IMPACT OF GREEN BUILDINGS ON THE VALUE OF PROPERTY

The Bartlett School of Graduate Studies IMPACT OF GREEN BUILDINGS ON THE VALUE OF PROPERTY Submission by: Elaine Ng L. M. (110083287) A Dissertation Submitted in part fulfillment of the Degree of Master of Science Built Environment: Facility and Environment Management Bartlett School of Graduate Studies University College London Monday, 2 nd September 2013 1

Plagiarism Statement I declare that, apart from properly referenced material, this report is my own work and contains no plagiarism. This report has not been submitted previously for any other assessment in this or other graduate courses. Elaine Ng 2

Table Of Contents ABSTRACT 5 1. INTRODUCTION 6 1.1 PROPERTY, ECONOMICS AND ENVIRONMENT 7 1.2 RESEARCH QUESTION 9 2. LITERATURE REVIEW 10 2.1 DEFINING GREEN BUILDINGS 10 2.2 BENEFITS OF GREEN BUILDINGS 12 2.3 QUANTIFYING THE BENEFITS 14 2.4 CERTIFICATIONS, RATINGS AND VALUE 16 2.5 COSTS OF BUILDING GREEN 18 2.6 SUMMARY OF LITERATURE REVIEW 19 3. RESEARCH DESIGN 20 3.1 METHODOLOGY 20 3.2 THE QUESTIONNAIRE DESIGN 21 3.3 THE CASE STUDY 24 4. RESULTS AND ANALYSIS OF THE SURVEY 25 4.1 PROFESSION 25 4.2 ASPECTS WITH THE GREATEST POTENTIAL IMPACT ON MARKET VALUE 26 4.3 STATEMENTS ON GREEN BUILDINGS 30 4.4 FACTORS IN ASSESSING VALUE OF GREEN COMMERCIAL BUILDINGS 31 5. CASE STUDY RESULTS 33 5.1 ONE GEORGE STREET 33 5.2 COST, RENTAL AND VALUE 34 6. DISCUSSION 38 6.1 PROPOSED GUIDELINES 39 7. CONCLUSION 41 REFERENCES 44 3

APPENDICES 47 APPENDIX 1 48 APPENDIX 2 72 LISTS OF TABLES Table 1: Certification Systems and Ares of Focus, WBDG, 2013 and GBCA, 2013 (Green Star, Australia) Table 2: Financial Benefits of Green Buildings, Kats et al., (2003) Table 3: Sustainability Criteria Linking to Value, Sayce et al., (2004) Table 4: Summary of Methodology Table 5: Aspects - Enhanced Value Table 6: Aspects - Maintenance Costs / Savings Table 7: Aspects - Sustainability Table 8: Aspects Legislation LIST OF FIGURES Figure 1: Value Impact of Environmentally Efficient Buildings, Boyd, T., (2006) Figure 2: Aspects which Impact Market Value Figure 3: Profile of Respondents - Profession Figure 4: Profile of Respondents - Length of Service Figure 5: Summary of Aspects Figure 6: Statements on Green Buildings Figure 7: Factors in Assessing the Value of Green Commercial Buildings Figure 8: Property Details - One George Street Figure 9: Location of One George Street, OneMap (2013) Figure 10: Construction Costs, SGD per square foot (GFA), DLS (2009) Figure 11: Grade A Office Rentals-Raffles Place, Savills Research and Consultancy (2013) Figure 12: Transaction Prices-Office; Raffles Place/Marina, Square Foot Research (2013) Figure 13: Linking Sustainability Features to Factors for Valuation 4

Abstract Purpose The purpose of this paper is to review the relationship between sustainability and property value in commercial real estate and provide some suggestions for valuers in recognising the features of sustainability in property valuation. Design/Methodology Research and studies by professional bodies on the relationship between sustainability and value is reviewed to identify key factors that could influence or impact the valuation of commercial property. A survey of stakeholders in the real estate industry was conducted to gather their perception on the importance of sustainability factors and a case study reviewed to provide some evidence on value of a Green Mark certified building in Singapore. Findings Stakeholders generally recognise the importance of sustainability factors in property value with a strong focus on economic factors such as lower costs and expected financial performance of the asset. Though social benefits are recognised, the translation to financial value is more complex. Further quantitative and market studies are required to provide evidence of the link between features of green buildings and the impact on property value. Some guidelines have been proposed as a result of this study; to improve data collection and storage in a more comprehensive manner and enhance current valuation parameters to incorporate financial benefits of sustainability features. Value The increasing role of sustainability needs to be further addressed in valuation practice. This qualitative study highlights some of the issues faced by valuers and how information and data gathering should be improved and further education required to encourage continual learning and understanding of sustainability features, and developments in the area. 5

1. Introduction Sustainability has taken on an increased significance in the real estate sector in recent years. Greater awareness, especially among stakeholders, such as owners, investors, developers, occupiers and the public sector has placed the issue of sustainability as a high priority globally. In the current context, sustainability is generally interpreted as achieving a balance between the economy, environment and society while sustainable development is an ongoing process towards achieving this goal. The importance of how buildings are designed, built and managed is recognised as being able to influence the negative impact of the built environment. Contributing up to 40 percent (%) of CO 2 emissions, 40% of energy consumption, 16% of water usage, 30% of solid landfill waste and 40% of raw materials consumption (Newell, 2009), buildings have a major impact on climate change. One key justification to encourage action within the property and construction sector is its greatest potential to contribute to sustainable development; a sector termed the cornerstone of sustainability (OECD, 2003). The Stern Review on the Economics of Climate Change argued that the cost of no-action would be equivalent to losing between 5% to 20% or more of global gross domestic product each year (Stern, 2006). Some progress has been made in areas of planning, design, construction techniques, building products and materials, rating and assessment tools. However, in practice Lorenz and Lutzkendorf, (2008) argue that these broadly technocratic approaches had insignificant impact on property markets. There have also been considerable studies and discussions by academia and industry on the market drivers for sustainability in commercial real estate. These include increased stakeholder value, meeting legislative requirements, reduced operating costs, increased productivity, tenant retention and corporate social responsibility (CSR) initiatives, etc. (JLL, 2007). Whether purely market-driven or mandatory requirements imposed by governments can be effective in reducing the environmental impact of building stock is a highly contested issue. The public sector, industry and non-profit organisations have strived to encourage the adoption of sustainability practices for implementation in the built environment through various means. However, generally stakeholders, i.e. owners and occupiers, are usually more interested in the benefits they receive in adopting sustainability initiatives within their portfolios (Warren-Myers, 2012). In this aspect, professionals in the 6

industry, especially valuers have a key role to play in assessing and advising about the effect of sustainability on property value. Without financial justification the viability of the required investment in commercial real estate may not be fully recognised and the advancement of sustainability in the property and real estate industry may be limited. 1.1 Property, Economics and Environment With buildings playing a key role in the battle against the issues of climate change, individual countries and governments have developed various policies and regulations to mitigate or remedy this situation. Changes in policy and regulations within the real estate industry are continually being introduced; more so in developed markets globally. Property working groups have been established with support from the Institutional Investors Group on Climate Change and Global Reporting Initiative, to review property issues in key forums etc. Forms of mandatory policies, such as the requirement for buildings in the European Union (EU) to publicly display Energy Performance Certificates following the EU Directive on the Energy Performance of Buildings in 2003 and other market-based environmental rating and certification systems for buildings such as LEED (USA), Energy Star (USA), Green Star (Australia), BREEAM (UK) and Green Mark Scheme (Singapore), (WBDG, 2013). The growing push towards green certified buildings has generated greater research on the subject, but quantified research on the relationship of green features to asset value is still in its infancy (Pitts and Jackson, 2008). A framework has been established by the UN Environment Programme Finance Initiative, 2006 for responsible investment, endorsed by organisations, financial institutions and private investors representing more than US$8 trillion in assets globally (UNEPFI, 2006). Building green buildings and making old ones greener alone is not going to solve the world s environmental problems. Nor is it going to lead to energy independence or plummeting utility bills. But it is one of the most important single areas on which we will see increased focus as the world struggles to adapt to climate change. (Asia Business Council, 2007 p.3). In the operation of commercial markets, price signals are central in providing information for the basis of allocation of resources. In a real estate context, higher potential returns on certified green buildings would not only increase the development, supply and use of such buildings but also encourage greater investment in this area. 7

The value of property investments in Singapore averaged US$24billion annually for the last 3 years (CBRE, 2012) representing about 9.7% of annual gross domestic product (GDP), which averaged at USD$247.47billion for the same period (SingStats, 2013). With a target of at least 80% of buildings in Singapore, set by the Inter-Ministerial Committee on Sustainable Development (IMCSD), to achieve the Green Mark certification by 2030 (BCA, 2009), the impact of green buildings on the value of property certainly has a factor to play in influencing investments in green buildings. The main objective of property valuation is to provide a financial measure of the function or service derived from the use and control of property. Value is determined through the flow of services it is capable to generate to meet the requirements of owners and/or occupiers. Depending on the purpose of the valuation, concepts of value used in property valuation can defer. The two being market value (i.e. exchange value) and worth (i.e. use value), (RICS, 2007). Worth can be defined as the value of the property to a particular investor, mainly for the purpose of investment. Market value is shaped by competitive forces within the market where the property is located identifying what is likely to be the highest and best offer in exchange of the asset. The Singapore Institute of Surveyors and Valuers (SISV) adopts Valuation Standards and Guidelines that members have to follow. Non-SISV members abide by the valuation standards and guidelines issued by the Royal Institution of Chartered Surveyors (RICS) and/or the International Valuation Standards Committee (IVSC). The SISV Standards generally adopts the International Valuation Standards based on three fundamental approaches: - Direct Comparison Method - by comparing properties to similar buildings that have been sold, to infer value; making relevant adjustments for differences between comparable properties. Cost Method takes into consideration initial costs, i.e. as green buildings may be more costly to construct, a building certified Green Mark Platinum may be more costly and likely more valuable than one that is Green Mark Certified all other characteristics of the two properties being similar; 8

Income Method - estimated net income that the property may generate which could be in the form of increased rental as well as reduction in operating expenses. The income method may be in the form of a direct capitalisation method using the prevailing rental multiplied by the years of purchase or a discounted cash flow over an appropriate period taking into account the expected useful life of the property (SISV, 2012). 1.2 Research Question A study done by RICS in the UK in 2005 concluded that; not only are green buildings good for the environment, provide healthier places to live and more productive places to work, they can command higher rents and prices, attract tenants more quickly, reduce tenant turnover and cost less to operate and maintain. Similar studies done in the US (Kats et al., 2003) and Australia (Davis Langdon, 2007) focus on how green buildings should or could impact on the market value of such buildings, but there is little available data to show that it does. Though financial benefits and risks reduction of sustainable buildings may be acknowledged, (i.e., by banks, insurance agencies, investors, occupiers etc.), there is no hard data to support this. Also few green buildings have yet to change hands, or are within private ownership. Owners/developers are reluctant to share financial data and fair comparisons may be limited. When valuers compare prices they need to consider that the final price of the transacted asset may be brought about by the interplay of constellations of pricedetermining factors, (Lorenz and Lutzkendorf, 2008). These exchange ratios are not constant and typically valuers make their own informed judgments on the assessment of market value of property. In practice, there are no clear approaches yet, for including the value of sustainability when assessing the value of green buildings. Thus, valuers and appraisers need to understand the specific features of green buildings, adopt methods to assess the impact on property value and possibly fine-tune the current methods to address these new issues (Pitts and Jackson, 2008). This paper looks at current practices in identifying the value of green buildings, and examines the link between commercial real estate value and features of green buildings; with the aim to propose possible approaches, that could be adopted by the real estate sector in valuing green buildings, and some guidelines that could be incorporated into property valuation practices in the Singapore context. This is done through a review of academic papers, industry publications and a survey conducted with stakeholders within the real estate industry. 9

2. Literature Review The environmental, social and to some extent economic benefits of sustainable buildings have been extensively researched, documented and illustrated in the literature. A large proportion of the research focuses on the normative effects of sustainability, i.e. how sustainability should affect market value or studies which look at the reduction in operating costs and occupant productivity, to provide some financial justification to investors and other stakeholders in the real estate industry, (Warren- Myers, 2012). Some have also looked the impact of sustainability on rental and property values and identified positive relationships, Miller et al., (2008), Eichholtz et al., (2009), though to different degrees. However, few have been able to demonstrate or shown evidence to support the conversion of features or benefits of green buildings to property value. 2.1 Defining Green Buildings To be able to adequately consider the impact of sustainability issues on property values it is necessary to define what a green building is. The expression green building and sustainable building are often used interchangeably, though these terms can have different meanings too. Green buildings can be expected to consume less energy and thus consequently generate lower CO 2 emissions. The definition of a sustainable building, according to Lutzkendorf and Lorenz (2007, p.60), goes far beyond the narrower concept of lowering a building s energy consumption, as sustainable buildings are constructed with a higher urban planning, creative, functional and technical quality. However, in the context of this paper and for the purpose of the survey done locally, the term green building has been used and can be defined as those which have low environmental impact throughout the various phases of a buildings life cycle, that is; in their design, construction and operation and a building that offers health and well being for occupants (Miller and Buys, 2008). Various assessment systems for green buildings have been developed worldwide. (Table 1). 10

Building Rating or Certification System Building Research Establishment s Environmental Assessment Method (BREEAM) (UK, EU, EFTA member states, EU candidates, as well as the Persian Gulf) Leadership in Energy and Environmental Design (LEED) Energy Star Green Mark Scheme (Singapore) Green Star (Australia) Type of Standard or Certification Certification system is a multi-tiered process with preassessment, thirdparty consultant guidance through an assessment organisation Green building rating and certification system through independent thirdparty verification Government certification using a benchmarking method Benchmarking scheme that aims to achieve a sustainable built environment by incorporating best practices in environmental design and construction, and the adoption of green building technologies Comprehensive, national, voluntary environmental rating system that evaluates the environmental design and construction of buildings and communities Managing Organisation BRE Global US Green Building Council US EPA and US DOE Building and Construction Authority (BCA) Green Building Council of Australia (GBCA) Issue / Areas of Focus Assessment uses recognised measures of performance, against established benchmarks: Energy and water use Internal environment (health and well-being) Pollution Transport Materials Waste Ecology and Management Processes Performance in: Sustainable Sites Water Efficiency Energy & Atmosphere Materials & Resources Indoor Environmental Quality Locations & Linkages Awareness & Education Innovation in Design Regional Priority through prerequisites and credits Building energy and water use Rates buildings according to five key criteria: Energy efficiency Water efficiency Environmental protection Indoor environmental quality Other green and innovative features that contribute to better building performance. Rates buildings according to nine categories: Management Indoor Environment Quality Energy Transport Water Materials Land Use & Ecology Emissions Innovation Table 1: Certification Systems and Ares of Focus, WBDG, 2013 and GBCA, 2013 (Green Star, Australia) 11

The UK adopts BREEAM, which can be attributed as the model for the US LEED and for the Australian Green Star systems; with adjustments incorporated for country specific issues. Generally the rating systems focuses broadly on categories related to sustainability of location, water efficiency, energy and atmosphere, materials and resources, indoor environmental quality and innovation and design process. There are also different levels of accreditation based upon a scoring founded upon those categories. Singapore adopts the Green Mark Scheme (GMS), launched by the Building and Construction Authority (BCA) in 2005. The assessment identifies specific energy efficient and environment-friendly features and practices incorporated into projects and points are awarded for features that exceed normal practice. Depending on the overall assessment and point scoring, the building will be certified to have met the BCA Green Mark Platinum, GoldPlus, Gold or Certified ratings. 2.2 Benefits of Green Buildings Through extensive research, market studies and industry reports in this area, it can be said that there is a general consensus that sustainable buildings: - are more energy efficient; have lower operating and maintenance costs; provides better comfort and well-being for occupants; are more marketable than conventional buildings; have lower risk potential; and reduced negative impact on the environment. (see, for example, Kats et al., 2003; RICS, 2005; Green Building Council of Australia, 2008). A study done by Boyd and Kimmet (2006), looked at the Triple Bottom Line (TBL) approach to the financial performance of investment properties, focusing specifically on environmental and social characteristics of green buildings. The probable impact of enhanced environmental characteristics on investment-type property is shown in (Figure 1) below. 12

Environmentally Efficient Buildings Improved Working Environment Reduced Building Operating Costs Reduced Facilities Maintenance Costs Greater Capital Costs Greater Demand for Space Lower Operating Expenditure Lower Operating and/or Capital Expenditure Lower Initial Return on Capital Higher Rent, Less Vacancies Increases Net Income Increases Net Income or Decreases Capital Positive Effect on Value Positive Impact on Value Positive Impact on Value Negative Impact on Value Figure 1: Value Impact of Environmentally Efficient Buildings, Boyd, T., (2006). The figure shows four expected outcomes from greater environmental efficiency, i.e. Improved working environment, reduced building operating costs, reduced facilities maintenance (FM) costs and increased capital costs. All characteristics, with exception to the latter had positive impacts on the capital value of property (Boyd and Kimmet, 2006). While environmental benchmarking is well advanced, such as with building rating systems like BREEAM and LEED, benchmarks for social factors are not yet established. Some studies such as Lutzkendorf and Lorenz (2007) and Sayce and Ellison (2003) include some social characteristics within the environmental benchmarks. Environmental characteristics generally include resource efficiency (water, energy), design and use of materials and resources, indoor environmental quality and innovation etc. Social factors would look at health and safety, including compliance with legislation, occupant satisfaction and productivity. A balance of economic, social performance together with environmental protection factors should be evaluated for a meaningful Triple Bottom Line assessment of built assets (Boyd, 2006). The study by California s Sustainable Building Task Force (Kats et al. 2003) quantifies the financial costs and benefits of Green Buildings. (Table 2). In addition to environmental benefits it also places a strong focus on health and productivity. Some of the common attributes found to promote healthier working environments include improved comfort and better ventilation, significantly better lighting quality; i.e. more 13

day lighting and greater occupancy control over light levels, much lower source emissions from building material etc. However it also concluded that the relationship between worker comfort, productivity and building design is complicated. Measuring the financial impact of greener more comfortable buildings on the value of property would be difficult. Category 20-year Net Present Value Summary of Findings per square foot (US$) Energy Savings $5.80 Emissions Savings $1.20 Water Savings $0.50 Operations and Maintenance Savings $8.50 Productivity and Health Benefits $36.90 to $55.30 Subtotal $52.90 to $71.30 Average Extra Cost of Building Green (-$3.00 to-$5.00) Total 20-year Net Benefit $50.00 to $65.00 Table 2: Financial Benefits of Green Buildings, Kats et al. (2003). Though the findings are contestable, it would appear that green commercial buildings provide a healthier and more enjoyable working environment and have been shown to improve worker productivity. Incorporating green design into an organisation s building may also improve its image and visibility and thus generate intangible benefits. According to Wasiluk (2007), sustainable commercial buildings have a competitive advantage over conventional buildings and are able to attract higher profile tenants, command above market rentals and thus increase capital values. These findings have been supported by Miller et al. (2008), who conclude that Energy Star and LEED certified office buildings in the US have a competitive advantage over their non-rated counterparts. 2.3 Quantifying the Benefits Some links are beginning to emerge between market value of a building, its sustainable features and financial performance. This was based on case studies in Australia that identify the economic value of certification of sustainable buildings. The 14

Green Building Council of Australia (2008) reported that sustainable buildings in Australia commanded 5% to 10% higher rents and had higher relative investment return and asset values of 10%. A study initiated by the Building Construction Authority (BCA) and the Department of Real Estate, National University of Singapore (NUS) in 2011 sampled 23 commercial properties that were refurbished. Key factors considered included the tenure, age of property, location, size, Green Mark award rating and year of award and energy consumption figures (before and after retrofit) and capital expenditure for the retrofit project. The study concluded that retrofitting can lead to an increase in the property value of about 2%, with an average expected savings in operating expenses of 10%. Research has also been done; primarily by Sayce et al., (2004), Lorenz and Lutzkendorf, (2008) and Boyd and Kimmet (2006) in proposing to modify valuation theory and methodologies to incorporate sustainability features in valuation. Generally they proposed that sustainability issues would affect major risk factors in computing the asset value. Thus, valuers can attach a risk premium to each of these factors or group the risk factors to adjust other parameters used in traditional valuation methods. The proposed model by Sayce et al., (2004) for a sustainability appraisal assumes that all the characteristics of a property investment can be reflected through four key variables: - 1. Rental growth 2. Depreciation 3. Risk Premium; and 4. Cash flow They further assumed that the specific sustainability criteria would impact on one or more of these key variables, (Table 3). 15

Sustainability Criteria Building adaptability Accessibility Building quality Energy efficiency Pollutants Waste and Water Occupier satisfaction Conduit Risk premium, cash flow, rental growth, depreciation Rental growth, depreciation Rental growth, cash flow, depreciation Rental growth, risk premium, cash flow, depreciation Rental growth, risk premium, cash flow, depreciation Rental growth, cash flow, depreciation Risk premium Table 3: Sustainability Criteria Linking to Value, Sayce et al., (2004). The outcome of the study found that the standard appraisal method (using the RICS, 1997 basis for computing worth) resulted in an over-valuation in comparison to the results of the sustainability appraisal. In contrast, the application of the standard method for a building with favourable sustainability criteria would lead to an undervaluation in comparison to the results of the sustainability appraisal. Part of the reason for this could be that the selection of the sustainability criteria and weightings were done in consultation with stakeholders in the industry, property professionals and consultants. Different groups would focus on various sustainability aspects that would affect the calculation input parameters. 2.4 Certifications, Ratings and Value A report published by the RICS, concluded that a clear link is beginning to emerge between the market value of a building and its green features and related performance (RICS, 2005, p.3). Studies done by Miller et al. (2008), Eichholtz et al. (2008) and Fuerst and McAllister (2007) found that green buildings had a positive impact on rents and values. Though there were variances in the extent of the relationship, a positive effect of the Energy Star certification was common among the three. All used data from the CoStar database, which utilised sales, and rental transaction data for office property in the US. Miller et al. (2008), conducted the study Does Green Pay Off using a sample of 550 Energy Star rated buildings and 318 LEED rated buildings. They found that the average LEED impact on sales price per square foot is 9.94%, while the Energy Star impact on sale price is 5.76%. 16

Eichholtz et al. (2008) carried out an analysis of 10,000 subject and control buildings to identify the economic values of certified green buildings in the US. Energy Star certification achieved more than 3% rental per square foot with increment selling prices as high as 16 per cent. The results suggested a premium for Energy Star buildings, but not LEED certified buildings. Fuerst and McAllister (2007) analysed transaction prices for 292 Energy Star and 30 LEED certified buildings. A 10% price premium was found for Energy Star and 31% price premium for LEED certified buildings as compared to non-certified buildings within the vicinity. In Singapore, Deng et al. (2011) analysed the economic returns of energy-efficient investments in the local housing market. The study looked at 62,434 transactions of Green Mark certified and noncertified residential units, using a 2-stage design in its empirical analysis. The research concluded that the Green Mark price premium commanded about a 6% premium over comparable non-certified dwellings, with higher premiums for higher certifications, i.e. up to 14% premium for a Green Mark Platinum certification. The large variance in these quantitative studies would suggest that the results cannot be considered statistically significant with confidence. Miller et al. (2008), observed that the data (from CoStar) are from a variety of properties, with different characteristics, locations and certification levels. The study done by Deng et al. (2011) looked at 62 Green Mark rated projects for a specific use in a small market i.e. Residential dwellings in Singapore. Research on the effects of the Green Mark scheme in Singapore is at the incipient stage. Valuers would not be able to utilise the information to accurately assess a relationship between sustainability and market value, as the reliability and communication of the specific quantitative results of these studies are incomplete and inadequate for use in practice (Muldavin, 2008). Lutzkendorf and Lorenz (2007) argue that a major obstacle for a more scientific basis for integration of sustainability aspects into property valuation is due to insufficient property transaction evidence linking the buildings environmental and social performance to property prices. Studies that investigate the relationship between building characteristics and property prices rely on property transaction databases that contain generally crude statements on the availability, age or size of particular building features and/or by making use of subjective and mainly qualitative judgments based on implicit assumptions. As such benefits of sustainability may be reliant on the knowledge, judgment and experience, or lack thereof, of the individual valuer. 17

In addition, the application of sustainability assessment tools has not yet gained general market acceptance within the property sector. This could be partly due to the limited comparability for the various certification systems as they vary, partly in terms of the criteria, definition of performance indicators and their respective weighting and the presentation of results. 2.5 Costs of Building Green A study done by California s Sustainable Building Task Force of 33 green buildings found an average of 2% construction cost premium associated with certification. However, it also concluded that the minimal increase in upfront costs; mainly attributed to design, would on average, result in 20% savings of total construction costs over the life cycle of the building, Kats et al., (2003). From a life cycle savings standpoint, savings resulting from investment in sustainable design and construction dramatically exceed any additional upfront costs (Kats et al., 2003, p. vii). Similarly, a 2005 survey by Turner Construction found cost premiums of up to 20% for LEED certified buildings. Costs were dependent on the timing to obtain certification and the level of certification desired, which is likely to be lower when requirements have been integrated into the design of a new project as compared to retrofitting for improvements subsequently (Turner Construction, 2005). A later study by Davis Langdon in 2007 in Australia found that the cost of constructing sustainable buildings under the Green Star certification tend to match or only slightly exceed those of comparable non-green buildings. The research indicated that the initial impact on construction costs is in the region of 3-5 per cent for a 5 Star solution, and a 5 per cent plus for a 6 Star non-iconic design solution. In order for the additional construction costs of green buildings to be rationalised, investors would require a combination of higher income and/or reduced risks. Failure to recognise price premiums at the initial phase would be a disincentive for stakeholders to invest in green buildings. Such costs therefore would have to be accompanied by an understanding of benefits obtained for the additional construction costs to be justified. Robinson, J. (2005) stipulated that the initial capital investment surcharge would be recovered many times over in terms of lower energy and operational costs. Similarly 18

the RICS, Green Value survey (2005) found that initial construction costs are typically higher but these extra costs may be recouped through operating savings and reduced energy costs. Initial research focused on the relationship between cost and value in looking at the value of sustainability in commercial real estate. In established markets, such as the commercial office market, the cost approach is not an acceptable method by the profession in determining market value (Whipple, 1995). Valuers require hard data and at this point there is only anecdotal evidence that green features increase the value of a building by reducing longer-term operating costs. 2.6 Summary of Literature Review The wealth of research and studies show that green buildings have characteristics and benefits that could influence value. Major themes reviewed comprised the following: - Green buildings generate benefits, not only from environmental efficiency, but also improved health and productivity, have a competitive advantage over conventional buildings and are more marketable; Certified buildings have a positive effect on property rental and values; There is a cost premium associated with building green, but also lower operating costs over its useful life. The studies have also attempted to quantify the financial costs and benefits to provide some certainty around the relationship between sustainability and property value. However, in reality, the applicability of these studies is not appropriate for the valuation profession. To develop an opinion on value, an appraiser investigates how the market views a particular property, which will require an analysis of trends and forces that influence value and input expert intuition for the assessment. Finding positive correlations between sustainability and market value using large data sets, such as CoStar may not lead to the same conclusions in practice. Valuers may also not have a full understanding of the characteristics or ability to translate these into financial benefits to form appropriate assessments on property value. Generally few of the studies have been able to show evidence or propose suitable methods to identify a relationship between sustainability and property value or propose guidelines on how this could be done in practice. 19

3. Research Design 3.1 Methodology Three approaches were used to assess the impact of green buildings on property values: The first, a worldwide literature search on the topic (Part 2 above). The literature reviews provided a global perspective on the issues being discussed and guided the design of the questionnaire for the survey for the other methods; The second, a survey of stakeholders who are involved in various aspects of the property and real estate sector in Singapore, namely developers, investors, financiers, valuers, consultants and asset and facility managers. The aim of the survey is to gather and review their perception of the economic, social and environmental impact of green buildings (Part 3 and 4); The third, a case study review of one Green Mark certified building in Singapore, in comparison to property market performance indicators (Part 5). Similar methodological approaches identified during the literature review process are summarised in Table 4. Approach Reference Description / Purpose Survey of stakeholders in the real estate sector (Section 1 and 2) Kats et al., (2003) Fuerst and McAllister (2007) Green Building Council of Australia, (2008) To compile the key features and benefits of green buildings derived from the literature search and rank their level of importance in influencing the value of property. This could assist valuers in identifying key features of sustainability which should be considered when assessing property values Survey of stakeholders in the real estate sector (Section 3) Case Study Lorenz and Lutzkendorf, (2008) Singapore Institute of Surveyors and Valuers (2012) Green Building Council of Australia, (2008) Eichholtz et al. (2008) To identify the current factors adopted in practice in assessing the market value of green commercial buildings To review and compare the value of a Green Mark certified building against property market indicators. Table 4: Summary of Methodology 20

There have been just a few empirical studies done on the impact of green buildings on the market value of commercial properties in Singapore. The reason for their small number could partly be due to the fact that a large database would be required to analyse the performance of green buildings and that there are only about 1,500 Green Mark certified buildings, as of March 2013, since the implementation of the scheme in 2005 (BCA, 2013). Of this, less that 18% or about 260 are commercial buildings. A recent study done by Yu and Tu (2011), Are Green Buildings Worth More because they Cost More? looked at the impact of the Green Mark certification on private residential property. Transactional data was obtained from the Real Estate Information System (REALIS), developed by the Urban Redevelopment Authority (URA) in Singapore. This database, not unlike CoStar in the US, has current and historical data of all transactions which further breakdowns into location, size, tenure, etc. useful for analysing sales and rental transactions for a variety of developments, including commercial property. However, unlike CoStar, the green building certifications, are not tagged to the property in REALIS. There are also very few single building Green Mark developments, as compared to individual office/commercial units within a development, which have been transacted to allow for meaningful comparisons to be made. Rather then trying to draw some conclusion from the limited number of available empirical studies, it was decided to carry out a targeted questionnaire type survey. The questionnaire was to be distributed to a group of practioners within the real estate industry to gather feedback and information on the perception of industry players on the impact of green buildings on property values. Some interpretation is required for the analysis of the responses and comments, based on qualitative data as compared to a quantitative analysis. 3.2 The Questionnaire Design The survey comprises of an electronic questionnaire, (Appendix 1) based on a standard set of questions to obtain mainly qualitative responses. The electronic survey was conducted over a 3-week period from 19 th July to 9 th August 2013. The questions looks at 3 areas (Section 1-3), with an additional comment field under Section 4: - Section 1: What aspects do you think have the greatest potential impact on the market value of Green Buildings? 21

This section comprise of 15 questions on the benefits of sustainable buildings, derived from the literature review, (Kats et al., 2003, Fuerst and McAllister, 2007 and GBCA, 2008). These were grouped into 4 categories, namely; Enhanced Value, Maintenance/Cost Savings, Sustainability and Legislation (Figure 2). Figure 2: Aspects which Impact Market Value A further breakdown of the categories listed specific features such as better market positioning, more energy efficient, compliance with legislation etc. Respondents were ask to rank the factors according to the level of importance on a 5-point Likert scale, with 1 being Least Important and 5, Most Important. This would allow for further evaluation and comparison of the responses for the various categories into positive and negative responses. A central Neutral rating was also allowed. The findings from this could assist valuers in identifying the key features of sustainability that should be considered when assessing property values. 22

Section 2: Do you agree (or disagree) with the following statements on Green Buildings? The second Section requested respondents to indicate their agreement or otherwise of 7 typical statements of sustainable buildings, mainly focusing on economic and social considerations. Responses are also required to be ranked according to a 5-point scale, with 1 being Strongly Disagree and 5 Strongly Agree. Studies primarily by Sayce et al., (2004), Lorenz and Lutzkendorf, (2008), suggested that different groups of stakeholders (investors, financiers, occupiers, FM s) would focus on different sustainability aspects. The results of this section would highlight that valuers need to recognise the different perspectives as the weightage given by different stakeholders could have a different impact on the outcome of the valuation. Section 3: What do you consider are the most important factors in evaluating or assessing the market value of a commercial Green Building? Section 3 requests respondents to list down, (not more than) 8 key factors that should be considered in evaluating the market value of Green Buildings, based on typical factors currently adopted by valuers (SISV, 2012) in their assessments. Factors such as location, size, age, etc. The results would be reviewed to see if there are similarities with green building benefits and explore the possibility for valuers to expand their evaluation to incorporate enhanced benefits of green buildings within these factors as part of future guidelines. Section 4: Do you have any other comments to add on the financial benefits of green buildings and their evaluation? A final additional comment field was also included for respondents to include any other remarks on the financial benefits of green buildings from their individual perspective. Section 5: Demographic profile which included profession and length of service. 23

3.3 The Case Study One case study is selected to look at a Green Mark certified building in Singapore which has been in operation for over 8 years since its completion in 2005. The Green Mark scheme was introduced in 2005 and in 2008 it became mandatory for all new buildings to meet the certification requirements. The property, One George Street, is a Grade A office building located in the Central Business District (CBD) of Singapore. The property was sold in 2008 and subsequently re-certified in 2010 after a major refurbishment was carried out. A detailed description of the One George Street is shown in Appendix 2. The selection of a case study allows for further insight into the research issues, which would be overlooked in any large number study. The case study also identified a few consistent experiences with other case studies done globally which may provide some important pointers for valuation. 24

4. Results and Analysis of the Survey 4.1 Profession A total of 41 completed survey forms were returned. Of the total number, about 40% of respondents are current practitioners in Asset, Property and or Facilities Management. Another 15% are consultants involved in various building related aspects including Design and Environmental Management. 12% are involved in finance and real estate investments, 7% property development and 2% valuation (Figure 3). There is a fair mix of participants presently involved in the property and real estate industry who submitted their surveys. Profile of Respondents '&" '%" '$" '#" '!" &" %" $" #"!" 45"/2#""%6#7#0)*8#2$%!""#$%&%'()*#($+%&%,-./0/$+%1-2-3#(% 9)2"50$-2$%% 9)(*)(-$#%&%!:8/2/"$(-;7#% 6#7#0)*#(%,/2-2.#%%,/2-2./-0%<#(7/.#"% =27#"$8#2$% >#-0%?"$-$#%!3#2$%&%@#-"/23%&% A-05#(%&%!**(-/"#(% Figure 3: Profile of Respondents - Profession 56% of the respondents have been working in their current capacities for more than 11 years of which 9 respondents have at least 20 years of service (Figure 4). More than 80% of the respondents have a minimum degree qualification, 11 of who hold a Masters or PHD 25

Length of Service #*$'12$ '345&$%&'()$ ##+$!"#$%&'()$!*+$,"-$%&'()$!.+$!!"!.$%&'()$,0+$ /"!*$%&'()$!-+$ Figure 4: Profile of Respondents - Length of Service 4.2 Aspects with the Greatest Potential Impact on Market Value Respondents were required to answer all questions for each of the four (4) categories under Section 1, with the first being Enhanced Value. The 6 aspects generally looks of market positioning, ability to command higher rental, attract better tenants, faster take-up rate, lower tenant turn around and better demand from investors, (Table 5). Section 1: What aspects do you think have the greatest potential impact on the market value of Green Buildings? Aspects Least Not so Neutral Import- Most Total Important Important ant Important Responses i. Better market positioning 1 7 3 25 5 41 ii. Able to command higher rental 1 3 4 28 5 41 iii. Attracts good quality tenants 1 7 4 23 6 41 iv. Faster take-up rate 1 10 11 19 0 41 v. Lower tenant turnover 1 13 11 16 0 41 vi. Higher demand from investors 1 7 7 22 4 41 Enhanced Value (Total for 6 Aspects) 6 47 40 133 20 Total for 6 Aspects (%) 2.40% 19.10% 16.30% 54.10% 8.10% 100.00% Table 5: Aspects - Enhanced Value 26

Interpreting the results as a category, the responses show that a total of 62.2%, (54.10% + 8.10%) of responses rated these aspects to be important or most important, i.e. a positive influence on property market value. The 3 highest ranked attributes; better market positioning, ability to attract good quality tenants and command higher rental, shows a focus on income generation. On the other hand, 1 respondent felt that none of these 6 aspects had the potential to impact on the market value of green buildings. The second category, Maintenance Costs, looked at 5 aspects; Lower operating costs, more energy efficient, reduced need for future refurbishment, lower service charge and reduced risks (Table 6). Section 1: What aspects do you think have the greatest potential impact on the market value of Green Buildings? Aspects Least Not so Neutral Important Most Total Important Important Important Responses i. Lower operating costs 1 2 1 24 13 41 ii. More energy efficient 1 0 0 27 13 41 iii. Reduced need for future refurbishment 1 10 7 20 3 41 iv. Lower service charge 3 10 5 21 2 41 v. Reduced liability, risks 2 3 8 24 4 41 Maintenance Costs/Savings (Total for 5 Aspects) 8 25 21 116 35 (Total for 5 Aspects) % 3.90% 12.20% 10.20% 56.60% 17.10% 100.00% Table 6: Aspects - Maintenance Costs / Savings 37 out of 41 (90.2%) respondents rated lower operating costs (i) as important or most important and only 1 respondent, rated energy efficiency (ii) as least important. Under the income method of valuation, lower operating expenses would increase the net income and infer a positive impact on property value. With 40% of respondents from Asset, Property and Facilities Management fields, it is not surprising that both energy efficiency and lower operating costs were rated the highest. 27

Aspect iii. Reduced need for future refurbishment and iv. lower service charge were rated almost equally with about 44% of respondents who felt that these aspects were not important or took a neutral stand on the position. Generally lower service charge would impact on income generation from a landlord s perspective. About 68%(28 out of 41) rated reduced liability and risk as import or most important. This aspect would probably be more heavily weighted from the perspective of a landlord, investor or property or facility manager, but not from a developer or consultant. Overall, about 73.7% (56.60% + 17.10%) rate these 5 aspects important or most important in influencing the market value of property. Section 1: What aspects do you think have the greatest potential impact on the market value of Green Buildings? Aspects Least Not so Neutral Important Most Total Important Important Important Responses i. Reduced impact on the 1 1 1 29 9 41 environment ii. Meeting corporate social 1 7 3 24 6 41 responsibility initiatives iii. Reduced health and safety risks 1 5 5 24 6 41 iv. Increased occupant productivity 3 10 9 17 2 41 Sustainability (Total for 4 Aspects) Table 7: Aspects - Sustainability 6 23 18 94 23 (Total for 4 Aspects) % 3.70% 14.00% 11.00% 57.30% 14.00% 100.00% The third category; Sustainability featured 4 main aspects including: - reducing the impact on the environment, corporate social responsibility initiatives, health and safety and productivity (Table 7). Looking at the 4 aspects in total, the weightage is on a positive side with 71.3% (57.30% + 14.0%) indicating that environmental and social attributes play an important role in contributing to the market value of property. 28

Section 1: What aspects do you think have the greatest potential impact on the market value of Green Buildings? Aspects Least Not so Neutral Important Most Total Important Important Important Responses i. Compliance with legislation 1 0 3 22 15 41 Legislation (Total) 1 0 3 22 15 (Total) % 2.40% 0.00% 7.30% 53.70% 36.60% 100.00% Table 8: Aspects - Legislation Compliance with legislation weighed heavily on the positive side, with 90.30% (53.70%+36.60%) ranking this factor to be important or most important. Again, 1 respondent felt that this aspect was least important. In summary it can be said that of all the four aspects (Figure 5), greater importance is placed on legislation and maintenance costs as compared the sustainability and enhanced value categories. All except 4 responses ranked legislation important or most important (90.3%) and about 74.0% (57.0% + 17.0%) ranked aspects under maintenance costs as important or most important. Summary of Aspects by Category Legislation (Total) 7.00% 54.00% 37.00% Least Important Sustainability (Total for 4 Aspects) 14.00% 11.00% 57.00% 14.00% Not so Important Neutral Maintenance Costs (Total for 5 Aspects) 12.00% 10.00% 57.00% 17.00% Important Most Important Enhanced Value (Total for 6 Aspects) 19.00% 16.00% 55.00% 8.00% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Figure 5: Summary of Aspects 29