ESG factors bring ‘a fundamental change’ to the valuation process

Paul McNeive

Most of our building stock is not to the highest new standards and there will be ‘stranded assets’

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February 03 2022 02:30 AM

Sustainability has been a fast-growing factor in the property market for a decade and the issue has now been expanded and formalised with the addition of the term “Environmental, Social and Governance” (ESG) as criteria which valuers must take into account . The Red Book, which is the bible of standards for surveyors worldwide, has been revised, and from this week forward, valuers must take account of sustainability and ESG factors when inspecting buildings, gathering information, and reporting to clients.

This change potentially has a big impact on values, according to Johanna Gill, Deputy Head of Valuation and Advisory at Cushman & Wakefield and a member of the Valuation Professional Group at the Society of Chartered Surveyors Ireland. “It’s a fundamental change,” Ms Gill told me. “It’s not a surprise in that the green agenda has been becoming more prominent, and is now formally part of the valuation process.

“Valuers will have to interpret market views on sustainability and ESG, and a practical result is that the valuations of second-tier assets are being affected,” she said. “Lots of people are concerned by this but it is just another factor in the valuation, as you would consider the tenant, the income and construction. It is resulting in values that are lower for second-tier properties, but that reflects the market. For example, if the energy rating of a property is too low, it’s not that there is a 5pc drop in the value, some funds won’t even consider buying it.

“Most of our building stock is not to the highest new standards and there will be “stranded assets” where eventually the value will have to fall to a level where a developer will redevelop,” Ms Gill continued.

Higher sustainability standards have been driven by occupiers, but the market has responded and some developers and funds are now leading best practice. A good example of this is the Hibernian REIT strategy of selling relatively modern buildings and renewing their stock with new properties to the highest ESG standards.

The change to the valuation standard presents somewhat of a conundrum for valuers in that they may now be assessing the rapidly changing ESG factors of a valuation, without a lot of new comparable evidence of deals. Ms Gill told me that this is similar to the situation valuers faced in the pandemic, where there was a lack of evidence on which to base your conclusions.

Ms Gill told me that the social part of “ESG” is becoming more prevalent and that some investors will not buy investments where the tenants business or reputation has become socially undesirable. Not only that, but prospective clients are now interrogating the ESG policies of estate agents, before awarding contracts.

Agents CBRE are saying that ESG is now the lens through which all property decisions are made. Surely, this mandatory focus on sustainability and ESG will strengthen the advantages of new buildings.

Iain Finnegan appointed

Congratulations to Iain Finnegan of Finnegan Menton who has been elected as the incoming Vice President of the Society of Industrial and Office Realtors (SIOR) European chapter. SIOR is a network of commercial agents with 3,500 members in 45 countries.

Mr Finnegan has been instrumental in bringing the SIOR International European Conference to Dublin, and over 300 delegates will travel to Ireland in July. This networking bonanza is open to local agents. Visit sioreurope.com.