valuation practice, until more energy efficient buildings will be available to be used as comparable properties.

The sales comparison approach is based on the idea that identical houses should have identical prices. This approach uses transaction prices of highly comparable and recently sold or currently for sale properties. Firstly, the appraiser must investigate and analyze market data in order to extract quantitative information. Then, he has to estimate the degree of similarity or difference between the subject property and the comparable sales by considering various elements of comparison. Finally, adjustments in accordance with specific differences (e.g. age) are applied to the sale price of each comparable property to derive the best-estimated value for the subject property. 3.3.1


The sales comparison approach is applicable if similar properties have recently been sold or are currently for sale in the subject property’s market. It is highly recommended for valuation of condominiums, especially if they are owner-occupied. In the case of single family houses, it is recommended just for typical, standardized objects, such as semidetached houses. For the valuation of multifamily-houses it should have only a supportive role.

Energy savings potential as main criteria The methodology presented here is based on the idea that the difference, named Energy Saving Potential (ESP), between the annual energy demand (Edemand) and the reference energy IMMOVALUE

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demand per year (Eref), both presented in the EPC, represents a feature to be taken into consideration in valuation procedures. The reference energy demand and the reference building are concepts issued from the Energy Performance of Buildings Directive, which stipulates that “the energy performance certificate for buildings shall include reference values such as current legal standards and benchmarks in order to make it possible for consumers to compare and assess the energy performance of the building”. Definitions of the reference energy demands, if any, are different for each country. Procedures for calculating them depend on the type of building. The proposed methodology must be adapted to each situation. Rates of ESP must be calculated for each type “j” of energy demand/consumption (e.g. j=1 for gas, j=2 for electricity, j=3 for district heating, etc). For a specific energy demand/consumption “j” , the ESP of a building is ( ESP) j = (E demand ) j − (E ref

)

j

(4)

where:

ESP

- energy saving potential of the building [kWh/m².year];

Edemand

- energy demand/consumption of the building [kWh/m².year];

Eref

- reference energy demand [kWh/m².year].

If two buildings are compared, the best from the point of view of energy performance is the one with the lowest ESP. An observation must be done. In some situations, the valuer may be tempted to use the energy consumption in Equation (4), because it is considered more realistic than the theoretical calculation of energy demand. It might be an option, only if the consumption of the building is not affected by factors such as degree of occupancy, social and psychological parameters, limited financial possibilities of occupants, etc. Theoretically, commercial or office buildings, may comply with this situation. The reference energy demand Details about the reference energy demands based on information extracted from the report ”Implementation of Energy Performance of Buildings Directive. Country reports, 2008“ published on the site of EPBD Buildings Platform, are presented below for England and Wales, Romania and Austria.

Proposed application for the case of England and Wales The EPC from England and Wales is a two label certificate with two scales: one for the energy demand of the studied building and one for the potential energy demand if all cost effective measures were installed. The residential buildings certificate is accompanied by a report, which includes cost-effective recommendations to improve the energy ratings. Indicative paybacks are listed for each improvement. In the case of domestic properties, indicative paybacks are categorized as lower cost - typically up to £ 500 and higher cost - typically over £ 1,500. IMMOVALUE

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The non-domestic EPC also provides two benchmarks. Cost effective recommendations for non-domestic properties are categorized as: short term - payback less than three years, medium term - payback between three and seven years and long term - payback more than seven years. Other recommendations are based on the assessors’ knowledge. In this case, the potential energy demand if all cost effective measures were installed, presented in this EPC can be considered to be Eref from Equation (4).

Proposed application in the case of Romania The EPC from Romania presents information about the so-called reference building, a fictive construction that corresponds to the building in question regarding geometry, orientation, and terms of use, but all the buildings’ envelope elements and installations correspond to the current legal standards regarding energy features. In this case, the Eref from Equation (4) is the energy demand of the reference building presented in the EPC . In Figure 9, the EPC from Romania is presented including indications about where the Edemand and the Eref can be found, for each type of energy.

Page1. Energy demand Edemand .

Page 2. Energy reference Eref .


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Convert energy savings into present value The methodology presented here considers that the added value of a building generated by energy efficiency can be calculated with the Equation

∑[

]

⎡ (1 + i )t − 1⎤ (ESP ) j ⋅ (PE ) j ⋅ ⎢ VESP = MAR ⎥ t ( ) + ⋅ 1 i i ⎢ ⎣ ⎦⎥ j =1 3

(5)

where:

MAR

- market adjustment coefficient;

j

- type of energy (i.e. j=1 natural gas, j=2 district heating, j=3 electricity)

PE

- actual price for each type “j” of energy [€/kWh]

i

- discount rate [-]

t

- remaining economic lifetime of property [years]

In order to find the premium/discount of value for energy efficiency, a market adjustment in accordance with the willingness to pay for energy performance is applied. One could use the score-card methodology proposed under chapter 3.2.4. The coefficient MAR is 0-25 % for low awareness among tenants for energy efficiency, 25-75 % for a medium awareness and 75-100 % for high awareness. In some cases, even if MAR is considered 100 %, the calculated added value generated by energy efficiency is lower than the difference between the market value estimated by taking into consideration energy efficient properties and the market value estimated by taking into consideration non energy efficient properties, as comparable properties. This situation may occur if the owner who invested in energy efficiency also made other investments which makes the property more attractive or when the market is extremely sensitive to energy performance. Calculation of added value using the net present value of costs as it is proposed here, must be based on prognosis of energy prices made by reliable sources, such as well-known energy agencies. Moreover, it is better to use the discount rate for each type of energy, if this kind of information is available to the public. A problem might be that energy prices increase or decrease with unexpected rates, while in the proposed methodology, they are considered to increase according to the general discount rate. The best way to study the impact of the volatility of energy prices is to use the real option approach, which is a complex tool. For research studies these are the recommended procedures, but valuers will not necessary do the same. Therefore, for ordinary valuation, Equation (5) seems a plausible choice. Some other remarks regarding the limits of the methodology must be made. It leads to best results, if the subject property and the comparables used in the valuation procedure have same source of energy for heating, which is usually the case for condominiums. The result of the proposed methodology is affected if sources for heating are

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different, i.e. natural gas, district heating, electricity, since there are important differences between prices of each type. It must be underlined that the proposed valuation methodology works better if the comparable properties are constructed within the same construction standards as the subject property. Large differences between the energy demands of buildings are generated by different construction codes at the date of erection. 3.3.2

Methodology for developed markets

In developed (i.e. transparent or with available databases) markets, appraisers are supposed to have access to a large database with information concerning transaction prices of property sales and rents, etc. Main real estate characteristics should be found in these databases for a wide range of buildings: age, location, number of floors, useful surface area, facilities, improvements, etc. By using statistical analysis tools, such as regression analysis, the valuer can analyse the influence of each factor and the estimate market value for subject properties. By considering VESP a marketable feature, regression analysis can provide a coefficient reflecting its weight in the total value of the building. This coefficient can be theoretically applied for further valuation. Special attention must be paid to the remarks presented above, when comparables for regression analysis are chosen. 3.3.3

Methodology for opaque markets

The calculated value of a building using the direct sales comparison approach is derived by comparing the property being appraised to other properties, applying appropriate units of comparison and finally making adjustments to the sale prices of the comparables based on the criteria of comparison. The sales comparison approach needs comparable buildings for its calculations of the market value of the subject property being valued. Opaque markets are characterized by a reduced number of comparables. The main problem in using the sales comparison approach is that it is very difficult to find comparables that have an EPC and/or are energy efficient. Undeveloped markets usually have a reduced number of EPC. This represents a certain limit on the proposed methodology. Moreover, the proposed methodology requires that the subject property and the comparables are built within the same construction codes, regardless of whether the markets are transparent or opaque. This requirement further limits the choice of comparables, which might generate additional problems. We can summarise as follows: The proposed method depends on the markets’ transparency and available data including, data extracted from the EPC, which limit broader use. The present work represents the first step on a new and challenging research domain. Final validation requires studies on different markets, by using a wide range of buildings. Such studies are difficult to do right now, because of lack of data.

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3.4

Cost Approach

Key Facts and Findings

• The cost approach is driven by two main effects. The technical effect and the market effect. The technical effect contains the technical characteristics and the cost related implications of these parameters. The latter effect comprises the market effect and thus the demand side. This parameter does not include any costs and adjusts for the willingness to pay. • The technical effect is reflected by the replacement costs, which are market driven themselves, and/or adjustments (other value affecting characteristics). The adjustments based on the market effect, however, are based on market evidence. • The following process for integration can be constituted:

• Technical effect: The quantification is the same for “developed” and “undeveloped” markets. Therefore, it must be clear which type of construction leads to a good energy efficiency level. A higher quality usually leads to higher costs. E.g. a building with a thermal insulation has higher replacement costs than a building with the same features without thermal insulation. • Market effect: The quantification is different for “developed” and “undeveloped” markets. (1) Developed market: One must derive the ratio between the market value (the real transaction price) and the calculated cost value from past transactions. If both values are known, there are two ways to calculate the adjustment – a) Simple linear regression, and b) Compare same buildings. (2) Undeveloped (opaque) market: One might use a scoring model in order to quantify the market effect related to energy efficiency in the opaque market. The scoring model is a tool to get a feeling how important energy efficiency in the observed market is. Furthermore the tool helps to quantify the effect.

Of all three main approaches, the cost approach is least frequently used because the cost approach is not able to reflect the market in most cases.61 Nevertheless, many countries still use it as an accepted valuation approach. The cost approach uses the replacement costs of the property being valued.62 In the cost approach the market value is the sum of the land value and the total replacement costs of a new building reduced by the accrued depreciation. Cost 61

Cf. Leopoldsberger, G. Thomas, M., Walbröhl, V. (2007), p. 520

62

Cf. EVS (2007) p. 36

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related approaches are applicable if there are no comparable values and it is used in markets where market actions cannot be observed.63 Therefore this method is particularly applied to the appraisal of special purpose properties or financial statements. In general, the cost approach is used for properties where the costs play the dominant role. The basic concept of the cost approach is shown in Figure 10.

Figure 10: General Cost Approach

In the cost approach one can classify the main value drivers into two categories – the technical effects and the market effects. These two effects represent the adjustments that are necessary in order to match construction costs and the actual value of the building. As seen in an economic context: the technical parameter provides the supply side i.e. it represents the object and its specific characterizations, which are offered at the market. Therefore the market parameter focuses on the demand side where the focus lies in the analysis of the demand structure and its implication on the value of the building. The cost approach is based on the replacement costs, i.e. the technical aspects are the focus of the valuation. In fact, these costs refer to the construction costs of the object at the point in

63

Cf. Bienert, S., Reinberg, M. (2007) p. 477

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time the valuation is undertaken, reflecting current economic and technical aspects.64 The technical adjustment parameter can be defined based on this specification. It reflects the technical characteristics as a whole. As described above this might also be interpreted as the supply side. The quantification results from the cost side. The technical parameter is obtained by comparing the actual building and a theoretical implementation of e.g. a thermal improvement. The second effect comprises the market effect and contains the demand side. This parameter does not include any costs and only considers the market. This parameter takes in account the issue of the diverging “technical value” and the market value. How high is the willingness to pay e.g. for a house with an excellent thermal insulation? In other words the market parameter reflects the demand e.g. for a house in Austria with an EPC of Level A++ compared to Level D, but equal construction costs and size. The main question is how these parameters might be integrated into the cost approach? The integration of technical parameters can be done more easily. All technical effects may be calculated and integrated through the additional costs resulting from the higher quality of the material used to erect the building. For example, the additional cost of excellent thermal insulation may be calculated and thus lead to higher replacement costs for the building. This consideration of high-quality components is already common practice in property valuation. Therefore a valuer can use the EPC as an indication for higher replacement costs. The market effect provides a direct connection to the demand side of the market. The main issue here is to what extent the energy efficiency of LCC optimized houses will be honored by the market. The consumer (renter/buyer) generates the willingness to pay for special features that are reflected in the market prices. However, one must consider this effect with the aid of an adjustment based on market evidence. The market effect cannot be generally quantified as the quantification is individual for each single region. 3.4.1


While modifying the basic approach one must keep the following statement in mind. Upgrading a property to the highest thermal standard technically feasible and subtracting the value before the renovation does not reflect the gain in value since no investor/owner would look at the situation this way.65 Cost to upgrade does not necessarily equal value. This fact shows the need for the valuer to separately integrate the technical effect and the market effect. The modification must contain both effects to get the actual market value.

64

Cf. Funk, M., Koessler, C., Stocker, G. (2007) p. 270

65

Cf. Davis Langdon (2009): Upgrade to good medium standard as a most likely szenario.

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The cost approach offers four theoretical options when integrating the effects of the energy certification: (1) Replacement costs (2) Adjustments (other value affecting characteristics) (3) Deprecation (3) Adjustment based on market evidence Upon closer examination there remain actually two possibilities for integration: technical aspects (replacement costs and adjustments for other value affecting characteristics) on the one hand and the market aspect on the other hand (adjustment based on market evidence). The valuer can integrate the technical effect into the replacement costs and/or adjustments (other value affecting characteristics). The integration depends on the construction parameters. If a certain design construction is included in the level of quality of standardized replacement costs, the integration of this design is already ensured through the use of this parameter. Only constructions that are not included in the level of quality must be adjusted for by the valuer (through other value affecting characteristics). As far as the market effect is concerned, there is only one clear possibility for integration: adjustment based on market evidence. The following Table 5 reviews the integration of the market and technical effects into the cost related approach.

Table 5: Integration of technical and market effects

Table 5 shows only the general possibility. A common solution for the cost approach for all countries or regions is impossible because of the different characteristics of the regional and national property markets.

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In this context, the valuer must differentiate between developed and undeveloped/emerging markets. This differentiation leads to two different procedures to integrate the energy certification into the cost approach. 3.4.2

Approach for “undeveloped/emerging markets”

On one hand, the label undeveloped/emerging market describes a market where are no if not limited data concerning green/energy-efficient buildings available (e.g. Germany, Austria, etc.) and on the other hand, there are markets that in general have limited availability of property market data (e.g. emerging markets like Romania, SEE-countries, etc.). For the emerging markets, data availability is difficult in general let alone specific problem of valuing energy-efficient buildings. In principle, however, the approach for both cases is the same.

Figure 11: Process of integration in undeveloped markets

The first and second steps are the same as in the approach for “developed markets”. In this sense, analyzing the energy certification and identification of the technical effect does not and cannot differ from the work previously mentioned. If there are no standardized replacement costs like the NHK or BKI in Germany, the valuer can adjust the costs with country specific factors. For example, the BKI from Germany can be used for Austria if they are adjusted with a published local factor.66 So the NHK from Germany can be used for the Austrian market and therefore must be adapted with the published factor for Austria. In extreme cases it might be necessary for the valuer to obtain offers from local developers and construction companies. The huge difference between the two markets lays in how the valuer evaluates the market effect. Because there is no market data available, the valuer cannot obtain a direct quantification. One must derive the market effect from so called “soft facts”. The valuer 66

BKI, (2008)

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should use these soft facts as an instrument to get an overview as to how green buildings are observed in the market. Examples of soft fact that a valuer could use might include: oil price, public opinions in local newspapers, availability of energy in the region, market structure etc. Indicator

Effect

Sensitive of energy certification

Oil price

Oil price rising up

↑

Public opinion

Many articles about energy green

↑

Market structure

Offer-driven market

↑

Demand-driven market

↓

Table 6: Indicators to quantify markets awareness for energy efficiency

A clear quantification of the market effect is very difficult in undeveloped markets. The valuer must observe and audit all previously mentioned aspects critically. In addition to these aspects, valuers should obtain the opinions of local market actors like real estate agents, developers or real estate administrators. One possible and appropriate way for a valuer to quantifying the market effect in an opaque market focusing on energy efficiency might be through the use of a scoring model. For that reason a so-called “weighted adjustment for valuation parameter effecting characteristics” (WAPEC) was established as a first indicator for property valuers, which is also used in a different way in the income approach. The idea for this scoring model is based on the additional costs between reference buildings in the market and the valuated building. The remainder is the basis for the calculation. This value is referred to as AAP. This amount is then multiplied by the “market adjustment rate” (MAR), which can be seen as quantification for the markets’ attention and resulting from the willingness to pay for energy-efficient buildings. In other words the AAP is weighted by the MAR. Hence the adjustment is the product of MAR times AAP. Significant adjustment

Key Valuation ParameteMarket maturity Additional costs

Opaque (Emerging) Market --> Discount for energetic building --> Premium for non-energetic building

Medium adjustment

Low adjustment

-high price elasticity

- tenants do not pay attention on sustainability and energy efficiency at all

- high awareness of users for sustainability and energy efficiency

- media does not recognise green buildings benefits at ll - majority of property market

- omnipresence of green building issues in the media - market postulate green buildings standards/codes

is not willing to pay higher costs for green buildings

- good general economic conditions -…

- suffering economic situation -…

Market adjustment rate (MAR) x Average adjustment parameter (AAP)* x Valuers estimation adjustment (VEA)** = --> Weighted Adjustment Factor (WAF)

neutral

-low price elasticity

+/- 75 - 100 %

+/- 25 - 75 %

+/- 0 - 25 %

+/- 0 %

x [€] --> AAP derived from remaining amount between reference buildings and valuation building

+/x

[%] --> Valuers estimation adjustment due to probability of occurrence, uncertainty, etc. regarding the AAP

+/= +/-

[€] --> = MAR x AAP x VEA Adjustment based on Market Evidence [€] =

Figure 12: Example of WAPEC for Adjustment based on market evidence

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4

Results of Case Studies - Property Valuation Samples

The IMMOVALUE implemented a comprehensive practice testing of the modified valuation approaches. Altogether the following “practice testing” has been realized:

•

Calculation of 10 case studies applying the income approach which can be seen as the standard approach prevailingly for markets with complex and heterogeneous properties (office, retail, bigger residential buildings etc.): 6 case studies related to the Austrian market, 3 case studies were calculated for the German market and 1 case study dealt with the Swedish market. For the given building segments these entire markets can interpreted as opaque markets with comparably little (reference) data available;

•

Testing of the sales comparison approach for one case studies on the Romanian market: The sales comparison approach suitable for homogenous property markets where a lot of data for similar comparables is available. It was therefore tested for multi-family residential buildings (panel buildings) on the real estate market of the city of Iasi;

•

Finally the modified cost approach was tested for 4 case studies. The cost approach is only applied for simple properties; therefore it was tested with the pilot valuation of three single family houses and of one condominium.

4.1

Overview on the main results of practice testing

The main result of the practice testing is that all proposed modified valuation approaches work well and generate comprehensible results. There are, however, in practically all cases serious data problems relating to the lacking availability of EPC - and potentially further sustainability data such as LCCA - not only with respect to the subject property but even more pressing with respect to reference properties (“comparables”). Although it was not the main purpose of practice testing to deliver a comprehensive analysis of the “value impact” of the modified approaches as compared to conventional valuation a few preliminary observations can be put on record:

•

The value impact is for most cases very low. In practically all cases (except for two case studies) it is negligible (around resp. below 1 %).

•

There are two reasons for the negligible value impact: Firstly the “distance” between the subject property and standard buildings on the market with regard to energy efficiency is too low. Secondly, the weak and incomplete data basis forces the valuers to take conservative assumption with respect to market sensitivity for energy efficiency and sustainability aspects, i.e. to which degree the market takes into account these issue. The (necessary) conservative assumptions on the willingness of the market to adjust to energy efficiency and sustainability aspects lead to a further reduction of value impacts.

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•

For one case study where the project team calculated a comprehensive LCCA for the subject property as well as for the comparables the value impact is around 5 % (taking into account only differences in operational costs, but without taking into account potential additional differences with regard to vacancy rates etc.). The reason for this remarkable value impact is the reliable data basis with respect to operational cost (differences) and the fact that the subject property is a very sustainable building with superior energy efficiency.

•

In addition, the case studies applying the sales comparison approach (panel building in the city of Iasi) comes up with a value impact of around 5 % between a nonrefurbished and a refurbished block of flats. In this specific case it is interesting, however, that the market value estimated by using thermal retrofitted comparables is higher than the value calculated by the proposed modified methodology, which means that - for the Romanian market (or at least for the specific market segment in Iasi) - the market adjustment rate (MAR) > 1. Buyers/sellers from the city of Iasi seem so sensitive to thermal retrofitting, that they had the willingness to pay more than the value of the achievable energy savings or the costs of investments for thermal retrofitting. This may indicate that thermal refurbishment is assumed by the Romanian real-estate market, to be part of a package of qualities specific to modern, healthy, good looking properties.

•

Altogether the case studies show that only for very energy efficient and sustainable properties with sufficient data basis on energy and/or operational cost differences the modified approaches would come up with a premium of 5-10 %. Only if the market sensitivity towards energy efficiency and sustainability grows beyond the pure cost advantages (i.e. if the market account also for better comfort levels, for better productivity etc. to be achieved in sustainable buildings) the premium can increase beyond 10%. In addition, there might be reason for assuming lower vacancy rates or higher economic lifetimes in sustainable properties, which would have a positive influence on value impacts, too.

The comprehensive practice testing as confirms the following recommendations for a broader application of the proposed modified approaches for an integration of energy efficiency, LCCA, and other sustainability aspects into valuation practice:

•

Descriptive part of the valuation report: It is recommended to add a subchapter at the report structure especially for describing observable property market sensitivity and maturity for energy-efficient or sustainable properties and developments. In addition it is also necessary that valuers address and investigate more precisely the aspects which influence propertys’ energy efficiency and sustainability. Some information can be noticed by the valuer during inspection of the property (source of energy, type of windows, thermal insulation if it exist, etc), others can be extracted from the EPC and from the energy audit (energy demand of the building, energy demand of the reference building, measures for better energy efficiency, rate of investments for thermal retrofitting, etc). The information can be given in the various

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already existing parts of a valuation report (e.g. description of building equipment and appliances, structural condition and repair, etc.).

•

To adequately include EPC into property valuation practice valuers need to be trained to be able to derive operational cost data from technical building characteristics in general and to interpret EPC and results of LCCA in the right way in particular. To adequately include EPC, LCCA and other sustainability aspects into property valuation practice it is important that valuers understand the basics of these issues.

•

In most cases data on energy efficiency, LCCA and other sustainability aspects is very vague. Although prescribed by law EPC are still missing for many valuation processes, LCCA is practically not available at all. Therefore valuers usually apply very simple benchmarks for cost categories such as operational cost (OPEX) which due not differentiate properly according to the specific building characteristics. Therefore valuers would need reliable data bases on reference buildings (comparables) including not only data on building site, rent level and building equipment but also on energy efficiency and different operational cost categories.

In the following chapters four selected case studies are described in detail.

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4.2

4.2.1

Case Study A – “Community Center in the Ruhr Area”: Valuation based on the modified income approach Key figures of the Property valuation

Key figures Starting point Region/Tow n Year of construction Year of last (intensive) renovation Main use Location quality (A to D) Construction quality (A to D) Maintanance quality (A to D) Market data transparency (A to D) Property data transparency (A to D) Lettable area Vacancy in % Gross external area Gross internal area Valuation methodology applied Valuation Company Current rent Retail small Retail large Office Gastronomy Date of valuation Measured energy use Calualated energy demand EPC existing (Y/ N) LCC calculation existing (Y/ N) Market value

Figures

Applying the modified approach Methodology for developed market (Y/ N LCC carried out (Y/ N) Revised Value

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Ruhr area 2008 mixed used B A A C B 10,757 m² 0% 30,000 12,908 German income capitalisation DLP 25.00 €/m² 14.00 €/m² 11.00 €/ m² 21.00 €/ m² 1st November 2009 n.a. 18.63 kWh/ m³* a Y N 34,900,000 € Figures N N 34,900,000 €

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4.2.2

Results from ordinary valuation

4.2.2.1 General description and explanation Background/Initial Situation

Valuation of property for the owner for internal purposes.

Scope of Work

Site inspection: 10th November 2009 Date of valuation: 1st November 2009 The condition of the construction has been assessed due to the discovered conditions during the local site inspection and the supplied material and informations given by the customer. Detailed analysis of the property conditions, like contaminations of the ground, the used construction materials, installation, as well as technical equipment have not been carried out. The valuer has carried out analysis of the location and the property market situation. The property has been valued by using the German direct capitalisation methodology (WertV: Ertragswert).

Basis of valuations

Valuation was carried out in accordance to the legal requirements of the German Market Value (§ 194 BauGB) and the legal ordinances of WertV and WertR. Main informations supplied to the valuer: - land register – abstract - cadastral map excerpt - designation of area and zoning map - current rent role - energy performance certificate (in line with § 13 EnEV 2007) - rent roll - Legal Due Diligence Report - Floor Plans - Information out of the Land Charges Register - planning information from the developer In addition to the mentioned documents the valuer as well take following considerations into account: - results of the site inspection - several market research reports - information to the ground value of the site - information to the building regulations

Legals Status/Statutory Considerations/Town Planning

Some further potential for constructive extension could be possible. Audit of existence of planning and building permission and other official permission required for the usage of the property hasn’t been carried out in detail. Due to the presented planning permission it is assumed that

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the property has been constructed due to the effective building codes and standards. The site of the property is designated as a commercial landuse area. Location

The property is situated in the German Metropolitan Ruhr Area with 10 Million inhabitants. It has a very good and close link to the individual transport system (National Primary Roads and Highway) and a specific bus stop in front of the property. The surrounding area is mainly characterized by one family houses and residential properties. Further commercial properties besides the property being valued didn’t exist.

Site description

Specific retail space among a residential area. The location is provided with access to the basic public utilities (e.g. electricity, district heating, water, sewerage system, etc.). The plot is defined by an irregular layout. Due to the statement of an environmental expert report officially the site is free of contaminations. The site is not located in endangered areas, which might be affected by natural disasters like avalanches, earthquakes, soil erosion, etc.

Property description (construction)

The construction of the property was finished in 2007 and encompasses a gross floor area (GFA) of approx. 12,908 m² with a lettable area (LA) of around 10,757 m². The property represents a concrete building made out of prefab elements and some wall glass facades. Instead of the glass elements the facade is made out of insulated sandwich panels. The property and its retail units are accessed via a main entrance and some side-entrances in the ground floor. The gastronomy units mostly got specific entrances and the office and doctors offices can be reached upon extra entrances and staircases. Two elevators exist. The retail and office spaces mainly consist of brickworks. The completions of the lettable units were done as tenants fit out individually. The property is equipped with a district heating system, sprinkler system and emergency-power supply. The tenants integrated the air conditioning systems in some retail units. Ventilation should be done conventional, so there is no specific ventilation system besides the sanitary rooms.

Structural condition and repair

The property is in a very good condition, due to its year of construction. No backlogs of maintenance and repair, as well as structural damages have been observed. Therefore no major repairs, improvements or renovations are required. Adequate function of electric, sanitary and other equipment and appliances, as well as the supply and disposal utilities are assumed.

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Market condition investment)

(rental, The general investment market in Germany has slowed down in 2008 and 2009 due to consequences of the global financial crisis. Very few, if any, transactions could be observed and therefore analysed. Due to the falling demand rents decreased as well as yields increase about 50 until 100 basis points, which depends on local property market and building quality conditions. In the end of 2009 property transaction activities have gained momentum and lead to positive market perspectives by the market participants. The current net initial yields for offices in the Ruhr area are on average in the range of 6.25 %. Retail net initial yields for prime retail spaces in the city centres are around 5.75 until 6.00 %. The Committee of valuation experts for the local property market released applied capitalizations “Liegenschaftszinssätze” in a range of 4.6 and 7.4 % for business premises. Currently office rents on average ranges between 8.00 and 12.00 €/m² p.m. and prime rents are around 13.00 €/m². Retail spaces in secondary and sub locations achieve rents between 25.00 and 30.00 €/m² for smaller units and between 12.50 €/m² and 20.00 €/m² in large sized units. In the short-run maybe higher risk for letting high standard areas due to current market conditions (financial crisis, decreasing demand, etc.) – may lead to higher vacancy risk in some property markets.

Valuation methodology and Usually commercial properties are held and operated to gain commentary income, so an income related approach have to be chosen to quantify the market value of the subject property. The “Ertragswertverfahren”, the German direct income capitalization method has been applied. The valuer estimate the gross annual return of a property less non-recoverable operating expenses and the annual return of the land value and capitalize them with the applied capitalization “Liegenschaftszinssatz”, a specific yield for properties, for the remaining economic lifetime of the building to achieve the value of the building. To obtain the market value of the property the land value have to be added. 4.2.2.2 Key valuation parameter Current gross rental income

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The rental income of the subject property due to current tenancy agreements exceeds an annual amount of 2,063,475 €. It is separated to the different usage of the lettable spaces as followed: Retail (small): 25.00 €/m² p.m. Retail (large): 14.00 €/m² p.m. Office: 11.00 €/m² p.m.

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Gastronomy: 21.00 €/m² p.m. Non-recoverable operating expenses

The current annual non-recoverable operating expenses have been derived by empirically established figures for comparable properties. The following estimates were chosen: Maintenance costs: 7.00 €/m² p.a. for retail, office and gastronomy 25.00 €/m² p.a. for outside parking spaces Management costs: 3.00 % of the gross annual return Non-recoverable operating costs: 1.00 % of the gross annual return Vacancy and collection loss: 3.25 % of the gross annual return (in general 4.00 %, but due to the good building standard respectively the energy efficiency of the building being valued, it is assumed that the duration of marketing and letting will be shortened due to the high standard)

Applied Capitalization (“Liegenschaftszinssatz”)

The applied capitalization (“Liegenschaftszinssatz”) for the capitalization was estimated due to the location, the condition of the building and the local property market 5.00 %. It encompasses adjustments for location, property configurations, and risks adjustments for expected shortterm difficulties.

Ground Value

The expert committee of the local property market published a ground value of 400.00 €/m² for the subject property.

Land Value

18,043 m² x 400.00 €/m² = 7,200,000 €.

Total economic lifetime

The total economic lifetime is estimated up to 60 years.

Remaining economic lifetime

The remaining economic lifetime due to the year of construction amounts 58 years.

Market rent

Observable market rental levels are comparable to the contract rents. So market rents are estimated to match the contract rent.

4.2.2.3 Ordinary valuation calculations and results Market Value (MV)

34,900,000 €

Lettable Area (LA)

10,757 m²


5.00 %

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Input Parameter

Lettable Area

Retail (> 200 m²) Retail (< 200 m²) Office Gastronomy Total

7,088.40 m² 1,719.08 m² 1,120.18 m² 829.51 m² 10, 57.17 m²

Current Rent = Market Rent

Retail (> 200 m²) Retail (< 200 m²) Office Gastronomy

14.00 €/m² 25.00 €/m² 11.00 €/m² 21.00 €/m²

Annual Gross Rental Income

2,063,475 €

Total non-recoverable Expenses

- 230,652 €

Annual Net Operating Income

= 1,832,823 €

Annual Return of the Land Value

- 5.00 % x 7,200,000 €

Annual NOI of the Building Applied Capialization (“Liegenschaftszinssatz”) Multiplier (“Vervielfältiger”)

= 1,472,823 5.00 %

(1 + 5.0%) 58 − 1 (1 + 5.0%) 58 ⋅ 5,0%

x 18.82

Income Value of the Building

= 27,700,000 €

Land Value

+ 7,200,000 €

Market Value

= 34,900,000 €

4.2.3


The following explanations illustrate an applicable way how valuers could address energy efficiency aspects or further sustainability issues in an appropriate manner within the already existing qualitative/descriptive parts of a property valuation report. It further illustrates in a comprehensible way how the derivation of reliable measures in general for quantitative integration of energy efficiency into property valuation calculations could be done if property markets’ willingness to pay is observable but no reliable numerical evidence is available. While in the conventional valuation approach it is assumed that the duration for marketing and letting will be shorter due to the good energy building standard and therefore the vacancy and collection loss was adapted down to 3.25 %, it has to removed to 4.00 %, which are used in general for comparable buildings, to avoid redundancies. 4.2.3.1 Descriptive integration of aspects affecting buildings’ energy efficiency 4.2.3.1.1 Building equipment and appliances Heating and cooling

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oil, gas and electricity. Ventilation, air conditioning The property did not have controlled ventilation and air and indoor air quality conditioning system. Only the sanitary rooms got some single air condition and ventilation systems. If some air conditioning exists, the tenants did it. Lighting and daylighting

Use of renewable resources Plumbing heating

and

Due to the buildings structure the minority of lettable retail areas have access to natural lights. Artificial lighting is mostly required. The office and gastronomy premises got access to natural light sources, so there are less artificial lighting systems necessary. The availability of natural daylight in the offices and gastronomy units supports efficient use of energy source (electricity). energy The subject property is not equipped with renewable energy resources.

hot-water The subject property is equipped with modern plumbing systems due to the current building standards and therefore supports efficient use of water resources.

Other equipment

The subject property is further equipped with fire protection appliances (automatic fire detection system, a sprinkler system) and emergency-power supply.

4.2.3.1.2 Energy efficiency and other sustainable features of the property Energy efficiency

According to the available EPC the subject property achieves an overall annual primary energy demand of 18.63 kWh/m²*a (energy efficiency: green due to current EPC standard) and deceed the acceptable maximum value. The energy efficiency of the subject property therefore can be evaluated as good.

Energy source

The use of gas, oil and electricity for energy supply did not ensure the long-term security of energy supplies. The supply depends on the natural energy sources, which will become more rare in the future. The building did not use renewable energy sources.

Green lease agreements

There are no green lease agreements with tenants/occupiers.

LCC

No Life-Cycle-Costing analysis or investigations are available.

Property configuration

The propertys’ configuration supports and sets the basis for the possibility of efficient and flexible use of space (A/V ratio of 0.37/m according to the EPC), which as well influence the buildings energy efficiency. The overall loss of heat (“Transmissionswärmeverlust”) amounts 0.39 W/(m²*K). Since EnEV 2009 became effective the maximum for loss of heat of the opaque

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components of the building should not exceed 0.35 W/(m²*K). For transparent components of the building except curtain walls, glass roofs or domed roof lights the overall loss of heat should not exceed 1.90 W/(m²*K). Therefore the overall loss amounts only a bit more than the maximum of the new legal requirements for the opaque building components the efficiency of the building envelope can be rated as “above-average”. 4.2.3.1.3 Observable property market sensitivity and maturity for energy-efficient or sustainable properties Real estate market sensitivity

Besides the already mentioned information about the current property market situation and condition following additional observations concerning the real estate markets’ awareness, sensitivity and maturity regarding energy efficiency and sustainability are necessary. In general the German property market start to recognise the importance of propertys’ energy efficiency and sustainability. The awareness of property owners, tenants, occupiers, etc. for energy efficiency and sustainability is rising, such aspects are in most cases still not recognised within decision-making processes so far (e.g. in the course of leasing a property or part of it, etc.). Therefore currently no price elasticity for energy efficient buildings can be observed. Moreover no proven evidence for higher willingness to pay for energy-efficient properties can be seen in the property markets so far. But international research projects show some evidence for rental premiums of sustainable properties. So it seems to be a matter of time that markets will acknowledge energy efficiency as well as sustainability of properties.

Market information available

Even though there exists a mandatory disclosure of property owners for EPC potential tenants just get informed about the energy efficiency if they explicitly ask for it. In most cases where lettings are offered no EPC or other information about buildings’ energy efficiency are available or even exist. In this valuation case no comparable properties were available.

Public awareness

The public media in general already start to recognise the importance of energy efficiency due to the constantly rising energy prices and the international political debate regarding the reduction of the green house gas emissions, which are mainly driven by the holding stock of buildings. So some increase of sensitivity and awareness for

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sustainability and energy efficiency can be recognised in the society. General circumstances and mandatory regulations

Governmental institutions and policy makers already realised the importance of and promote energy-efficient and sustainable developments. Therefore mandatory regulations and directives on national as well European level have been established – e.g. EPBD (2002/91/EG), EnEV 2009 (Energy Savings Ordinance for buildings), etc. Beyond low-energy building requirements (energy demand below 25 kWh/m².a) are on the way to become the general building standard. Moreover passive houses are at the forefront.

4.2.3.1.4 Application of the modified Valuation Method As described in IMMOVALUE report 7.2 valuers could use a scoring model, WAPECScoring to derive valuation parameter adjustment (VPArent). The developed methodology for quantifying the rental impact of energy efficiency determined by the EPC will be applied in the case study (see Figure 13).

Figure 13: WAPEC-scoring: Example office rent

One of the first steps should be collecting information of comparable properties, which are necessary to verify the market rent, average energy demand, etc. They can be defined as a peer of comparable properties. IMMOVALUE

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But in the case of the subject property no comparable buildings were available, so the valuer has to estimate the AAPrent with the aid of his experience and knowledge. Due to the high insulation building standard AAPrent is estimated to achieve 2.50 %. So it is assumed, that in the mid run tenants will honour the good thermal quality of the building, because they can spend money due to less energy consumption than expected, compared to the conventional building stock. To verify and estimate the current market sensitivity for energy efficiency, which determines the markets’ willingness to pay for energy efficiency, the market adjustment rate (MAR) has to be estimated. Therefore the in Figure 13 illustrated WAPEC-scoring model has been applied. Because of the upcoming discussions and international research programs, the starting awareness of the market participants the MAR in line with the assessments and interpretations of the literature and publications is estimated to gain 40.0 %. To consider the uncertainty of the future development regarding the willingness of the market participants to honour the extraordinary energy efficiency of buildings, the VEA, which expresses the valuers estimation of the probability of occurrence regarding the estimated AAPrent is assumed to be 75.0 %. After assessing the AAP, the MAR and the VEA, these factors are connected with the aid of multiplication to obtain the weighted adjustment factor (WAFrent) see Equation 6 (mixed used building Ruhr Area) and Equation 7. Due to the verification the WAFrent can be calculated as follows: WAFrent = MARrent ⋅ AAPrent ⋅ VEA = 40% ⋅ 2.5% ⋅ 75% ≈ 0.75%

(6)

The current rental impact because of the good energy quality of the building, defined as VPArent for the office units for example achieves: VPArent = WAFrent ⋅ rmarket = 0.75% ⋅11.00 €/m² = 0.08 €/m²

(7)

The other rental parameters for the small- and big-sized as well as the gastronomy areas of the community center will also be adapted like demonstrated in Equation 6 and Equation 7 (see Input Parameters VPArent in the following subchapter 4.2.3.2).

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4.2.3.2 Valuation calculation results of modified method Market Value (MV)

34,900,000 €

Lettable Area (LA)

10,757 m²


5.00 %

Input Parameter

Lettable Area

Retail (> 200 m²) Retail (< 200 m²) Office Gastronomy Total

7,088.40 m² 1,719.08 m² 1,120.18 m² 829.51 m² 10,75 .17 m²

Market Rent

Retail (> 200 m²) Retail (< 200 m²) O fi e Gastronomy

14.00 €/m² 25.00 €/m² 11.00 €/m² 21.00 €/m²

VPArent


0.11 €/m² 0.19 €/m² 0.08 €/m² 0.16 €/m²

Adjusted Market Rent


14.11 €/m² 25.19 €/m² 11.08 €/m² 21.16 €/m²

Annual Gross Rental Income

2,079,420 €

Total non-recoverable Expenses

- 247,404 €

Annual Net Operating Income

= 1,832,016 €

Annual Return of the Land Value

- 5.00 % x 7,200,000 €

Annual NOI of the Building Applied Capialization (“Liegenschaftszinssatz”) Multiplier (“Vervielfältiger”) Income Value of the Building

= 1,472,016 5.00 %

(1 + 5.0%) 58 − 1 (1 + 5.0%) 58 ⋅ 5,0%

x 18.82 = 27,700,000 €

Land Value

7,200,000 €

Market Value

34,900,000 €

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4.2.4


Result of ordinary (conventional) valuation Annual gross operating income

34,900,000 € 2,063,475 €

Result of modified valuation approach Rental impact (nominal) Annual gross operating income

34,900,000 € Premium between 0.08 and 0.19 €/m² p.m. 2,079,420 €

Rental impact (in %) Rental impact (in €) Value Impact

Premium of 0.77 % 15,945 € 0%

Explanatory notes

The results of the applied modified methodology in comparison to the conventional valuation show that the impact of energy efficiency on property rents is still at a negligible scale. An impact on property value could not be observed, because redundancies have to be avoided. Therefore the valuation parameter of the vacancy and collections loss, which implies a shorter period for marketing and letting due to the good energy efficiency of the building had to be returned to the usual 4,00 %, because it is explicitly considered within the higher market rents. In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings’ energy efficiency in an appropriate manner and obviously lead to plausible results.

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4.3

Case Study B – “Vienna Offices Building”: Valuation based on modified income approach with a full life-cycle cost assessment

In addition to the results derived from case study 1, where only energy cost differences have been integrated into the valuation, in case study B it has been tried to enlarge the approach towards an overall LCCA thus introducing the operational cost differences as main driving factor behind different values. Due to a lack of data on technical characteristics of the valued object as well as of the reference objects it has been decided to estimates of realistic buildings - i.e. the office buildings used in case study B are virtual ones although they are rather similar to office building really existing on the Viennese market. Furthermore the valued building is not a standard building but similar to one of the highly sustainable office building of Vienna. This fact ends up with remarkable differences in operational cost between the valued building and the reference group building. 4.3.1


Due to the fact that only estimates of realistic buildings have been used no ordinary valuation has been made before the modified methodology has been applied. Therefore a direct assessment of the impact of the modified methodology compared to the ordinary one is not possible for this case study. 4.3.2


In the following it is described how the results of a full Life Cycle Cost Assessment (LCCA) can be used in the income approach for property valuation. In general, this is done by calculating cost differences for operational costs. It further illustrates in a comprehensible way how to derive a reliable and generally applicable approach for quantitative integration of sustainability aspects (captured through cost differences in the LCCA) into property valuation calculations even for opaque property markets’ where willingness to pay is observable but no reliable statistical evidence is available.

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4.3.2.1 Description of key findings Result of modified valuation approach Rental impact (nominal) Rental impact (percentaged) Value impact (nominal) Value impact (percentaged)

17,150,000 € Premium of 0,53 €/m² p.m. Premium of 3,74 % +810,000 € Premium of around 5 % (of which around 1,4 % is direct impact due to difference in non-recoverable OPEX)

Explanatory notes:

The results of the applied modified methodology in comparison to conventional valuation show that a building of high energy and sustainability performance (as this is the case for the valued property) has a considerably higher value compared to comparable buildings with standard performance. The higher value comes prevailingly from achievable rental premiums and partly also from lower non-recoverable OPEX. Depending on the observable sensitivity on market (MAR) the calculated value impact is between 5 and 10 % not taking into account the potential additional impact of lower vacancy rates in higher quality buildings. The application of LCCA in the income approach of property valuation is feasible and leads to reliable and plausible results when integrating sustainability aspects into property valuation.

4.3.2.2 Key valuation parameters Current gross rental income

The rental income of the subject property due to current tenancy agreements is calculated on the basis of 13.0 €/m² p.m. amounting at a current gross rental income of 1,138,800 €/a.

Non-recoverable Operating expenses

The current annual non-recoverable operating expenses (OPEX) have been calculated by the LCCA based on the technical characteristics of the building and amount at 20.5 €/m² p.a. This is considerably higher than OPEX benchmarks which are typically used in property valuations (around 10 €/m² p.a.). The difference can be explained by the fact that LCCA includes also yearly average cost for capital repair. At the same time the LCCA shows that the non-recoverable operating expenses of the highly

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sustainable and energy efficient subject property is a little bit lower than the OPEX from the comparables (-2.0 €/m2 p.a.) Applied yield (term)

The applied yield for the term was estimated with 6.6 % and encompasses adjustments for location, property configurations, and risks adjustments for expected shortterm difficulties in letting high standard offices (vacancy and collection loss).

Applied revisionary yield

For the period after the expiration of the contract duration a revisionary yield of 6.5 % was applied to address the positive market expectations due to recovery of the market conditions.

Average residual term of contract

assumption: 3 years

Estimated rental value (ERV)

For the calculation of the estimated rental value the approach used for case study 1 was used as the subject property is part of the same market (office buildings in Vienna). On the basis of the market observation the market rent for comparable properties ranges between 14.0 and 14.5 €/m² p.m. Therefore a value of 14.2 €/m² p.m. was applied.

Vacancy rate

The current observable vacancy rate of 15 % has been addressed within the applied yield.

4.3.2.3 Technical characteristics of the valued property and of comparables Life cycle cost is calculated based on the technical characteristics of the building. The following Table 7 gives an overview of the technical characteristics of the property building and of the comparables as they were assumed for this case study calculation. As already mentioned in the introduction the office buildings used in case study B are virtual ones but their technical characteristics are very similar to real office buildings on the Viennese market. Furthermore the valued building is not a standard building but similar to one of the highly sustainable office buildings in Vienna.

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lettable area, m² heating, cooling, ventilation heat production refrigeration ventilation

comp 1 20.000

comp 2 34.000

comp 3 22.000

com 4 20.000

subject roperty 7.300

district heating district heating district heating district heating heat pump vapor-compression vapor-compression vapor-compression vapor-compression vapor-compression refrigeration refrigeration refrigeration refrigeration refrigeration ventilation with ventilation with ventilation with ventilation with ventilation with preconditioning and preconditioning and preconditioning and preconditioning and preconditioning and air de-/ humidification air de-/humidification air de-/humidification air de-/humidification air de-/humidification

heat dissipation

radiation

fan coils

radiation heating

fan coils

building component activation

cold dissipation

fan coils

fan coils


fan coils


ventilation

ventilation

ventilation

ventilation

ventilation

-

-

-

-

-

-

-

-

300 m² hot water and heating support 400 m², integrated facade

glass and panel facade

perforated facade

70% none

100% none

sun-blind none cat burglar glass and panel facade

sun-blind none cat burglar aluminum window

thermal insulation glass 0,65

thermal insulation glass 0,65

0,35 1,7 0,2 0,4

0,37 1,3 0,24 0,38

0,31 1,15 0,21 0,41

0,35 1,7 0,2 0,4

0,11 0,6 0,09 0,13

-

0,24

0,2

-

-

indoor ventilation renewables solar thermal system use of solar thermal system PV facade / design type of facade

window area share sun protection

dazzle protection daylight control purifier windows

glazing g-value window u-values [W/ m²K] exterior wall window ceiling against exterior wall ceiling against unheated building floor over ambient air

glass and panel facade glass and panel facade (80%), perforated facade (20%) 70% lamellae horizontal overhanging

70% none

perforated facade

31% special constructive facade (tilted forward)

sun-blind sun-blind sun-blind none none none cherry picker cat burglar cherry picker aluminum window (at glass and panel facade aluminum window the perforated facade (20%)) thermal insulation thermal insulation sun protective glass glass glass 0,65 0,65 0,45

Table 7: Technical characteristics of subject property and comparables

4.3.2.4 Results of LCCA Based on the data resp. assumption of technical characteristics a comprehensive LCCA has been conducted with an integrated LCCA tool which has been developed by e7 together with the Austrian real estate consultant M.O.O.CON (see WP 5 report, Annex 2). Since the LCCA serves only for the calculation of operational cost differences, LCCA was limited to operational cost (including capital repair cost) but did not include the primary construction cost. The following Table 8 summarises the results structured according to different cost categories. Since LCCA usually works on the basis of sqm gross floor area, all results are given for this unit. IMMOVALUE

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Table 8: Operational cost according to cost categories for subject property and comparables (based on a comprehensive LCCA)

The following Table 9 gives the results for the differences in operational cost between the comparables and the subject property after recalculating the figures of Table 8 to the unit of sqm lettable area which is the usual area unit for property valuation and after taking into account the differentiation between recoverable and non-recoverable operational costs. For this purpose it was assumed that non-recoverable costs consist of 70 % of costs for conversion and backfitting and of 100 % of capital repair costs. For all other costs it was assumed they can be recovered from the tenant.

Table 9: Total recoverable and non-recoverable operational costs for subject property and comparables (in €/m2a lettable are; based on a comprehensive LCCA)

4.3.2.5 Valuation calculation results of modified method Revised Value

17,150,000 €

Gross Lettable Area (GLA)

7,300 m²

Net Initial Yield (MV as basis)

6.50 %

Input Parameter

Term

Reversion

7,300 m² 13.0 €/m² p.m. -

7,300 m² 14.2 €/m² p.m.

VPArent

-

+0.53 €/m² p.m.

Estimated Rental Value

-

14.73 €/m² p.m.

Lettable Area Current Rent Market Rent

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Annual Gross Rental Income Total non-recoverable OPEX per a. (difference to average nonrecov. OPEX of comparables)

Applied yield Average residual term of contract (1 + 6.6%) 2.43 − 1 (1 + 6.6%) 2.43 ⋅ 6.6%

Investments Net Rental Income x Annuity factor

Net Present Value (Term)

1,290,348 €

149,122 €

149,122 € (-14,336 €)

Annual Net Rental Income

Annuity factor

1,138,800 €

Net Present Value (Reversion)

989,768 €

1,141,226 €

6.60 %

6.50 %

3 years

-

2.648

-

-

-

2,616,325 €

-3,022,508 €

-

17,557,316 €

2,616,325 + (17,557,316 – -3,022,508) =

Total Net Present Value Revised Market Value

17,151,133 € 17,150,000 €

To derive the above mentioned valuation parameter adjustment (VPA) the developed methodology for quantifying the rental impact of operational cost differences (as expressed in the report 7.2, chapter 6.4.3.2.2) has been applied. Therefore one of the first steps requires the collection of information of comparable properties, which are necessary to verify a market rent and average operational costs of a “peer group” (defined as a peer of comparable properties). On the basis of the estimated key figures, required for quantifying the operational cost saving potential (OCSP), the average adjustment parameter to derive the rental impact of energy efficiency (AAPrent) can be calculated as follows:

AAPrent = OCSP =

(OC ) − (OC ) = 61,0 − 48,2 ref ,i

r M ⋅12

subj

14.2 ⋅ 12

= +7,48 %

(8)

To verify and estimate the current market sensitivity for energy efficiency, which determines the markets’ degree of willingness to pay for energy efficiency, the market adjustment rate (MAR) has to be estimated. Therefore - as for case study 1 - the following illustrated scoring model has been applied. The results of the WAPEC-scoring indicates, that the market is assumed to have low to medium sensitivity for operational cost differences and achieves a MAR of around 50 % due to valuers expectation based on observable market conditions and circumstances (see report 7.2 chapter 4.2.2.3.2.3). After applying the WAPEC-scoring the valuer can calculate the weighted adjustment factor (WAFrent), which determines the specific valuation parameter adjustment (VPArent) as input

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variable for the estimated rental value (ERV) of the subject property. Due to the verification of the the WAF can be calculated as follows:

WAFrent = MARrent ⋅ AAPrent ⋅ VEA = 50% ⋅ 7,48% ⋅ 100% ≈ +3,74%

(9)

The current rental impact of energy efficiency, defined as VPArent achieves

VPArent = WAFrent ⋅ rmarket = 0.43% 14.2 €/m² p.m. ≈ +0.53 €/m² p.m.

(10)

4.3.2.6 Pitfalls within the process Information quality concerning It has not been possible to gather real market data necessary LCC for a comprehensive LCCA. Therefore several assumptions on the technical characteristics of the property building as well as of the comparable buildings had to be made. Nevertheless the data which has been finally used in the case studies are realistic and reflect existing differences between conventional and energy efficient buildings on the market. Information quality concerning The information given EPC includes a lot of detailed energy-efficiency information on the technical characteristics of the building and is thus also an important starting point for LCCA. Use of LCCA by valuers

IMMOVALUE

The calculation of LCCA is a specialised task which usually cannot be done in the valuation process. It has to be seen as a kind of preparatory work - comparable to a technical due diligence assessment. For the moment property valuations are not based on information which is given by LCCA.

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4.4

4.4.1

Case Study C “Residential property in Iasi”: Valuation based on the modified sales comparison approach Key figures of the property valuation

Key figures Starting point Region/Town Year of construction Year of last (intensive) renovation Main use Location quality (A to D) Construction quality (A to D) Maintenance quality (A to D) Market data transparency (A to D) Property data transparency (A to D) Lettable area (4 apartments) in m2 Vacancy in % Gross external area of the building in m2 Gross internal area of the building in m2 Valuation methodology applied Valuation Company Current rent in [€/m2 ] Date of valuation Measured thermal energy use [kWh/year] Calculated thermal energy use [kWh/year] EPC existing (Y/N) LCC calculation existing (Y/N) Value of the apartment calculated without thermal rehabilitation [€] Applying the modified approach Methodology for developed market (Y/N) LCC carried out (Y/N) Revised value [€] 4.4.2

Figures Iasi, Romania 1974 2008 residential B B B C B 234.26 0% 3,826.38 3,343.45 Sales Comparison Approach Expert Buildings 5.00–5.70 September 21, 2009 528,200 475,338 Y N 51,484 Figures N N 54,392


The valuation company “Expert Buildings” from the city of Iasi (Romania) carried out the ordinary property valuation. This company is qualified for valuing real estate objects for courts, banks, annual financial reports of companies, etc. In this report, the sales comparison approach is applied in two versions; as it is usually applied in the region and as a new methodology, which was presented in the report D5.1-D5.3 of IMMOVALUE

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IMMOVALUE project. Data for the comparables were collected from the market of the city of Iasi (Romania). The new methodology to be tested in this case study uses data extracted from the EPC to find an indicated value for a thermal retrofitted apartment. Results are compared with values obtained by the classic methodology. The case study followed several steps. Firstly, information was collected about which residential buildings from the city of Iasi have an EPC. Most of them were block of flats, constructed during 1960-1984. Secondly, market data about these buildings were collected. Three districts were attentively monitored during August-September 2009. The most dynamic one, offering sufficient comparables, was the district Alexandru cel Bun. The subject property and the comparables are located in this district. The next step was filtering the selected buildings in accordance with age, so only buildings constructed within same construction codes were used. Finally, the valuer inspected the subject property and the calculation of estimated value using comparable properties was done. The valuation report is based on some hypothesis and constraints. Hypothesis:

• property documents are in agreement with national and local laws that comply with environmental regulations; • property rights result only from the documents submitted by the owner, without requirements for additional guarantee. Ownership is considered valid and marketable. It is assumed that the property is under a responsible ownership and a competent management; • information which was collected from owners is considered to be authentic and accurate; • selected valuation approaches are in agreement with the scope of the valuation, property rights and data collected from the market when the valuation report was elaborated; • valuation methods are based on valid and reasonable assumptions; • the property may have hidden or invisible characteristics like underground constructions, inappropriate construction materials which can influence the value. In such cases the valuer is not held responsible since it has not the right, the competence or the ability to detect these aspects and to make technical studies necessary to discover them; • valuation of the property is based only on data at the valuers’ disposal. It doesn’t mean that supplementary data do not exist. Constraints:

• this valuation report cannot be considered as a technical study on the construction structure of the building or on the land or on the environment; IMMOVALUE

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• this valuation report may be used only by the specified beneficiary for the specified scope; • dimensions of the property were extracted from the cadastral documentation submitted by the owner; • data used in valuation process are in accordance with the market trends at the time of the valuation report; • any calculation of value from this report corresponds to the full property; derivations to be used for valuation of parts of the property are not permitted, except the case when the report specifies that this procedure is considerate appropriate; • the valuer is not expected to offer further expert advice or to provide court or hearing testimony or to attend court proceedings; • the viability of the report corresponds to the description of the property and market evidences at the time of the report. The valuer cannot be held responsible for modifications of value due to physical deterioration, economic factor or any other factor which occur after the time of the report and may alter valuers’ opinions. 4.4.2.1 General description and explanation Background/initial situation Scope of work

Basis of valuations

IMMOVALUE

Valuation of an apartment situated in a block of flats, in order to complete the case study of IMMOVALUE. The scope of the case study is to calculate the value of an apartment including calculation of added value generated by energy efficiency. A new methodology based on data extracted from the Energy Performance Certificate (EPC), which was presented in Report D5.1-D5.3 is used. The property has been inspected on September 21, 2009. The structural condition, construction materials and installations has been evaluated in the course of the visual inspection. No detailed technical analysis was made. The valuer has carried out a survey and analysis on location and market situation. Calculation of value was done in accordance with the scope of the work, type of property and recommendations of International Valuation Standards IVS1 and Romanian valuation procedures. Main basis for the valuation has been the documents supported as follows: - land register – abstract of title - cadastral map - designation of area and zoning map - energy performance certificate (in line with the EU Directive 2002/91/EG) - energy audit of the building, including Page 77 of 105


Legal Status/ Statutory Considerations/ Town Planning

Location

Site description

Property description (construction)

IMMOVALUE

recommendations for better energy efficiency - ownership contract. In addition to the mentioned documents the valuer as well take following considerations into account: - results of site inspection - observable property condition - current observable market condition and situation of the local real estate market. The legal status of the property results from the selling documents. The owners of the apartment have full property rights, without contractual restrictions, mortgages, etc. It is assumed that the property has been constructed due to building codes and standards for construction valid at the time of construction. No further extension of the zone is foreseen. The building is situated in the city of Iasi, a town with 350,000 inhabitants, from the North-East part of Romania. The area of the city is 96 km2. The valuation concerns an apartment with 67.34 m2 useful area, situated in a block of flats from Alexandru cel Bun district. The surrounding area is mainly characterised by residential properties and retail infrastructure is rare Alexandru cel Bun district is situated at 3-5 kilometers away from the city center. The main buildings are block of flats (303 from 330 in total), constructed during 1971-1989. The apartment to be valuated is located in a block of flats which is part of a set of blocks with ground floor + 10 floors, ground floor + 4 floors, ground floor + 7 floors. There are facilities for car access, pedestrian access, parking, public transport (tram, bus, mini bus), stores, food market, school, health center, parks, banks, etc. The development of the area has not been foreseen until now. The area is polluted by noise and CO2. The site is not located in endangered areas that might be affected by natural disasters (e.g. avalanches, earthquakes, soil erosion, etc.). The building where the subject property is situated, is a residential block of flats, which underwent thermal retrofitting in 2008. It is a building with basement+ground floor+10 floors, constructed in 1974. The gross internal area of the block of flats is 3,343.45m2. The ground floor and the first nine floors contain 2 apartments with 49.79 m2 useful area and 2 apartments with 67.34 m2 useful area. On floor 10, there is an apartment with 49.79 m2 useful area, an apartment with 67.34 m2 useful area and an apartment with 84.29 m2 useful area. The height of Page 78 of 105


rooms is 2.51 m. On the top of the building there is an open terrace, with thermal and waterproof insulation, non pass permitted. The apartments are accessed by staircase and elevators. The structure of the building is made of concrete foundations and reinforced concrete frames. The walls are made of bricks. Last maintenance of the building was made during summer 2008, when the envelope underwent thermal retrofitting. The outside walls, the ceiling of the basement and the attic are insulated. The windows are energy efficient (double glazing windows with PVC frame). The building is supplied with utilities: water-sewage, telephone, electricity, gas, Internet, cable TV. Adequate function of electric, sanitary and other equipment and appliances, as well as the supply and disposal utilities are assumed. The apartment to be valuated is situated on the 9th floor and it contains: living room, two bedrooms, entrance hall, kitchen, bathroom, balcony. The owner invested in design improvements such as: special sandstone and tile, natural wood floor. At the time of valuation, the owners, 2 persons, occupied the apartment. Structural condition and repair Market condition

IMMOVALUE

The building is with respect to its age in a good condition. No structural damages were observed. Major improvements, renovations or reparations are not required. Social, economic, environmental, governmental, political, international aspects affect the Romanian real estate market. Ongoing financial crisis caused a dramatic decrease in demand. End-users looking for a good investment are waiting for better opportunities. End users without financial possibilities want to buy, but depend on financial support from banks, which have stricter rules for approving loans and which increased instalments. Resellers withdrew from the market due to the increasing investment risk. At the time of this case study (September 2009), on the realestate market from the city of Iasi, the supply is higher than the demand. This tendency occurred by August-September 2008. In the same period during 2007, the real estate market was active with increasing demand and by consequence with increasing prices. Since August-September 2008 the market is continuously declining. The effect is low demand, oversupply of offers, which generated decrease of value up to 40 %, during last year. In the city of Iasi, at the time of this study, the value of apartments from residential buildings was 450-1,600 €/m2 and the yield rate was 6.0-8.5 %.

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Valuation methodology and The valuation methodologies used in this report are: commentary 1) Classic sales comparison approach applied under the supposition that added value produced by thermal retrofitting is neglected. Calculations and results of valuation are presented in Table 1. 2) A new valuation was done by adding costs of investments for thermal retrofitting to the estimated value of the subject property calculated in Table 1. Results were presented in the section named Ordinary valuation calculation and results. 3) The new methodology for the sales comparison approach. 4.4.2.2 Key valuation parameter Price of comparable properties

The estimated value was derived from transaction prices of comparables. The comparable properties were located near the subject property and constructed under same construction codes as the subject property Comparable Price [€] Price [€/m2] assets Comp 1 58,000 773.33 Comp 2 60,000 810.81 Comp 3 57,000 770.27

4.4.2.3 Ordinary valuation calculations and results Valuation was performed for an apartment with a useful area of 67.34 m2. The apartment is situated in a block of flats, which underwent thermal retrofitting, recently. The Romanian classic sales comparison approach considers two types of adjustments:

•

market adjustments for age, conditions of financing, location, etc., in accordance with national valuation codes;

•

adjustments as costs of investments for better design and comfort comparing to standard (modern doors, special tile, special sandstone, wood floor, individual heating systems, energy efficient windows, etc).

Comparable properties which underwent thermal retrofitting are very difficult to be found. Ordinary valuation uses comparable properties that did not undergo thermal retrofitting. Table 10 presents calculation of estimated value without taken into consideration thermal retrofitting, as it usually happens. The estimated value of the subject property is 51,484 € [764.53 €/m2].

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Comparison elements Price [€] Useful area [m2] Adjustment Adjusted price [€] Age Adjustment Adjusted price [€] Conditions of financing Adjustment Adjusted price [€] Floor/highest floor Adjustment Adjusted price [€] Location Adjustment Adjusted price [€] Improvements Indoor design investments Adjustment Adjusted price [€] Energy efficient windows Adjustment Adjusted price [€] Individual heating system Adjustment Adjusted price [€]

Subject property 67.34

1973

Market

9/10

Iasi, Alexandru cel Bun district

Yes

Yes

A 58,000 75.00 -5,924 52,076 1974 0 52,076 Market 0 52,076 6/10 -1,562.29 50,514 same

Comparable assets B 60,000 74.00 -5,400 54,600 1976 -2184 52,416 Market 0 52,416 8/10 -524.16 51,892 same

C 57,000 74.00 -5,130 51,870 1974 0 51,870 Market 0 51,870 6/10 -1,556.10 50,314 same

0.00 50,514

0.00 51,892

0.00 50,314

-200 50,314 No 840 51,154 Yes 0 51,154

0 51,892 No 840 52,732 Yes 0 52,732

330 50,644 No 840 51,484 Yes 0 51,484

Estimated value of the subject property 51,484 € Table 10: Results of conventional valuation

In reality, the subject property underwent thermal retrofitting, which cost 40 €/m2 (2693 € in total). These costs of investments should produce added value, neglected usually by ordinary valuation. According to Romanian valuation procedures, an awarded valuer may add to the value calculated by ordinary valuation costs of investments for thermal retrofitting and find a new market value. In this case the estimated value of the subject property would be 54,177 € [804.53 €/m2].

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4.4.3 Results applying the modified methodology The following chapter illustrates how valuers could address energy efficiency aspects in an appropriate manner, using sales comparison approach. Further it illustrates how to derive reliable a measure for quantitative integration of energy efficiency into property valuation calculations, if property markets’ willingness to pay is observable. 4.4.3.1 Theoretical basis of the new methodology for sales comparison approach (ESP method) The modified methodology for the sales comparison approach uses the so called “Energy Saving Potential” (ESP) as an input in calculation of value added generated by energy efficiency. Then following gives a short summary of the approach (details see in IMMOVALUE report 7.2). For each type “j” of energy demand (i.e. gas, electricity, heating), the Energy Saving Potential is calculated by the Equation,

(ESP ) j = (E demand ) j − (E ref ) j

(11)

where:

ESP

- specific annual energy saving potential [kWh/m².year];

Edemand

- specific annual energy demand [kWh/m².year];

Eref

- specific annual reference energy demand [kWh/m².year].

A retrofitted old building has very low ESP – hypothetically zero, while non-retrofitted old buildings have high rates of ESP, even if both the retrofitted and the non-retrofitted building are constructed under same construction codes. The reference energy demands and the reference building are concepts issued from the Energy Performance of Buildings Directive, which states “the Energy Performance Certificate for buildings shall include reference values such as current legal standards and benchmarks in order to make it possible for consumers to compare and assess the energy performance of the building”. The EPC from Romania presents information on the so-called reference building, a fictive construction that corresponds to the building in question regarding geometry, orientation, and terms of use, but all the building envelope elements and installations correspond to the current legal standards regarding energy characteristics. In this case study, Eref from Equation 11 is the energy demand of the reference building extracted from the Romanian EPC.

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Page 1: Energy demand Edemand .

Page 2: Energy reference Eref


Another option appropriate for semi-developed markets is to consider in calculation of ESP, an average reference energy demand for m buildings, instead of the specific annual reference energy demand for each building. In this case,

(ESP )*j = (Edemand ) j − (E ref_average ) j

(

(12)

)

where E ref_average represents for each type of energy, the average of annual reference j energy demands for m buildings constructed within the same construction codes as the subject property and the comparable properties,

⎛1 m ⎞ E ref_average = ⎜ E ref i ⎟ . ⎟ j ⎜m ⎝ i =1 ⎠j

(

)

∑

(13)

The new methodology considers that costs of ESP, during the remaining economic life-time of the building generates depreciations/appreciations due to energy efficiency. The added value generated by the ESP is calculated as follows:

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⎛ (1 + i )t − 1 ⎞ ⎟⋅S V ESP = MAR ⋅ ESP ⋅ PE ⋅ ⎜ ⎜ (1 + i )t ⋅ i ⎟ ⎝ ⎠

(14)

where:

VESP

- added value generated by Energy Saving Potential [€/m2];

MAR

- market adjustment rate;

ESP

- annual Energy Saving Potential [kWh/m².year];

PE

- price of the unit of energy [€/kWh];

t

- remaining economic life-time of the building [years];

i

- discount rate;

S

- surface area [m2].

By applying adjustments to each comparable, the estimated value of the subject property can be calculated. 4.4.3.2 Description of key findings This case study focuses on an apartment situated in a block of flats, which has undergone thermal retrofitting, recently. The new methodology for sales comparison approach calculates the added value generated the Energy Saving Potential (VESP) only for heating. No other type of energy is taken into consideration. Results of all methodologies are summarized in Table 11. The estimated value calculated by classic valuation using comparable properties that underwent thermal retrofitting, represents the market value to be reached by the new methodology. Value [€/m²] Subject property 815.74 Market value Value calculated by classic valuation, using non-retrofitted buildings as comparable properties Value calculated by adding cost of investments for thermal retrofitting to the value derived by classic methodology using non- retrofitted buildings as comparable properties.

764.53

804.53 807.72

Value calculated by the modified methodology.

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Comparing to the market value, the calculated value of the subject property is:

•

6.2 % lower, if non-retrofitted buildings are considered as comparable properties;

•

1.37 % lower, if costs of investments for thermal retrofitting are taken into consideration as adjustments in classic valuation using non-retrofitted buildings;

•

0.99 % lower, if the new methodology is used.

4.4.4 Descriptive integration of aspects affecting buildings’ energy efficiency 4.4.4.1 Building equipment and appliances Heating and cooling

The heating is provided by the individual heating system using natural gas as source of energy.

Ventilation, air conditioning The apartment is not equipped with ventilation or air and indoor air quality conditioning system. Lighting and day lighting

Use of renewable resources

Plumbing heating

and

Other observations

All rooms, except the entrance hall, have access to natural light. All rooms are equipped with electric installations including artificial light.

energy The subject property is not equipped with a solar heating system nor a photovoltaic (PV) or other alternative energy supply system, and consequently do not directly use renewable energy resources. hot-water The subject property is equipped with new plumbing installations. Hot-water heating is produced in each apartment by the individual heating systems. In the last 12 months, the entire building consumed 528,200 kWh/year, for heating and preparing warm water for domestic purposes. Price of thermal energy produced from natural gas was 0.0296 €/kWh (VAT included) in this period. Data was delivered by the E.On Moldova, the Energy Company from the city of Iasi.

4.4.4.1.1 Energy efficiency and other sustainable features of the property Energy efficiency

IMMOVALUE

According to the available EPC of the subject property, the annual thermal energy demand after thermal retrofitting, made in accordance with recommendations from the energy audit document should be 142.17 kWh/m².a (the reference energy demand). In reality, the consumed energy for space heating was 157.98 kWh/m².a, after thermal retrofitting. The thermal energy efficiency of the subject property can be evaluated as good. The average energy demand for 22 nonretrofitted buildings, constructed under same construction codes as the subject property and situated in the same Page 85 of 105


district is 284.89 kWh/m².a. Energy source

Natural gas is used for the individual heating system.

Green lease agreements

The property does not have green building certifications (LEED, BREEAM, DGNB, CEN, etc.).

LCC

No Life-Cycle-Costing analysis have been carried out.

Property configuration

The propertys’ configuration A/V=0.376, 11 floors.

4.4.4.1.2 Observable property market sensitivity and maturity for energy efficient or sustainable properties Real estate market sensitivity

The Romanian real estate market started to recognize importance of energy efficiency, since national programs for thermal retrofitting of old buildings was applied. Many owners, without waiting financial support from the government, started to invest in measures for better energy efficiency: thermal insulation of walls, energy efficient windows, modern heating installations. During transactions, these investments are considerate added value comparing to standard and the market is usually sensitive to it.

Market information available

In the present study, EPC for the subject property and comparables were available. In current transactions of apartments, EPC are not used in Romania, because they are not mandatory yet. The public media start to be interested in energy efficiency aspects. The law 372/13.12.2005 regarding the transposition of the EPBD 2002/91/EC into national law came into force on January 1, 2007. The law 372/2005 stipulates that for buildings with a total useful floor area over 1,000 m2, occupied by public authorities and by institutions providing public services (e.g. teaching units, hospitals, offices) an energy certificate must be placed in a prominent place clearly visible to the public. The sensitivity of the market is expected to increase when the EPC will become compulsory for dwellings and apartments in residential buildings when are sold or rented.

Public awareness

General circumstances and mandatory regulations

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In Romania, governmental institutions and policy makers promote energy performance in buildings. The values of energy performance and economic assessment are the result of methodological standards for the application of 372/2005 law, which were published in Official Monitor nr. 695/12.10.2007 art.19 and art. 20.

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4.4.4.2 Valuation calculation results of the new methodology The market value of the subject property, calculated by using comparables that underwent thermal refurbishment is 54,932 € [815.74 €/m2]. The purpose of the case study is to find an estimated value close to this market value, by applying the modified methodology (ESP method) for calculation of adjustments generated by better energy efficiency. Only energy for heating was taken into account. The subject property and the comparables were apartments situated in block of flats constructed in the period 1973-1974, under the construction codes STAS 6472-73. Details on calculation of the added value generated by thermal retrofitting is presented in Table 12. The following data was used: the current price of natural gas is CE=0.0296 €/kWh; market adjustment rate MAR=1; discount rate 8.0 %; total economic life-time of the building 60 years. The derived value of the subject property by applying the new methodology is 54,392 € [807.72 €/m2].

Subject Property

Comparison elements 1 2

Value calculated with classic inputs [€] Estimated value of the subject property using the classic method [€]

51,484

3

E demand [kWh/m².year]

142.17

4

E ref [kWh/m².year]

5 6 7

ESP [kWh/m².year] t [years]

266.83 137.37

275.14 136.03

264.34 138.25

129.46 25

139.11 24

126.09 24

10.67 67.34

10.67 75

10.53 74

10.53 74

0.00

3,067 54,221

3,209 55,941

2,908 54,392

142.17 0 25

⎛ (1 + i )t − 1 ⎞ ⎜ ⎟ ⎜ (1 + i )t ⋅ i ⎟ ⎝ ⎠ 2

8 9

S [m ]

10

Value calculated by ESP method [€] Estimated value of the subject property using ESP method [€]

V ESP [€]

Comparable assets A B C 51,154 52,732 51,484

54,392

Table 11: Results of the case study

Profitability of investments in thermal retrofitting was checked by the German costs of saved energy method, based on comparisons between the cost of the unit of saved energy (CG) and the expected average price of energy for the period under review (PAE). In the studied case, a discount rate of 8 % and a period of 15 years was taken into consideration, for calculation of (CG). A period of 15 years with an increase of 5 % of the price of energy per year, starting with 0.0296 €/kWh in the first year, was taken into consideration for calculation of (PAE). The

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result is CG=0.037€ Discount for non energetic building as in the market available

Significant adjustment

Low adjustment

neutral

low price elasticity observable

- market start to note price elasticity

- market does not reflect price differences due to energy efficiency or sustainability at all

- high aw areness of users for sustainability and energy efficiency

tenants partly start to focus on energy efficiency and sustainability aspects in their decision making process - sustainability and energy efficency aspects are recognised by a broad media

- tenants get informed about energy efficency but it does not play a main role

- tenants do not pay attention on sustainability and energy efficiency at all

- just specific media start to adress green building and energy efficency aspects

- media does not recognise green buildings benefits at all

- market postulate green buildings standards/codes

- high market sensivity for operating expenses and energy costs

- it is observable that few buyers start to just buy energyefficiency or sustainable properties

- majority of property market is not w illing to pay higher costs for green buildings

-…

-…

-…

-…

- omnipresence of green building issues in the media

Market adjustment rate Estimated MAR

Medium adjustment

- high price elastisity

+/- 75 - 100 %

+/- 75 - 50 %

+/- 25 - 50 %

+/- 0 - 25%

0%

0 [€] --> AAP derived from remaining amount between peer groups and valuation building x VEA +/- 100% [%] --> Valuers estimation adjustment due to probability of occurrence, uncertainty, etc. regarding the AAP = 0 [€] --> = MAR x AAP x VEA WAF +/AAP +/-

With the support of the consultation and the WAPEC–scoring the calculated adjustment based on market evidence is Zero. Compared to the original calculation the following modified calculation has no significant modification. The original calculation gives a market value of 93,200 € and the modified calculation gives a revised value of 93,200 €. Since this market does not show any evidence of a higher demand for energy efficient buildings. It has been ascertained, that energy does not play a role for decision making in this market segment.

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Input Parameter

Cost Approach

Replacement Costs of the building Technical depreciation Adjustment based on market Constructional defect/structural damage Causeless premium Value of the land Cost value Servitude Adjustment based on market evidence Discount: energy efficency

40.0 % 18.0 % 6.0 %

0 € (WAF)

Market Value

-174,700 € -69,880 € -31,440 € -10,480 € 8,000 € 27,800 € 98,700 € -5,500 € 0€ 93,200 €

4.5.3.4 Pitfalls within the process Market transparency

The building is situated in a rural area. In general the market transparency in rural areas is lower than in urban areas. So it is very difficult to identify comparables properties. In general this is a problem to identify the value of the land. But also a problem to identify properties, to get information about energy efficiency or LCC.

Information quality concerning The area, where the building is situated can be seen as an energy-efficiency undeveloped market in the case of EPC. Information about EPC or energy efficiency is not available. To get a feeling for the influence of the EPC or energy efficiency some real estate agencies were contacted. The survey shows that the EPC or energy efficiency does not play a role in the buying decision. But not only information of real estate agencies was collected, also information from municipalities. Information quality concerning There is no information about LCC available. LCC

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Acknowledgement We would like to thank the European Commission (the executive agency for competitiveness and innovations – eaci), RICS (The Royal Institution of Chartered Surveyors), gif (Gesellschaft für Immobilienwirtschaftliche Forschung e.V.), Federal Ministry of Agriculture, Forestry, Environment and Water Management of the Republic of Austria (BMLFUW) as well as the Federal Ministry of Economy, Family and Youth of the Republic of Austria (BMWA), for sponsorship and funding the and the IMMOVALUE-project in general. Further we would like to thank Neuman und Partner GbR (CREIS) and ERES NETconsulting-Immobilien.NET GmbH (www.immobilien.net), who act as a sponsor of this project, for the provision of the data used in this study.

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