Socially Responsible Property Investment: Quantifying the Relationship between Sustainability and Investment Property Worth

Abstract

This paper explores the potential link between the sustainability of a property asset and its investment worth. The research is based on the premise that sustainability represents an additional and changing set of risks for property investors and as such needs to be examined systematically for those risks to be properly understood and mitigated. It seeks to make the bundle of issues referred to as ‘sustainability’ explicit within the appraisal process in order that their impact on property worth can be more effectively examined and assessed from a property investment perspective.

A series of relationships between sustainability and the functional performance of a property are theorized. A set of parameters quantifying the impact of that functional performance on rental growth and depreciation are then developed. The main findings are that sustainability is pertinent to property investment and can be analysed in relation to potential impact on standard investment appraisal variables. The paper presents a model for doing this as a foundation from which further work can be developed. Two example appraisals are presented to demonstrate the approach developed.

Keywords:

• Sustainability
• energy efficiency
• property investment
• appraisal
• worth
• investment performance

Notes

1. This paper is based on work carried out within the Sustainable Property Appraisal Project, research that was funded by the DTI Partners in Innovation fund, Prudential Property Investment Management Ltd, The Investment Property Forum Educational Trust and Boots plc. Cross‐industry support was also provided by Drivers Jonas, IPD, Universities Superannuation Scheme and Forum for the FutureBased on observation of one corporate portfolio of 60 outlets of varying sizes. Figures for individual units vary significantly. Energy use data for retail property is scant.

2. Sustainability has a number of definitions the most commonly cited being ‘development that meets the needs of the present without affecting the ability of future generations to meet their own needs’ (World Commission on Environment and Development, 1987). However there are others, see for example Pearce, 2003. The ‘triple bottom line’ definition considers sustainability under the three headings of environmental, social and economic impact.

3. The Future‐Proofing Property Questionnaire (FPPQ)

4. It is the increase in cost that affects the negotiation. As energy costs rise, the marginal increase in cost to the occupier of an energy inefficient building will be greater than that for an occupier of a more energy efficient building. It is this marginal increase that has the potential to affect the rental negotiation.

5. BRE Environmental Assessment Model – a system for scoring a building on the environmental impact of its construction and/or refurbishment.

6. Sevenoaks District Council v Circular Facilities, Sevenoaks Magistrates Court, June 2004

7. With thanks to Kevin Luckett at Ascent Insurance Brokers for is assistance in gathering the information in this table.

8. Accessibility here refers to the ease with which a property can be reached, as opposed to ingress, egress and circulation which is the subject of the Disability Discrimination legislation.

9. These figures were provided by PMA Research Consultants and are indicative only, based on their understanding of spending patterns. Further research would be required to develop more reliable estimates. The research team is grateful to PMA Research Consultants for their assistance.