Sustainability, referring here to the economic, environmental and social impact of an activity, has emerged over the last decade as a key business issue. Since Shell International Group produced its first corporate social report in 1996, similar documents have become standard practice for many large corporate organisations. The Dow Jones Sustainability Index and the FTSE4Good, coupled with the growth of environmentally focused business service organisations such as the Ethical Investment Research Service (EIRIS) underline the relevance of sustainability to major business organisations and to the funds who invest in them.
The major institutional investors have moved with this changing market in a variety of ways. Responses reflect the different strategies of the individual organisations and compliance with the amendment to the 1995 Pensions Act requiring disclosure of a statement of investment principles. Many have set up investment funds that either screen out investments in certain sectors and/or engage with companies in an attempt to ensure particular standards of corporate social responsibility are adhered to. It has been estimated that 3% of all equity investment monies are now placed in ethical or socially responsible funds (Goodland, 2003). Whilst socially responsible investment is something of an adjunct to the broader understanding of ‘sustainability’, it has enabled equities investors to respond to the sustainability agenda.
The property investment community, by contrast, has found it more difficult to respond to this issue. Two major obstacles have limited progress: the lack of an established means of identifying or classifying sustainability in property, particularly within the existing commercial stock; and the absence of practical tools and advice to assist the property investment community in aligning issues of sustainability with economic return.
The Sustainable Property Appraisal Project was set up with industry, government and academic backing to begin to address these obstacles. It is led by Kingston University School of Surveying and funded by the government Department of Trade and Industry, Prudential Property Investment Managers, Investment Property Forum and Boots. Surveyors Drivers Jonas, Universities Superannuation Scheme and Forum for the Future are also partners in the project. The primary objective of the work is to provide a practical tool with which the property investment community can begin to examine what sustainability, SRI and CSR might mean for property investors in financial terms.
The project will produce:
q a sustainable property assessment tool;
q a sustainable property appraisal tool; and
q a framework from which a sustainable property performance index could be developed.
These outputs will assist property investment appraisers in assessing the sustainability of existing commercial property and translating that into a potential impact on property worth.
There are three key stages to the project. Stage one required the identification of a set of sustainability characteristics relevant to commercial property that link through to property worth. Herein lies the most fundamental element within the appraisal tool: the quantification of the impact of sustainability on property worth. This quantification has been developed through consultation with industry, pilot testing on commercial properties, and reflection on a wide range of research focusing on the different elements of a property’s function, from energy efficiency to occupier density ratios. It is the first time quantification of the impact of sustainability has been attempted and is therefore to be seen as a foundation on which the industry can build through further research and data collection.
The sustainability criteria used to assess property are: energy efficiency, pollution, waste and water, building quality, adaptability, accessibility, occupier, occupier satisfaction and contextual fit.
An assessment tool is being developed, based on these criteria, which will enable an assessment to be made of the level of sustainability of any commercial property. More detailed definitions of each criterion are available on the web at www.sustainableproperty.ac.uk.
Stage two of the project required the development of a cashflow model that would enable a property’s sustainability, once assessed, to be reflected in an appraisal of its worth using a widely understood appraisal process. The calculation of worth was identified as a suitably flexible and widely understood model and this has been adapted to include the sustainability criteria to form the sustainable property appraisal tool. Each criterion is linked through to the standard calculation of worth variables of cashflow, risk premium, rental growth or depreciation.
The criteria have different levels of significance for different property types and, as such, are weighted differently within the sustainable property appraisal model. Furthermore, change in the significance of each of these criteria is anticipated over time as the political-economic and regulatory frameworks change. The model is designed to be able to reflect such developments.
The final stage of the research focuses on the development of a framework for a pilot sustainable property index, in consultation with IPD. The full development of the index is beyond the scope of the existing project. However, it is hoped that funding will be forthcoming to continue work into this area given its significance in enabling the property investment community to analyse performance accurately and using benchmarks similar to those developed for the equities investors.
Responding to the sustainability agenda requires an understanding of how sustainable the existing commercial property stock is and what that might mean for investment returns. The outputs of this project will not provide the whole answer to these questions, but they will provide the industry with some much needed tools and a starting point from which more and better answers can be achieved.
Louise Ellison is senior lecturer at Kingston University School of Surveying