Green Value: Shifting Models Towards a Sustainable Future

By Hugo Le Moing, Colomer Expertises (France)

As real estate valuers and experts in the industry, we are noticing many shifts in the market that are beginning to have worldwide impacts. As times changes, so does the market, making it harder to comprehend the new rules of owning, valuing, investing, and sustaining commercial real estate properties. The buzz around green value and sustainable building practices is a market trend that is starting to gain the attention of real estate players.

Many regulations and policies today require that commercial real estate properties enhance environmental performance and energy efficiency, which has led to the term “green value”. Although extremely appealing for the many sustainability advocates in the real estate market, there are many questions around the financial benefits and implications that these new green policies bring to the market.

One such question circulating is whether the green and sustainability efforts are paying off financially?

Even for experts, this is not a simple question to answer, given that green building practices don’t always generate income for investors in the short run and they are not easy to assess at the time of investment since data is limited.

We are also aware that the financial methods used to appraise buildings barely consider the “green” value when assessing property valuations. The real impact of climate change and its effect on future income streams generated by green buildings also remains without much supporting evidence. All this gives rise to more questions and skepticism.

The reality is that even real estate players are in a dilemma as to whether there is truly a value ascertained from integrating the sustainability norms into their activities.

Despite all of this resistance and skepticism in the market, there is an inevitable global transition happening as authorities worldwide are tightening environmental regulations. This is slowly closing gaps in attempts to define and sustainable valuation approach in the market.

Therefore, devoting time now to understand some key benefits of integrating green value will fend off hesitancy and doubts in adapting to this new era and help us to better understand how green factors improve the market value of assets and property valuations in the long run.

• Added value to Property Owners & Tenants

Although integrated green practices that improve building efficiency are still a growing but nascent practice in the market, they are proving to be an efficient at increasing net income in the long run.

Owners are anticipating that a building that does not meet market standards for energy compliance may even remain vacant or will only find occupants at discounted prices. It is also foreseen that energy factors will be implemented in future taxes applied to real estate, as governments are rigorously beginning to combat the impacts of climate change and make our planet more sustainable.

From the tenants’ point of view, buildings that meet green standards and policies will continue to be more appealing as we all opt for sustainable lifestyle and living options.

• Investor Benefits

Despite not having accurate or historical data to rely upon while making investment choices, investors today are starting to shoulder the responsibility of making environmentally conscious decisions and that is shaping the future real estate market. Prudent investors believe that green value, although currently underestimated by many in the market, will help boost the profitability of the buildings in the long run.

Reduces Liquidity Risk
Green buildings are likely to have a shorter commercialization period, reduced turnover of tenants while maintaining higher rents, and higher resale value than non-certified buildings. With the popularity of sustainability themes in the global property markets, there is even less time needed to market such green properties making them highly attractive.

Improved Quality of Living for Tenants and Owners
Green buildings allow for secure cash-flows and improve the marketability of the property for investors. Big companies are now showing their strong preference to rent green buildings as they are looking to offer the best possible working conditions to their employees, but also to communicate intentions of supporting efforts towards a better planet.

Mitigating the Risk of Investing in “Soon to be Obsolete” Properties
Institutional real estate investors mostly have a long-term view when it comes to investing.

With these long-term views driving their strategies, they carefully invest in properties that meet expected future market demands and government policy requirements. Without necessarily generating capital gains in the short term, complying with environmental norms will help avoid accelerated obsolescence of the asset.

Investments in sustainable buildings will certainly help avoid the risk of the property becoming obsolete since in the future, the market will no longer consider building “prime” without a national or international environmental certification.

• Valuers’ Views 

The green shift is already happening and shouldn’t be ignored. The market is becoming increasingly aware of the positive effects of incorporating green and sustainable practices into business models and activities.

Although real estate valuers struggle to revise their current models to integrate green value due to the lack of historical data, it is imperative that they make a radical change in their practices, by adopting a prospective rather than retrospective vision. Financial models should be revised to integrate environmental and energy performance as a major factor of risk and opportunity to create value.

The benefits will eventually roll out in the future but awareness is the first step towards outstanding performance in the long run.

Conclusion

As zero-carbon and sustainable economies gain momentum, real estate players willing to bet on green efforts today will likely prosper in the greener market of the future.

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