Green Building Standards

Environmental changes have been quite rampant in the 20th and 21st century. Climate change and global warming have had severe impacts towards ecology. Human actions are among the highest contributors to environmental degradation and pollution which causes global warming. Buildings contribute significantly to environmental changes as well as pollution. In cognisance of this reality, there has been a lot of interest generated towards entrenching environmental standards in the building process and use of buildings. There has been the development of several building standards that ensure environmental friendliness of new buildings as well energy conservation. Consequently, some developers have shifted towards constructing green buildings and renovating old ones to achieve the sustainable building standards (Faulconbridge and Yalciner 2015, pp.360).

Sustainable or green commercial properties are described as commercial buildings that meet two distinctive conditions: being environmentally friendly and highly resource efficient. Royal Institute of Chartered Surveyors (RICS) is one of the organisations that set up the standards for efficient land use and sustainable building designs. Green building is the concept of using environmentally conscious and resource-efficient methods in all stages of construction and use of a building (Huang, Huang, Lin and Hwang 2015, pp.142). Sustainability of buildings also relates to other factors such as economy, utility, comfort, and durability (Faulconbridge and Yalciner 2015, pp.360).

In commercial buildings, there are distinctive features that describe green buildings. Darko and Chan (2016) evaluate such features which include large open spaces that allow natural light and air to flow. In such a design, there are significant savings in energy cost since there is no need for lighting during the day. Lower energy consumption also implies lower carbon emissions which is good for the environment in terms of the greenhouse effect. Water efficiency entails aspects such as rainwater harvesting which minimises the usage of water. Efficient utilisation of water resources is essential for environmental conservation (Darko and Chan 2016, pp.54).

Khashe, Heydarian, Gerber, Becerik, Hayes, and Wood (2015) bring out several standards that are used in the rating of green buildings. Such standards are developed by bodies such as RICS. Leadership in Energy and Environmental Design (LEED) is one of the environmental standards used in rating of green buildings. The LEED system was formulated by the United States Green Building Council (USGBC) (Council 2008, pp.57). The LEED system is consensus-based and market driven. It allocates ratings to buildings depending on the environmental responsibility during construction and usage of the building. Buildings also earn LEED points depending on new measures taken to enhance environment friendliness. The ratings depend on factors such as materials used, habitat restoration after construction, maximisation of open spaces, stormwater design, innovative design, water efficiency, construction waste management, and optimal energy performance, among others (Khashe, Heydarian, Gerber, Becerik, Hayes and Wood 2015, pp.477).

Altomonte, Saadouni, and Schiavon (2016) explore the BREEAM rating system that was established by Building Research Establishment in 1990. The BREEAM system is among the oldest sustainability rating systems for buildings. It uses scientifically based metrics to allocate ratings to buildings. Buildings are certified and rated on a scale ranging from 'pass', 'good', 'very good', 'excellent' and 'outstanding' for the highest rating. The rating is premised on factors such as waste management, efficient water and energy use, pollution, materials, habitat restoration among other (Altomonte, Saadouni and Schiavon 2016, p.56).

Roy (2017) describes the system of Green Globes which is another set of green building standards used primarily in Canada and USA. The system was established in the year 2004 and serves as an alternative for the LEED system. The Green Globes standards involve partnerships with developers during the construction process to identify areas that could use improvements and come up with sustainable buildings. The key objectives of Green Globes are to help buildings increase their marketability, improve working conditions, meet environmental standards enforced by the government, qualify for tax incentives, and minimise operating cost. The system has modules for new buildings, continuous improvement of existing buildings and healthcare buildings (Roy 2017, p.45).

A key aspect to note about the green rating systems is they are voluntary. Goulden, Erell, Garb, and Pearlmutter (2017) explore the several advantages associated with adopting the sustainability rating systems for a building. A building is able to acquire a tag of being environmentally responsible which increases the goodwill from the public and businesses towards such a building. Such a building develops a positive image from the community which is a marketing strategy of the building. The developers of such a building are also able to save on costs of running and maintaining the building if it meets the sustainability standards. The building is able to optimise energy use which saves on costs and conserves the environment. Additionally, the users of such a building are able to experience a high level of comfort due to the abundance of natural light and good aeration. Companies using buildings that have met the ‘green’ standards are thus able to retain their employees and maximise on labour output due to more hours worked. Employees are more willing and able to work when there is a conducive working environment. In the case of a school, the performance of the students is improved due to more hours of study resulting from a conducive school environment (Goulden, Erell, Garb and Pearlmutter 2017, pp.414).

Council (2008) explain that energy efficiency and incorporation of green aspects in the design and use of a building affects the valuation of a building. The sustainability rating of a building has a direct impact on the discounted cash flow of a building. Sustainability means that the usage of a building will be for a long time which is beneficial to the owner. Furthermore, a sustainable building tends to be highly cost efficient in running and maintenance. Also, sustainable buildings tend to be more marketable and will attract more business (Council 2008, pp.57). Using sustainable and green buildings benefit companies by having a low labour turnover which leads to cost savings. The employees also work in conducive working conditions which boosts their morale. These factors combined leads to a better financial performance of companies that use green buildings.

The discounted cash flow valuation model uses the income generated from a building to estimate the value of such a building. Market forces are the primary determinants of the rent and rental growth. Green buildings attract a higher level of market demand due to their various advantages as outlined above. The rent in such buildings is also expected to grow over the useful life of the building due to the high level of demand from the tenants. Such conditions lead to incremental cash flows from year to year. High and increasing levels of income generated by the building result to a higher valuation when applying the discounted cash flow method (Huang, Huang, Lin and Hwang 2015, pp.142).

Altomonte, Saadouni, and Schiavon (2016) focus on the cost of running and maintenance of green buildings and its relation to valuation. The cost is much lower for green a building which is beneficial to the owner of such buildings. Low operational cost emanates from the fact that the buildings utilise lower energy and the owners, therefore, pays lower power bills. The high level of water efficiency also implies lower water bills payable. Maintenance of buildings is also a major cost component of owning a building. Green buildings incorporate futuristic designs which mean that there is minimal maintenance in the present and in the future that is required for the building (Altomonte, Saadouni and Schiavon 2016, p.56). Therefore, the expenses of owning a green building are significantly lower which means higher net incomes go to the building owners. The valuation of the building using the discounted cash flow approach is positively impacted in this manner.

Exemplar property description

The property under assessment is located in plot 449, Katondo Road, Zambia. The commercial building is named Realty House and it comprises of four retail shops. The small sized building has a combined floor space of 237sqm (Appendix 1). The structure is aged 10 years but is still in a good condition. The three shops and one office are all under leasehold terms with varying rates in terms of the rent per sqm.

RICS guidelines are a standard framework used in assessing the building’s ‘green’ features using key attributes identified in Realty House. The framework incorporates key elements such as building design, location, environmental risks, materials used, legal and social considerations. The standards are deliberated and agreed upon by several professionals working in construction, infrastructure, land and property (Ball 2003, p. 5). The framework is adopted and applied in several jurisdictions across the globe. Energy and water efficiency is covered under building design. Realty House is properly ventilated by the use of large sliding doors, windows, and ventilation outlets which have been installed near the roof (Appendix 3). The ventilation minimizes the need to use air conditioning in this building which saves on energy. Furthermore, all the shops have large doors and windows which facilitate the free entry of light inside the building and reduce the need for electric lights (Schwartz and Raslan, 2013 pp. 356).These features represent the measures taken by the developer to enhance energy efficiency.

The location of the building is another prime consideration in the RICS sustainability checklist. The location factor evaluates how well accessible the property is using a variety of means of transport. For instance, it should ideally be easily reachable through public transport and also support private transport. Realty House meets these conditions since it is close to the main road, and it has a sufficient parking for private vehicles (Appendix 2). However, it has limited visibility to the main road. Furthermore, the increasing congestion is driving away several potential customers from this part of the CBD. The current average rent for realty house is ZMW 160/sqm. The level of rent for this building is therefore below the market rate given that the average rent for retail rentals in this market is ZMW 200/sqm. The presence of newer and ‘greener’ buildings can be said to account for the lower rent in Realty house.

A study of the local market conditions reveals that the location of the property is very critical in the local market. The property has advantages of being in a place with high foot traffic which translates to more customers accessing the various enterprises in the building. The level of rents in the local market is also influenced by the prevailing economic conditions. Demand for space is higher in times of economic boom when people have a greater purchasing power. These conditions push rents up. Finally, the appearance and attractiveness of the building is a key factor in the local market. Modern, quality and well maintained buildings tend to attract more foot traffic. Business owners tend to favour areas with high foot traffic and thus the properties fetch higher rents. These are also the key factors influencing valuation in the local market. A sensitivity analysis whereby each of the variables is isolated and tested in the local market reveals a similar pattern. Properties in a strategic location are valued higher. Secondly, an economic boom leads to higher property values in the local market. Finally, quality and well maintained properties have higher market value.

The development of supporting infrastructure such as roads, walkways will have a positive impact on the value of the building by attracting customers. These factors will contribute towards the growth of businesses which will induce a review of the existing rents upwards (Lorenz and Lützkendorf 2011, pp. 654).

Tabular description of Green features

Green Feature

Score

Justification

Energy Efficiency

Very Good

Flow of natural light through the doors and windows.

Natural ventilation.

Lack of solar panels.

Water Efficiency

Pass

Lack of water harvesting

Location

Excellent

Near the main road which increases accessibility.

Limited visibility from the main street.

Habitat Restoration

Excellent

Visible vegetation in the vicinity of the building (Appendix 2).

Green design

Good

Lack of stormwater design.

Old structure.

Valuation and sensitivity analysis

Vacant possession of the building has been assumed and the estimate of the rental value is based on comparable properties in the area. Rentals in the region have rental values averaging ZMW 200/sqm. Some features such as the planning of the ablution block (Appendix 1) and limited visibility of the building from the road are disadvantageous to this building which necessitates a downward readjustment of average rent levels downwards by 25%. For the subject building, the average rental value is adjusted to ZMW 150/sqm monthly. An assumption of a 5% annual growth rate of rent has been made. The capitalisation rate used in discounting cash flows is 12% which is the annual yield of a ten-year government bond. The rate has been assumed to cover the level of risk. Under these conditions, the intrinsic value of the building is ZMW 3,504,747 as shown in the workings.

Sensitivity analysis methodology helps in assessing how changes in the various aspects of the greenness of a building affect its valuation. In this case, various variables of greenness are the independent variables, whereas the valuation is the dependent variable. The analysis involves establishing the average rents that comparable properties charge in this area depending on the unique green features they possess. The variables chosen are derived from the RICS sustainability checklist which incorporates aspects such as the location, the building, and the land use (isurv, 2013). The variables to be tested under sensitivity analysis include energy efficiency, water efficiency, location, and green building design.

The first variable adjusted in calculating sensitivity analysis is water and energy efficiency. The two factors increase the values chargeable for rent and reduce the operational expenses. When these factors are put into consideration, the valuation increases to ZMW 4,157,358. A further sensitivity analysis is the location of the building. A market research shows that rents are higher for buildings more visible to the main road. The valuation when the location is factored increases to ZMW 4,600,832. The last variable tested under sensitivity analysis is a green design of the building which has used the comparison of the rents charged for similar buildings in the locality. A green design means that the building is generally efficient and incurs minimal maintenance costs. The valuation under this condition increases further to ZMW 4,752,016. All the calculations are in the separate workings file.

The time value of money is the theoretical model applied in the DCF valuation technique. It estimates the value of all expected future cash flows using a given discounting rate to obtain the equivalent present values. The approach that has been used in estimating valuation and sensitivity analysis may be criticised for the several assumptions it makes. The reason for the many assumptions is that the local property market has not extensively incorporated green features in buildings. Therefore, some of the values used as rent estimates for buildings with various green features are estimates rather than actual figures. The approach also holds several other factors constant such as natural disasters risks that could render the building unusable (Tanzil and Beloff 2006, p. 56). This creates a level of uncertainty in the DCF values.

Conclusion and recommendations

From the review of the literature, there is a positive relationship between the greenness of a building and its valuation. Buildings that have been rated for their greenness have a tendency of attracting more business since the rating gives them a tag of being environmentally responsible. The major rating systems for the sustainability of business have been identified to be LEED, BREEAM, and Green Globes, each of which adopts a unique methodology in their approach. The common green features for buildings identified include energy efficiency, water efficiency, green building design, stormwater design, materials used, habitat restoration, and construction waste management, among others (Kubba2012, p. 137).

The discounted cash flow model has been applied in estimating the value of Realty House. Various assumptions about the future and the required rate of return have been made in calculating the value of the building. Sensitivity analysis has been used to test how changes in various green features affect the intrinsic value.

The valuer ought to be aware of the conventional drivers of value in the global context as well as in the local market. In the global context, valuation of green properties should reflect the key conditions addressed by RICS. The valuer should evaluate the building features and configuration, the location, legal and social aspects facing the building. Furthermore, the valuation has to incorporate the vulnerability of the building to various environmental risks such as fire and floods (Sayce, Sundberg, and Clements 2010, p. 233). In the local market, the valuer should study the conditions using comparable properties as well as the consumer behaviour.

RICS sustainability checklist also identifies which aspects of the property require modifications. Building and configuration adjustments may cover factors such as increasing natural light getting into the building by expanding the size of the windows. Bigger windows will also make the shops more open and safer from hazards such as fire. Another critical modification for the premises would be to install water harvesting fittings on the building. Tenants will be more comfortable in a building with sufficient water supply (Lorenz and Lützkendorf 2011, pp.647).

In reducing the uncertainty in valuing green property, the data used should be primarily obtained from the local market where the building is located. Valuers should consider all unique aspects that exist in every property market. By doing so, valuers are able to pick unique attributes for each market such as the key property investment drivers in a certain locality. For instance, investors in the area are working to fight CBD degeneration by taking down old buildings and putting up modern developments. Such issues have a direct impact on the value of the subject property by affecting the factor of locality. Furthermore, the calculation of DCF must always incorporate the risk element. The risk is incorporated in the capitalization rate. The uncertainty of the value is minimized since the risk has already been factored.

The uncertainty of valuation should be reported by accompanying the valuation figure with the valuer’s opinion of the level of risk to which the figure may be affected.

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Works cited

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Ball, M., 2003. RICS European housing review 2003. United Kingdom: Royal Institution of Chartered Surveyors.

Council, U.G.B., 2008. Green building facts. US Green Building Council.www. usgbc. org/ShowFile. aspx.

Darko, A. and Chan, A.P., 2016. Critical analysis of green building research trend in construction journals. Habitat International, 57, pp.53-63.

Faulconbridge, J. and Yalciner, S., 2015. Local variants of mobile sustainable building assessment models: the marketisation and constrained mutation of BREEAM ES. Global Networks, 15(3), pp.360-378.

Goulden, S., Erell, E., Garb, Y. and Pearlmutter, D., 2017. Green building standards as socio-technical actors in municipal environmental policy. Building Research & Information, 45(4), pp.414-425.

Huang, K.T., Huang, W.P., Lin, T.P. and Hwang, R.L., 2015. Implementation of green building specification credits for better thermal conditions in naturally ventilated school buildings. Building and Environment, 86, pp.141-150.

isurv (2013) Sustainability and commercial property valuation (2nd edition), Guidance note [online], London: RICS. Available at: www.isurv.com/site/scripts/download_info.aspx?downloadID=474 [accessed 25 April 2017]

Khashe, S., Heydarian, A., Gerber, D., Becerik-Gerber, B., Hayes, T. and Wood, W., 2015. Influence of LEED branding on building occupants' pro-environmental behavior. Building and Environment, 94, pp.477-488.

Kubba, S., 2012. Handbook of green building design and construction: LEED, BREEAM, and Green Globes. Butterworth-Heinemann.

Lorenz, D. and Lützkendorf, T., 2011. Sustainability and property valuation: Systematisation of existing approaches and recommendations for future action. Journal of Property Investment & Finance, 29(6), pp.644-676.

Roy, J., 2017. Comparison of the Acoustic Design Requirements of the LEED, WELL and Green Globes Building Rating Systems. Canadian Acoustics, 45(3).

Sayce, S., Sundberg, A. and Clements, B., 2010. Is sustainability reflected in commercial property prices: an analysis of the evidence base.

Schwartz, Y. and Raslan, R., 2013. Variations in results of building energy simulation tools, and their impact on BREEAM and LEED ratings: A case study. Energy and Buildings, 62, pp.350-359.

Tanzil, D. and Beloff, B.R., 2006. Assessing impacts: Overview on sustainability indicators and metrics. Environmental Quality Management, 15(4), pp.41-56.

Appendix 1: Structural plan of Realty House

Appendix 2: Front View

Appendix 3: Front view