Valuation Practice Issues: Sustainability And Market Value

Limited financial justification and viability of sustainable investment - through valuation and identification of the relationship between sustainability and market value - has hindered the commercial property marketís adoption of sustainability (RICS 2008). Valuers have a pivotal role in the ascertaining and reporting of market values, and in an investment advisory capacity to investors (Lorenz, d'Amato et al. 2008, Levy and Schuck, 2000). To date, sustainability has received limited attention in valuation practice and as a result the relationship between sustainability and market value has not been clearly defined, making the investment community hesitant in regard to the necessary investment in sustainability (Sayce and Ellison 2003, Fuerst and McAllister 2008, Pivo and Fisher 2009). Existing research into the relationship between sustainability and market value has concentrated on normative models and theory, identifying the positive affect sustainability should have on market value of commercial property, illustrated by case studies. However, previous research has not yet provided the industry with substantial rationale for sustainability investment, as the market value of sustainability has been difficult to distinguish through valuation (Muldavin 2008). This paper reports on findings from an investigation into valuation practice processes in relation to the treatment of sustainability in commercial property and the assessment of market value. The research analysed aspects of valuation procedures and the ability of valuers to incorporate the concepts, characteristics and attributes of sustainability within these procedures. The research used a qualitative methodology to investigate valuation practice methods of comparison and assessment, and valuersí interpretation and understanding of sustainability and its affect on market dynamics. This was conducted in Australia and New Zealand, in order to compare the skills, perceptions and practices across similar countries at differing stages of market evolution. The research found that valuers are currently inadequately skilled to accurately assess and compare the relationship between sustainability and market value in commercial property. Although valuation methods used in practice at present are appropriate, the methods used to assess the level of sustainability in commercial property are inadequate and may lead to inaccurate reporting of values. The amount of evidence relating to sustainable property in comparison to conventional property is limited, which is restricting analysis and interpretation of the evidence and identification of a relationship between sustainability and market value. Valuersí assessment of the market dynamics and the trends of stakeholders were not correlated with investorsí actions and investment strategies. The research identified the challenges valuersí face in the assessment and quantification of sustainability in commercial property, particularly in the comparative analysis of sustainability levels in property. The research has highlighted methodological issues inherent in valuation practice, and the reliance on heuristics as barriers to effectively identifying the relationship between sustainability and market value. The research identified the requirement for further research and recommendations for the valuation profession, particularly in addressing the need to develop the level of education, assessment techniques and evidence-based knowledge of market value in relation to sustainability.