Approaches to sustainability in real estate valuation
31 August 2021
As a newly appointed partner, Jessika Baccetti has been heading up the Real Estate Valuation department since the beginning of June. Together with three other members of her team, the experienced real estate valuer carries out valuations on countless properties, including an increasing number with sustainability certificates.
What does sustainability mean in the context of real estate?
The term sustainability is deployed in conversations surrounding climate protection, often in a partisan manner and occasionally accompanied by exaggerated details. However, for us as real estate valuers, the issue is subject to an interplay between various factors. As well as the ecological standpoint, we also examine economic and societal aspects. Together, these factors influence the value of a property.
How do we picture this in concrete terms?
Imagine a property, located centrally with ideal transport links, close to shopping facilities, schools and doctors, and situated within a well designed estate, complete with excellent opportunities for activities and recreation. The property appeals to a wide range of people and is ideal for flexible use, which are both positives in terms of marketing. The building was made with sustainable materials and also conforms to the latest energy standards. CO2 emissions are prevented and natural resources are preserved. There is neither air nor noise pollution, simply contented renters who reduce the vacancy risk to zero and guarantee long-term, secure returns.
How significant is the interest in sustainable real estate in the Swiss market?
Judging by the array of ESG ratings providers (Environment, Social, Governance), the requirement for portfolios to be judged against sustainability criteria has grown steadily over the last few years. Countless new ratings providers (SSREI, ECORE, UNIL, CRREM, PACTA) have emerged since ESI and GRESB were first established in 2009. Three more labels have come onto the market this year alone: AMAS, REIDA CO2-Benchmark, REMMS. The problem with these ratings is that the parameters of direct and indirect emissions are weighted differently, both during operation of the property and in the context of its entire life cycle. Therefore, a comparison is barely possible. Labels which are issued for individual properties upon construction or renovation, such as the standard most widely known in Switzerland, ‘Minergie’, represent a simpler option. According to Minergie’s annual report for 2020, a total of 51,302 buildings were certified with the labels Minergie, Minergie Eco, Minergie P, Minergie P Eco, Minergie A and Minergie A Eco between 1998 and 2020. Some 93% of those were new builds, whilst only 7% were redevelopments. This shows that there is still plenty of room for improvement.
Where do the biggest challenges for valuing sustainable real estate lie?
From the cantonal policy agreement MuKEn, or the ‘Sustainability and Valuation Guide (NUWEL)’, to the ESI Indicator (Economic Sustainability Indicator) or international standards like SEED, there are many different approaches to valuing and these vary according to the type and location of the property. Unfortunately, despite all efforts, there is still no universal formula or consistent methodology for valuing sustainable real estate that would definitively reveal the difference in value through the lens of sustainability. Instead, we carry out a more holistic, advisory assessment, which then indirectly influences the final valuation.
So, are sustainable properties valued higher?
Institutional buyers tend to be willing to pay more for sustainable real estate. Each investor promotes their own sustainable investment strategy, which is considered standard practice nowadays. The producers of the certificates earn good money through the certification process; however, higher transaction costs lead to reduced returns since the property represents a lower risk. Higher returns mean higher risk, not necessarily better investment. What is interesting in the context of family homes is that, although they are often sustainably built, the high costs make certificates prohibitively expensive. Given the problems surrounding energy, the issue of sustainability takes on greater meaning. This is most notably apparent with regards to heating systems. In the latest Swiss Real Estate Monitor from Credit Suisse (Q2 2022), experts expect an increase in heating costs of around 38%. This means that the amount people are willing to spend on rent - their buying power - is decreasing. As a result, yields come under pressure.
Would you like your property valued? Jessika Baccetti (jessika.baccetti@kmp.ch, +41 43 344 65 24) looks forward to hearing from you!
