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Integrating Sustainability in Real Estate Valuation

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by

Jean Saubusse

on 12 December 2013

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Transcript of Integrating Sustainability in Real Estate Valuation

"Integrating Sustainability in Real Estate Valuation"
SustainableProperty & Real Estate
Real Estate Valuation
Global Warming: roots of the real estate change
Climate change : serious issue !
Real Estate industry : guilty !
General awareness !
Consequences on the Real Estate industry!
Sustainability !
Sustainable property performance !
Property sustainable characteristics !
Market Value
Investment Value
Transaction Value
The Valuation Process
Step 1 and 2:
1) Identify the appraisal problem
2) Determine the required scope of work
Step 3:
Collect Data and Describe Property
Step 4
Perform Data Analysis
Step 5
Determine the value of land
Step 6:
Three Valuation methods
Step 6:
How to introduce sustainability in the real estate valuation process?
Problematic definition
INSA Engineering School
Bachelor and Master of Science in Building & Urban Engineering

- Sustainability
- Urban Planning
- Architecture
International Work Experience
ESSEC Business School
Advanced Master's degree in Urban Management and Real Estate

- Real Estate Market
- Building = source of cash-flows
- Green Value
La Française
Real Estate Managers
- Real Estate Valuation
- Process & Methods (Capitalization, DCF)
- Exposed to many different situations
(Obsolescence, vacancy, leases, ages buildings...)
- Real Estate Market Data
Integrating Sustainability in Real Estate Valuation
- Internship in Chicago, USA
Project in Beijing, China
- Internship in Rabat, Morocco
- Study Trip in Singapore
- Sea level rise
- Global temperature rise
- Shrinking ice sheets
- Glacial retreat
- Extreme events
- Ocean acidification
Share of the built environment on pollution emission & resource use
CO2 Emissions from Buildings
The Kyoto Protocol (1997)

=> C02 Emission reductions
(5-15% rate, depends on the countries)
European Union Incentives (2007)
20-20-20 European Union Policy by 2020
=> minus 20% GhG Emissions
=> minus 20% Energy Consumption
=> 20% Renewable Energy
The Grenelle Laws (2007-2010)
- Building Energy Efficiency reducing energy consumption by 38% (BBC, BEPOS)
- Renovation
- Government buildings
- emerging studies:
Sustainable buildings have:

=> higher rent
=> higher resale price
=> less vacancy
=> lower risk
Social
Equitable
Bearable
Sustainable
Viable
Economic
Environment
Social
Sustainable
Economic
Environment
Functional/technical
- Certifications: LEED, BREEAM, HQE, Green Star
"The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion."
"Montant estimé pour lequel un bien pourrait être cédé, à la date de la valorisation, entre un acheteur consentant et un vendeur consentant dans des conditions de concurrence normales après une commercialisation adéquate, les parties agissant, chacune, en toute connaissance de cause, avec prudence et sans contrainte."
The maximum value that a buyer would be willing to pay for a particular property is the buyer’s investment value. On the other side, the seller’s investment value is the minimum he/she would be willing to accept.
- Market area data

- Subject property data

- Comparable property data
- Market analysis
Understanding the economic base of the city, the various submarkets sectors, clusters...
- Sales comparison method
- The sales comparison approach
Step 7 and 8:
7) Reconcile Indicated Values from Three Approaches
8) Report Final Value
- The income approach:
- The cost approach:
Direct Capitalization
Discounted Cash Flow
Step 1: Identify the Appraisal Problem
- Identify the general sustainable characteristics of the subject property
Step 2: Determine the Required Scope of work
- Integrating sustainability in real estate valuation requires more work
- Green certifications => facilitator
Step 3: Collect Data and Describe Property
- Market Data Area
Sustainability level
of the market
(Green value
characteristics)

- Subject Property Data

- Comparable property data
Step 4: Perform Data Analysis
- Analyze the market, subject property and comparable properties data in terms of sustainability
Step 5: Determine Land Value
- Sales comparison method

- land use (brownfield, pollution, flood, soil erosion...)

- Accessibility, location
Step 6: Three valuation methods
- sales comparison approach
- not very relevant, few comparable properties data

- cost approach
- limited: "fiscal and legislative considerations", "the management and leasing issues" not taken into account
Step 6: Three valuation methods
- The income approach
Step 7: Reconcile Indicated Values from Three Approaches
Cost Approach
Income
Approach
Sales
Comparison
Approach
Step 8: Report Final Value Estimate
- No specific "sustainability" section in the appraisal form

- Sustainability should be integrated in the whole report
Climate
Change
Real Estate responsibilities
General
Awareness
& Action
Plans
Consequences
on the Real
Estate
Industry
Integrating Sustainability
in Real Estate
Valuation
- "Assessing Sustainable characteristics" is in progress thanks to Green Certifications but still subject to debate

- The Valuation Process through DCF method can integrate Sustainability

- Still difficult to convert Sustainability in value
(qualitative vs quantitative)

- Still very recent (The Environment Grenelle happened 6 years ago...)

- Emerging studies attest that the real estate market take sustainability aspect in consideration
Real Estate Sustainability (source RICS)
source RICS
Source Redbook, RICS
by Jean Saubusse
09/12/2013
Full transcript