The Sustainable

Property Appraisal
Project
Developing property appraisal tools to assess building worth
in accordance with the triple bottom line. This is a collaborative
research programme combining the expertise and resources of
industry, academe and the Government to apply principles of
sustainability in property investment practice.
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The Sustainable Property Appraisal Project

by Louise Ellison and Sarah Sayce
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Copyright © Kingston University 2006

Published by Kingston University
ISBN 0-9554744-0-X
Printed and bound in Great Britain by K&N Press
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Contents

Acknowledgments

1 Introduction 5

2 Defining Sustainability 6

3 Sustainability Criteria for Commercial Property 8

4 Assessing Sustainability within the existing Commercial Property Stock 9

4.1 Applying the Future-Proofing Property Questionnaire 9

5 Linking Sustainability to Property Worth 11

5.1 Rental growth 11

5.2 Depreciation 11
5.3 Cashflow 12
5.4 Duration to sale 12
5.5 Duration to let 13
5.6 Summary 13

6 The Sustainability Appraisal Tool Parameters – estimating the impact

on property worth variables 14

6.1 Energy efficiency 14

6.1.1 Estimating an impact on worth 14
6.1.2 Significance across property type 15
6.1.3 Additional drivers for energy efficiency 16
6.2 Climate control 16
6.2.1 Significance across property type 16
6.2.2 Estimating an impact on worth 16
6.3 Pollutants 17
6.3.1 Estimating an impact on worth 17
6.3.2 Significance of pollutants across property type 18
6.4 Adaptability 18
6.4.1 Significance of adaptability across property type 18
6.4.2 Estimating an impact on worth 19
6.5 Waste management 20
6.5.1 Significance across property type 20
6.5.2 Estimating an impact on worth 20
6.6 Water management 21
6.6.1 Significance across property type 21
6.6.2 Estimating an impact on worth 21
6.7 Accessibility 21
6.7.1 Impact across property type 22
6.7.2 Estimating an impact on worth 22
6.8 Contextual fit 24
6.9 Occupier 24

7 Applying the Sustainable Property Appraisal Tool 25

8 Conclusion 26

Appendices 27

References 37

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Acknowledgments

This project has benefited from the support and expertise of a committed
group of highly experienced and informed individuals, forming a Working
Group to whom the research team at Kingston University is particularly
indebted. It also benefited from the valuable input and advice of a
constructive and well informed Advisory Group. It is the generosity of such
individuals and the organisations they work for that enabled the research
team to ensure the outputs of this project reflect the sustainability agenda
whilst remaining directly relevant to the property industry.

The Working Group

Paul McNamara PruPIM
Philip Parnell Drivers Jonas
Ian Cullen IPD
David Russell Universities Superannuation Scheme
Charles Follows Investment Property Forum
Sally Uren Forum for the Future
Anna McCrea Davis Langdon Consulting (Representing DTI)

The Advisory Group

Francis Salway (Chairman) Land Securities
David Stathers Boots Properties Plc
Martin Hunt Forum for the Future
Julie Hirigoyen Upstream
Emma Griffiths Casella Group

The Research Team

Sarah Sayce Kingston University School of Surveying
Louise Ellison Kingston University School of Surveying
Judy Smith Kingston University School of Surveying

The research team would also like to thank the following individuals and
companies for their valuable contribution to this work:

Robert Baldwin King Sturge

Richard Bartholomew Boots Properties Plc
Helen Beckett Grosvenor Group
Vernon Blunt Royal Sun Alliance
Marcus Boret Akeler
Rupert de Barr Drivers Jonas
Philip Clark Morley Fund Management
Martin Francis Atis Real
David Glinski Prudential Plc
Anna Govier Johnson Controls
Graham Harvey Jones Lang La Salle
Christoper Headley OPD
Philip Lowe PruPIM
Edward Mackiness Prudential Plc
Richard Moss Cluttons
Chris Perkins PruPIM
Geoff Robotham Borders Books
Sunil Shah Johnson Controls
Robert Sutton CBRE
Tim Townsend Knight Frank
Hilary Unsworth Johnson Controls
Philip Walker CBRE
Henry Watkinson Royal London Asset Management
Mikola Wilson Teesland Plc

This work was made possible by the generous financial support of the DTI
through the Partners in Innovation scheme, PruPIM, Investment Property
Forum Education Trust and Boots Properties Plc.
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1 Introduction

The aim of the Sustainable Property Appraisal This report presents the outputs of the research.
Project is to provide property investors and These constitute the first steps achieved in providing
occupiers with a system for reflecting sustainability investors and occupiers with the means to generate
within the appraisal of commercial property assets. quantifiable information on sustainability within
The lack of such a system has contributed to the existing commercial property assets and linking this
relatively slow response the property investment to the potential it has to impact on property worth.
industry has made to the sustainability agenda in
comparison with other investment sectors. With The following tools have been developed that enable
no means to measure sustainability within the an assessment of a property’s sustainability to be
commercial property stock or identify potential reflected within an appraisal of its worth:
impact on property worth, the market has been • the Future-Proofing Property questionnaire,
unable to discern a clear business case to generate • the Sustainable Property Appraisal Tool,
demand for property with positive sustainability • a pilot framework and sample for a Sustainable
characteristics. Whilst awareness of the significance Property Investment Index.
of the issue has increased amongst both occupiers
and investors, information has not been available The report sets out the terms of reference
to support the translation of that awareness into adopted for the research, the methodological
policy and practice. approach taken to the development of the
Sustainable Property Appraisal Tool and the
The research has addressed this problem by asking theory and assumptions supporting the process
how those issues, commonly bundled together to of quantifying the sustainability criteria1. Each
describe sustainability, are likely to impact on the element is open to challenge and debate and the
functions of commercial property that contribute to whole is presented as a starting point from which
property worth. The rationale for taking this the property industry can develop a practical
approach is that it provides a means of engaging response to the sustainability agenda.
the property investors with sustainability, in terms
clearly relevant to their overriding business objective.
Making the risks attached to unsustainable property
more transparent provides a mechanism for:
a) generating investor demand for more
sustainable property, and
b) improving less sustainable property within
investment portfolios.

1 Three further working papers are available

giving more detail on the developmental

stages of the research and outputs.
These can be downloaded from
www.sustainableproperty.ac.uk.

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2 Defining Sustainability

The triple bottom line approach to defining These three components are reflected through the
sustainability was adopted from the outset of this three stages of the sustainable property appraisal
work and is reflected within all the outputs. Whilst process:
it is acknowledged that this is only one of the • measurement of a property’s performance against
many definitions of sustainability that have been the sustainability criteria using the Future-Proofing
developed, it was considered the most appropriate Property Questionnaire;
for this work and for the current market context. • reflection of that measured performance within
It enables the economic sustainability that is the appraisal process through the Sustainable
fundamental to property investment to remain at Property Appraisal Tool;
the forefront of the appraisal process, whilst the • inclusion of the information this produces in the
environmental and social issues are linked in. This investment decision-making process (see Figure 1).
has enabled the research to bring sustainability
issues to the centre of the property appraisal Application of the Future-Proofing Property
process by making a quantifiable connection Questionnaire over whole portfolios over time will
between sustainability and property worth. As the allow tracking of investment performance against
economic context changes and environmental sustainability performance. Linking this data to
concerns perhaps increase, the balance of IPD investment performance data will enable the
significance between the three elements will development of a sustainable property investment
change. However, a definition that acknowledges index.
the role of economic sustainability enables the
policy, regulatory and market responses that will
help to address environmental and other problems,
to be explicitly reflected in the economic drivers of
the business response.

Three major components form the key building

blocks in reflecting sustainability in property worth:
a) a set of sustainability criteria that link the
functionality of commercial property with its
environmental and social impacts;
b) a system that measures property against those
criteria;
c) a set of parameters that link performance under
those criteria through to a calculation of
property worth.

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STAGE 1 Future-Proofing Property Questionnaire

Assessment of the asset against 7 sustainability criteria to give a
Future-Proofing Property Rating across 5-point scale overall and for each criterion

STAGE 2 Input of the Future-Proofing Monitoring of asset Management of the asset

rating data to the sustainability performance over time against to reduce or mitigate
appraisal tool other Future-Proof rated assets Future-Proofing risk

STAGE 3 Comparison of sustainable

and standard worth appraisal
variables and NPV’s

Application of information
in buy/sell and portfolio
construction decision-making

Better informed decision-making

Figure 1: Project Schematic

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3 Sustainability Criteria for Commercial Property

In establishing criteria for assessing the Investment and sustainability performance is likely
sustainability of commercial property, a set of to be enhanced by good public transport access
basic characteristics were identified as a key and local green travel plans in addition to car
requirement (Sayce and Ellison 2003a,b): access, but, with the exception of some city-centre
• simplicity: they should be easy to understand, locations, car access normally underpins occupier
transparent and accountable; demand and the economic viability of the asset.
• scope: they should cover economic, By adopting the triple bottom line, economic as
environmental and social issues and overlap as well as environmental and social impacts are taken
little as possible; into account. This enables the sustainability criteria
• validity: they should have scientific or analytical to be linked via an impact on the functional
validity, including capacity to respond to change; performance of the property through to performance
• robustness: they should be unambiguous and as an investment asset and hence to property worth.
independent of assumptions;
• focus: they should be limited in number; The Sustainable Property Appraisal Tool and the
• relevance: they should relate to a reasonable Future-Proofing Property Questionnaire that supports
time horizon and to relevant spatial area; it, attempt to make a realistic assessment of the
• availability: they should be readily available from sustainability of a property based on seven of these
existing data collection system; nine criteria. Through the course of the research it
• functionality: they should clearly link sustainability has not been possible to identify a quantifiable link
with the primary functions of commercial property. between the occupier and contextual fit criteria
and investment property worth. These are therefore
Having reviewed the wide range of existing indicator identified as relevant and worthy of further research,
sets available and consulted with environmental but are not incorporated in either the Future-Proofing
specialists and the occupier and investor Property Questionnaire or the Sustainable Property
communities, the following nine indicators were Appraisal Tool.
selected as the most appropriate sustainability
criteria for the project:
• energy efficiency,
• pollution,
• waste management,
• water management,
• climate control,
• accessibility,
• adaptability,
• occupier,
• contextual fit.

Common ground is shared between the

sustainability agenda and property investment
performance in assessing commercial property
under some of these criteria, such as energy
efficiency and water consumption. Other criteria
are counter-intuitive to sustainability when viewed
from the investor perspective; accessibility by car
for example. Accessibility of location underpins
economic sustainability for property and in the
context of current transport availability, accessibility
by car is often key to this.

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4 Assessing Sustainability within the existing Commercial Property Stock

4.1 Applying the Future-Proofing • capable of completion by someone with a

Property Questionnaire working knowledge of the property but without
engineering or building surveying expertise;
The selected sustainability criteria have been • capable of generating sufficient relevant data to
developed within the research as a means of make a useful assessment possible;
assessing the sustainability of any existing • capable of generating information useful to the
commercial property. This assessment is portfolio manager and investor;
premised on two points: • easy to analyse;
a) that all commercial property can be rated in • capable of being linked to industry standard
terms of its ability to perform as an asset under investment performance measurement data.
the changing demands generated by the
sustainability agenda; Many valuable assessment tools are available, but
b) that from the investor perspective, only issues their take-up has not penetrated the commercial
specific to the property and within the investor’s property market very deeply. Not having been
realistic control are relevant. developed for the investment sector they often
incorporate occupier issues over which the investor
By assessing a property in this way, it is possible has no influence, or focus heavily on environmental
to separate the assessment of the physical asset issues which do not reveal a complete picture of
from any assessment of the behaviour of the commercial property sustainability and can generate
occupier, which the investor can not control. anomalous results in terms of investment worth.
Once the sustainability assessment is focused on Usability is also often a major hurdle. Whilst more
physical characteristics, it is possible to ‘audit’ for complex, sophisticated tools can give more detailed
them; does the property have energy efficient information, they are time consuming and often
lighting? If it does not, it is likely the investor will expensive to complete. This provides a major
have to install this over the next 5–10 years, and disincentive to them being adopted en masse by
if it is not installed, the higher operational energy the market. Unless assessments are made on a
costs will strengthen a potential new occupier’s substantially increased scale, sustainability will
negotiating position on rent. continue to fail to be addressed within the
commercial property stock.
The Future-Proofing Property Questionnaire uses
a series of similar questions to assess a property’s Whilst these assessment tools are important, for
sustainability. It has been developed with the the purposes of a wide-scale assessment to be
particular objective of providing a useable driven by the investment sector, a less complex
assessment tool for the commercial property and more focused series of questions was required.
market. The aim is to enable the bulk of the
commercial stock to be assessed. To do this the The Future-Proofing Property Questionnaire2
questionnaire has to be capable of being developed here consists of four questions that
administered quickly and cheaply by someone identify the property sector and type, followed by
with a managerial connection with a large number a series of tick-boxes under each of the seven
of properties, for example a fund manager or sustainability criteria. Completion generates an
managing agent. This crucially provides access to overall numerical score and qualitative label,
the majority of commercial property held in supported by a further score and label under each
institutional investment portfolios. of the seven criteria. The scoring system that
underpins it is specific to each sector and each
These requirements gave rise to the questionnaire property type. This approach enables the impact
needing specific characteristics. It had to be: of each sustainability criteria to be tailored for
• short; different property sectors and for a range of
• appropriate to a range of property types with different property types within each sector. This
minimum change in format; produces a fully-flexible weighted scoring system. 2 The Future-Proofing Property

This can also be updated as the sustainability Questionnaire is included in full at

agenda changes over time. Appendix A.

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The numerical scores that underpin the performance will provide valuable information for
questionnaire generate the qualitative labels for decision-making.
each property. These are included for ease of
analysis and cross referencing of performance within The second function of the Future-Proofing Property
and across portfolios. The scoring is based on Questionnaire is its role within the Sustainable
consultation and experimentation carried out during Property Appraisal Tool. It is on the basis of the
the course of the project. As the questionnaire is numerical scores generated by the questionnaire
more broadly piloted and analysed it is anticipated that the appraisal tool makes small changes to the
the scores will be updated. Inevitably as the variables within the calculation of worth, enabling
sustainability agenda changes and as property is the appraisal to explicitly reflect sustainability. The
updated the scores will have to be updated to next section of this report sets out this process
reflect this. and the methodology whereby this research has
attempted for the first time to make an explicit and
The qualitative labels range across a five point scale: quantifiable link between sustainability and
• very poor performers, commercial property investment worth.
• poor performers,
• typical performers,
• good performers,
• very good performers.

Extensive piloting has demonstrated that the

questionnaire is capable of completion in 2–3
minutes by a managing agent or fund manager
with a working knowledge of a portfolio. So far
over 100 properties have been assessed,
generating a database that can be analysed to
show performance overall and under each
criterion. This can be used to identify different
levels of sustainability performance across a series
of portfolios, areas of weakness or strength in a
particular portfolio, or to identify properties that
represent a particular risk.

The Future-Proofing Property Questionnaire forms

Stage 1 of the Sustainable Property Appraisal
Tool, and as a stand-alone tool also forms the
foundation of the framework for a pilot sustainable
property index. As the number and range of
properties assessed using the system increases,
a useful measure of investment performance will
be developed.

The questionnaire will be made available for fund

managers to use on the basis that anonymous
data on future-proofing performance will be supplied
back to the project team along with a reference
number linked to IPD (where properties are
included within the IPD Portfolio). This will enable
refinement of the tool and the generation of data
for the further development of the Sustainable
Property Index. Over time, cross-examination of
future-proofing characteristics against investment

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5 Linking Sustainability to Property Worth

The sustainability criteria are anticipated as Using Example 1 below, if the impact was estimated
impacting on property worth through five main as being closer to 25% of the increase in cost, the
avenues: resultant impact on rental growth would be more
• rental growth, like .06% or a 6 basis points reduction.
• depreciation,
• cashflow, Whatever view is taken, the potential impact on
• duration to let; and rental growth is a prediction and subject to the
• duration to sale. inaccuracies of any prediction. It is also therefore
likely to differ from investor to investor. The model
Within the investment appraisal process these factors developed here enables the user of the Tool to set
will impact on the cashflow or discount rate variables. the parameter at whatever level of impact they
consider most appropriate.

5.1 Rental growth

5.2 Depreciation
The parameters developed for rental growth
assume a direct relationship between rent and Rental depreciation is commonly used by
occupier costs; any increase in occupier costs will appraisers to reflect refurbishment costs. It has
reduce the amount available for rent. Whilst this is therefore been selected as the most appropriate
a simplification of the bidding process and the conduit for reflecting any increase in refurbishment
characteristics that determine rent, it is essentially costs attributable to retro-fitting to a standard
true. Market factors dictate the rental level, but compliant with stronger sustainability principles.
business productivity ultimately dictates the The parameters set for adjusting the depreciation
occupier's ability to pay. Basing the rental growth allowance are based on the increased cost
parameters on this premise suggests the impact attached to refurbishing to such standards.
will be anywhere between a maximum of £1 and
minimum of £0 reduction in rental growth for each Depreciation is controlled through capital expenditure
£1 increase in costs. Transforming a change in on refurbishment and upgrade. Research by IPD
occupier costs into a percentage of current rental and Reading University (Baume et al. 2004) has
value enables an adjustment to be made to the identified the level of annual capital expenditure
rental growth figure (see Example 1 below). on a range of property types, as a proportion of
capital value. It can be argued that an appraisal
This example assumes the impact on rental of a property that scores poorly in terms of
growth is 100% of the increase in cost. However sustainability under criteria that can be addressed
this may not be the case. Whilst occupier costs through refitting, for example climate control and
are likely to impact on rent, the true effect is likely waste management, should reflect this by
to be less than this given that costs in addition to depreciating the rent at a rate that allows for the
rent and rates are held as less significant by additional capital cost required to bring the property
occupiers (Gibson, 2001). This can be reflected up to a higher sustainability standard. To do this
within the model by scaling down the impact on requires some understanding of the additional cost
rental growth through a multiplier. (if any) this would require.

Example 1

Current Rent: £300 m2

Current Cost (energy for example): £15/m2 or 5% rent
Predicted increase: 50%
New cost: £22.50/m2 or 7.5% rent
Potential rental growth reduction: 2.5% amortized over 10 years, say .247% per annum.

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Research on refurbishment costs suggests that 5.4 Duration to sale

refurbishing to sustainability standards can generate
a cost uplift of between 3% and 10%, (Davis As awareness of sustainability factors rises within
Langdon and Everest and Mott Green Wall, 2003) the property investment and occupier communities,
although it must be noted that research in this properties that perform poorly under specific
area is scant. Recent research on cost increases sustainability criteria may take longer to sell than
to achieve a higher BREEAM rating in a new-build better performing assets within their class. Recent
(as opposed to retro-fitting) suggest a cost uplift research has identified the median transaction
of 7% to raise a typically located air conditioned period for commercial investment property to be
office building from a pass to an excellent rating 190 days or approximately 6 months, although it is
(BRE/Cyrill Sweet, 2005). The cost impact on a emphasised that there are significant variations to
naturally ventilated office building is less at 3.4%, this figure (Investment Property Forum, 2004). This
again in a typical location. The most up-to-date research identified property-specific factors capable
research therefore gives some indication of the of delaying the sale of an asset but that are solvable
extra cost incurred for achieving higher over time, giving examples such as title problems
sustainability standards for new-build, but not or disputes with tenants. This type of problem would
retro-fitting, which tends to cost more. The figures lead to the price achievable in the market being
provide a useful baseline, to which some uplift “significantly below the perception of market value
must be added to allow for the extra cost of with the problem solved” (ibid:7) which would
retro-fitting. Working them through into delay any transaction, thus extending the duration
depreciation requires translating the uplift into an to sale until either market value catches up with
increase in the annual capital expenditure perceived value or the problem has been resolved.
estimate, which can then be annualised as a
percentage of the rent. (See Example 2 below). Poor performance under sustainability criteria would
clearly fit into this category of ‘solvable problem’.
The financial impact would be a function of the cost
5.3 Cashflow of resolving the problem (i.e. improving performance
under the sustainability criteria) and the opportunity
In some instances a sustainability factor may cost of the return foregone for the period of the
impact directly through the cashflow. This will extended duration to sale. The latter would
normally be due to a requirement for a one off or depend on whether the motivation for sale was:
series of cash payments to insure against or a) pressure to generate cash in which case an
mitigate a potential risk. Where this is the case, alternative asset may have had to be sold, or
assuming the cost can be accurately estimated, a b) because the asset does not conform to target
figure can simply be deducted from the cashflow portfolio holdings in which case the targeted
at the appropriate point. improvement in portfolio performance would be
foregone for a limited period. (ibid:25)

Example 2

According to recent IPD/Reading research (Baum et al 2004), offices in the south east of England incur
rental depreciation of 0.7% p.a. and capital expenditure at a rate of 0.7% of capital value per annum.
To refurbish to sustainability standards required to achieve an excellent BREEAM rating, the 0.7%
capital expenditure will increase by anything between 3% and 7% for a new building. Allowing an
increase to reflect the extra cost of retro-fitting, the uplift could be conservatively estimated at between
4% and 10% depending on the property type.

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Focusing on the period up to final price agreement, case until market awareness of sustainability
the period most likely to be extended in these factors increases and it is not possible to
cases, the IPF research again found wide variation calculate the potential impact on property worth,
in the data but approximately 60% of their sample as yet. Consequently this variable is set out here in
took up to 100 days (approximately 3 months) to a similar way to ‘duration to sale’; it is likely that
achieve final price agreement. This gives a base sustainability characteristics will impact on
line from which any extension to the sale period property worth through duration to let, but further
could be calculated. research is necessary for a clear methodology for
modelling that impact to emerge.
The potential for the transaction period to be
extended as a result of a low sustainability rating
should logically be reflected in the risk premium 5.6 Summary
for the property. It is a specific risk and will reduce
the present value of the capital sum eventually These are the five conduits through which
received by an amount equivalent to the appropriate sustainability is identified as potentially impacting
discount rate and time period of the delay. However, on property worth. However, the difficulties set
making an estimate of the possible extension of out above with regard to duration to sale and
duration to sale that might be attributable to duration to let have led to attention being focused
sustainability factors would be extremely difficult, on depreciation, rental growth and cashflow as
particularly once market conditions are taken into the main conduits for impact. The Sustainable
account. For this reason the methodology is set Property Appraisal Tool uses these three variables
out here as something that requires further to estimate the impact of sustainability
investigation and analysis. It is not adopted within characteristics on property worth.
the model.
The discussion that follows explores each
sustainability criterion individually, identifying
5.5 Duration to let appropriate, quantifiable links through to property
worth. These are then translated into figures,
As sustainability issues become more high profile, which have been incorporated within the
property with a low sustainability rating is likely to Sustainable Property Appraisal Tool as a first
become more difficult to let. This will increase the attempt to quantify the impact of sustainability on
void period at lease end. Where a standard property worth.
approach may be to allow a 6-month void at lease
end, limited sustainability may increase this either
by forcing early refurbishment or by reducing the
market for the property.

The issue is made more complex by the wide

variation in terms and conditions negotiated on
taking a lease. For example agents within the City
office market may be offering rent free periods of
up to 12 months in a slow market, reducing to
perhaps 3 months in a more buoyant one.

However, it could be argued that, whatever the

market, a low sustainability rating will increase the
void period at the end of the lease, beyond what
the market is currently suggesting. If the current
void is 12 months, a property with a low
sustainability rating might be expected to take 15
months to let by comparison to others in the
market. It is difficult to know whether this is the

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6 The Sustainability Appraisal Tool Parameters – estimating the impact on

property worth variables

6.1 Energy efficiency local supply infrastructure in parts of London being

stretched to capacity and little in the way of strategy
Being concerned with future income and outgoings to increase capacity (Coull, 2004). In terms of the
rather than past matters, this work focuses on international supply infrastructure, research implies
operational energy efficiency and not embodied3 current uncertainty over supply may well continue
energy. Operational energy efficiency impacts on and worsen over the next 30–40 years (Deloitte
the running costs of a property and therefore, Research, 2004).
potentially, on occupier demand. Indeed substantial
research has been carried out in the USA to establish The cost reductions achieved through deregulation
the financial benefits of low energy property (see for of the energy supply markets are likely to shift to
example USGBC 2003, The David and Lucille cost increases as the economic reality of the
Packard Foundation, 2002b). supply/demand equation takes effect. The impact
will be exacerbated if the markets continue to
However, the UK property market operates reflect an unstable political-economic context for
significantly differently from most others in that: the energy supply industry.
a) the income accruing to the property investor
(owner) is not directly affected by the property’s As energy prices rise and awareness of the
running costs4; and contribution of property to CO2 emissions grows,
b) rental levels and energy costs tend to be such it is anticipated that the operational energy efficiency
that the latter form a very small proportion of of a property will be increasingly significant to
total property costs, reducing the tenant’s occupiers and, ultimately, investor demand. This may
incentive to reduce energy consumption5. put pressure on owners to upgrade and retro-fit
less energy efficient property to maintain demand.
Thus the business case for energy efficient property Changes to Building Regulations and the anticipated
has so far been extremely hard to make in the UK introduction of the EU Directive on Energy Efficiency
and incentives for investing in energy efficient in Buildings (Commission of the European
management systems and plant and machinery Communities, 2002, ENDS 2004) are both leading
scant. Recent work by the Association of Energy the property market towards more energy efficient
Conservation supports this view (Association for standards. Over time, the investment performance
the Conservation of Energy, 2004). of less efficient property is expected to worsen
unless and until it is upgraded.
Where there has been investment in energy efficiency
3 Embodied energy is that used in the it has largely been voluntary and as part of a range 6.1.1 Estimating an impact on worth
construction of the property. i.e. materials, of measures seeking to achieve corporate social
transportation of materials and responsibility objectives rather than direct financial As an established element of occupier costs energy
construction processes etc... ones. As such the development of properties to efficiency is reflected within the Sustainability Property
4 It is accepted that prospective tenants are energy efficient specification has been largely Appraisal Tool through rental growth. This requires
wary of high service charges and other confined to the owner-occupier sector (Laing, 2003). the basic assumption that an additional £x spent on
outgoings, but the impact on the investor outgoings will translate into £x less available for rent.
flows through the tenants willingness to However this low energy-cost environment is Taking this assumption as a starting point it is then
pay rent rather than directly as would be changing. Oil prices have risen some 30% since a simple exercise to calculate the potential change
the case were outgoings netted off the the beginning of 2004. Gas prices are also rising in ability to pay rent that would flow from an
rental income. This inevitably reduces the and the trend appears unlikely to change. Whilst increase in energy costs. (See Example 3 overleaf).
impact on rental income and thus the the oil price rise is due more to market uncertainty
investor’s concern with the operational than shortages of supply, this currently shows little Table 1 overleaf summarises estimated energy costs.
efficiency of the property. sign of abating and will exacerbate the impact of It has to be treated with some caution given the
5 Research by the Energy Efficiency Best the 2/3 increase in demand for oil predicted variability in rental levels and limited data available
Practice Programme identifies savings of between now and 2030 (Deloitte Research, 2004). on energy usage. Operational demand for energy
£6.50/m2 as achievable by improving will be higher per square metre within some sectors.
air-conditioned premium space from Such an increase in demand prompts an For example retailing, and in particular food retail,
typical energy use to good practice examination of the supply infrastructure, both locally has substantially higher operational energy
(Action Energy, 2003). and internationally. There is already evidence of the estimates per square metre than other sectors.

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Statistics published by Movement for Innovation Example 3

benchmark operational energy consumption for
the worst performing retail property at 320kgCO2/m2 • Prime office building with air-conditioning
(850 kgCO2/m2 for food retail) as opposed to 250 • Energy costs per square metre:
kgCO2/m2 for offices (M4I, 2000). £16.50 (assumed)
• Current estimated market rent per square
6.1.2 Significance across property metre: £350.00
type • Energy costs as proportion of rent: 4.7%

As the biggest user of energy within the users Assuming a 100% increase in energy costs over
analysed here, the retail sector is clearly most the next 5 years energy costs will increase by a
sensitive to price change. However, it is important further 4.7% of current market rent.
to note that the high variability in rental levels
clouds the issue. Whereas an average figure of 8% Increased cost amortised over 10 years:
is supported by evidence from a retail portfolio of 0.46% per annum.
62 stores, this average hides a variation from <1%
to 12% in different store types within that one Based on a 1:1 ratio between rental growth and
portfolio. Nonetheless, a substantial increase in energy costs, rental growth would be reduced
energy costs will affect all property types. Example by 0.46% per annum.
3 uses an office building to set out how rising
energy costs are expected to affect rental growth. Assuming a less significant relationship, the
(See Example 3). reduction in rental growth could be reduced by
say 50% to 0.23% per annum.
The issue of energy efficiency is fast moving.
Better and more plentiful energy data will become
available on individual buildings as the requirement enable users to reflect these decisions and
for energy certification takes effect. This will estimates within the parameterization process.
eventually generate data on a property by
property basis and the Sustainable Property In essence, however, the more energy efficient the
Appraisal Tool has been designed to incorporate building, the smaller the impact any increase in
this. Forecasts of energy prices will change and energy costs on rental growth will be, and vice
investors using the Tool will make their own versa. Property that is efficient in terms of
decisions based on the available data and their operational energy use is clearly a lower risk for
estimate of how significantly that is likely to impact both investor and occupier, particularly where the
on rental negotiations. The Tool is designed to energy requirements of the occupier are high.

Property type Typical energy use kwh/m2 p.a. Energy costs/m2

Office A/C prime 580 £16.50

Office A/C standard 400 £11.50
Office – naturally ventilated, open plan 230 £6.50
Office – naturally ventilated cellular 210 £5.00
Industrial <5000m2 (heating only) 96 £2.88 (electricity)
- £1.30 (gas)
- £1.92 (oil)
Industrial>5000m2 (heating only) 92 £2.76 (electricity)
- £1.24 (gas) 6 Based on observation of one corporate

- £1.84 (oil) portfolio of 60 outlets of varying sizes.

Retail (non food) - 8% 6 Figures for individual units vary
significantly. Energy use data for retail
Table 1: Estimated Energy Costs (Source: Action Energy 2003, DTI, 2004, JLL Office OSCAR, 2004) property is scant.

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6.1.3 Additional drivers for energy performance of a property. More modern systems
efficiency may be more energy efficient and conform to current
best practice standards but not allow sufficient
Having addressed energy efficiency as a basic flexibility for using more energy efficient systems or
cost issue it is also important to explore it from the alternative technology as conditions allow.
corporate responsibility (CR) perspective. The
trend for CR reporting is making business energy Some property is fitted with both air-conditioning and
consumption more high profile, it is one of the mechanical ventilation or passive cooling to enable
items regularly reported and for which targets can the optimum solution to be selected depending on
be set (see for example Boots, Prudential, USS climate. Some are designed to incorporate more
Environmental Accounts). This implies that property energy efficient systems should the owner/occupier
consuming a higher than average level of energy in want to install them. To perform well in terms of
use will begin to fail to support the owner’s and/or sustainability, the climate control system should be
occupier’s CR policies, particularly as new building modern and appropriate for the property type, user
regulations enforce greater energy efficiency in new and location. In some instances this will lead to a
and substantially refurbished property. Property property with air-conditioning having a higher
developed or refurbished post enforcement of the sustainability rating for climate control than one
2003 Building Regulations is likely to be more energy with only natural ventilation. Whilst this seems
efficient than that built in preceding years. Likewise counter-intuitive to sustainability principles, it reflects
property developed and substantially refurbished the three elements of the triple bottom line and the
post the 2006 building regulations should again raise economic imperative that ultimately drives the
the standard in this area if policy objectives are to property market.
be achieved. The future introduction of energy
labelling of commercial buildings will further heighten 6.2.1 Significance across property
occupier and investor awareness and data. type

Whilst climate control is a requirement in some

6.2 Climate control property types and locations, in others it is
unnecessary. The Sustainable Property Appraisal
Air-conditioning has a substantial impact in terms Tool will adjust for the most appropriate climate
of energy use and thus carbon emissions. However, control system according to property type and
property that is not air-conditioned is likely to location. For example a city centre prime office
accommodate fewer people and may provide a building has a clear need for climate control, likewise
poorer working environment than property with an a similarly located shopping centre. If this function
effective climate control system, particularly in is performed by a modern mechanical ventilation
town-centre or city-centre locations. Property system and the building has been designed to allow
without air-conditioning may perform better under for passive cooling when possible, this is likely to
the environmental heading within the triple bottom be the optimum solution in the current market. An
line, but may perform poorly under the social out of town property is likely to have less need for
heading and begin to depreciate more rapidly as climate control and an air-conditioning system will
tenant requirements change, under-performing add to the operational energy usage unnecessarily,
economically. From the property investor and potentially negatively affecting occupier demand
occupier perspective this renders it less over time and speeding up the requirement to refit
sustainable over-all. Such properties are likely to to a more energy efficient specification.
require air-conditioning to be retro-fitted in the
short- to medium-term in order to maintain 6.2.2 Estimating an impact on worth
occupier demand and investor return.
The increased likelihood of retro-fitting being required
It is important, however, to differentiate between where a property under-performs in terms of climate
different types of air-conditioning system. Older control suggests the depreciation rate should be
systems may be less effective and will be likely to increased if it is to be reflected within an appraisal
have a negative impact on operational energy of worth. The extent of the increase in depreciation

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is based on the increased cost incurred, over and All of the above could reasonably apply to property
above that normally accounted for. investors rendering them potentially liable for an
incident, suggesting the potential for liability has
increased. A property’s propensity to host a pollution
6.3 Pollutants incident should thus be reflected in a calculation of
its worth. The most effective way of doing this is
The majority of commercial property enjoys a through an assessment of clean-up costs or the
relatively low risk of creating a pollution incident. cost of risk-transfer i.e. environmental insurance.
Industrial property is clearly most at risk particularly
that occupied by chemicals, metals or waste 6.3.1 Estimating an impact on worth
management businesses. However, environmental
regulation affects all businesses and an investor The increased risk attached to pollution and
needs to be aware of the implications of any risk contamination combined with stronger legislation
of a pollution incident. and environmental regulation has encouraged the
development of an effective market in environmental
The risk attached to owning a property that pollutes insurance. The level of insurance premiums on such
the environment has increased in recent years in policies provides a useful means of quantifying the
two respects: impact of pollution risk on property worth. It is
a) The Environment Act 1995 establishes that in difficult to give average figures for such premiums,
pollution cases where the polluter can not be each property being assessed and underwritten
found or can not pay, responsibility can fall to a on its own merits. However, the data in Table 2
“Class B” person. In the case of industrial (below) give some indication of the level of premium
premises, for example, this could easily be the that might be expected for a site specific 10 year
landlord who would find themselves bearing the Pollution Legal Liability policy, to cover liabilities
costs of clean-up and potential prosecution arising from new or unknown historic conditions
(Jayne and Skerrat, 2003); both on and off-site. (See Figure below).
b) the fines related to pollution are increasing. Whilst
the low level of fines is a common criticism of It must be reiterated that these figures are indicative
current pollution prevention policy, the level of only8. Each property would be assessed separately
the fine is normally dictated by the seriousness and in certain instances specific conditions will be
of the incident and can in fact be substantial. In excluded from cover. However, the data enables
2003 companies were ordered to pay fines of an estimate to be made of the additional outgoings
£73,000, £98,000, £100,000 and £250,000 for necessary to reduce the risks attached to holding
a range of pollution incidents (ENDS, 2004). property that performs poorly under the pollution
criteria, by insuring against it. The different levels
Liability for a pollution incident rests on, amongst of pollution risk attributable to different properties 7 Sevenoaks District Council v Circular

other things, being deemed to have ‘knowingly are reflected through the selection of the most Facilities, Sevenoaks Magistrates Court,
permitted’ the incident. The first court decision appropriate level of insurance cover, which is then June 2004.
under current contaminated land legislation7, reflected through the premium. Reducing the 8 With thanks to Kevin Luckett at Ascent

suggests the courts are giving the term ‘knowingly cashflow by the amount of the premium over the Insurance Brokers for his assistance in
permit’ a broad meaning. To be considered to life of the cover effectively reflects the impact of gathering the information in this table.
have ‘knowingly permitted’ contamination of land
one must:
• have knowledge of the presence of the Risk category Limit of Liability Deductable Premium
contaminants; of property
• power to prevent them from being there; and
• the ability and reasonable opportunity to prevent Medium £1m £25,000 £50,000–£60,000
their presence or remove them (Cameron Medium £5m £25,000 £100,000
Mackenna, 2004, Circular 02/2000). Medium £10m £25,000 £130,000–£150,000
High £10m £50,000–£100,000 £200,000–£250,000

Table 2: Estimated Environmental Insurance Premiums

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pollution risk within the investment appraisal b) adaptability across use – the ease with which
process. The decision to purchase the insurance a property can be adapted to support the
then lies with the investor. requirements of a new use type, for example a
switch from commercial to leisure or residential.
6.3.2 Significance of pollutants
across property type Occupier requirements change relatively
frequently. Retail occupiers change store layouts,
Where a site has been developed on contaminated manufacturers introduce new technology and
land, potential liability for future pollution problems production systems, office occupiers change
and clean-up costs is likely to impact on the sale working styles and practices and all businesses
of the property particularly where development incur fluctuations in staff numbers.
potential is contributing to value. However, these
risks are now increasingly well understood and in Owners of property that can not easily and
most cases this could now be mitigated through effectively accommodate change will have two
insurance, the cost of insurance thus equating to options:
the quantifiable impact on worth. This would hold a) to refit the property so that it can, or
true for all property types but insurance may be b) to accept a constrained letting potential and
more expensive for property perceived to be a thus higher risk of voids, relatively rapid
higher risk, for example industrial sites might be depreciation of the asset and thus reduced
expected to be more expensive to insure than investment return.
retail or office property.
The impact of changing occupier requirements is
For both retail and office property the main likely to be exacerbated by:
pollution risks on large sites are likely to come • shorter leases leading to earlier renegotiations
from underground fuel storage tanks. If a property or marketing of the property, and
has these, the risk of pollution is likely to be higher • higher levels of density achieved by new
and environmental insurance may be required. working practices becoming more widespread.
Otherwise the main risk of pollution will be through
leaks from air-conditioning systems. The quality 6.4.1 Significance of adaptability
and effectiveness of the air conditioning system is across property type
addressed specifically through the climate control
criteria, so does not need to be accounted for The Sustainable Property Appraisal Tool only
again here and can be disregarded for appraisal reflects adaptability within use in the assessment
purposes at this point. and appraisal of offices. The retail sector is
characterised by frequent, regular refits of shop
interiors, to support a relatively stable operational
6.4 Adaptability activity. The basic functional requirements of retail
units remain relatively unchanging. The exception
Adaptability reflects the potential for a property to to this could be the development of show room
adapt to fulfill the changing requirements of the stores, particularly for large goods and kitchens
existing user, a new user or a different type of user. for example, where nothing is actually taken from
This will in turn reflect the physical constraints of the store itself, purchases being delivered from a
the property, i.e. floor plate, construction type, warehouse. This changes the functional
m&e services, user requirements. requirements of the store and, to some extent the
activity of the shopper, but not to the extent that
The Sustainable Property Appraisal Tool reflects the physical arrangement of the property will have
two types of adaptability: to change significantly.
a) adaptability within use – the extent to which a
property can support the needs of the existing The relatively low unit cost of manufacturing space,
occupier group or type without requiring major along with low worker/space ratios makes adaptability
or frequent refurbishment and upgrading; of space less of a business driver. Whilst space
should be able to accommodate changing business

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requirements lower internal specifications and The financial benefits accruing from such efficiencies
relatively simple building design should support this. will obviously increase with the level of rent and
need to be offset against the costs of
The office sector is the most significantly affected accommodating this type of change. Research by
by changing occupier requirements. This sector Vaan der Voordt, (2004) found that at rental levels
incurs high costs for high spec. space that can be of £110/m2 (approximately £70/m2) a 24% reduction
expensive and complicated to retro-fit. Research in space requirements was necessary to offset the
suggests that this sector is experiencing relatively cost of adapting space. However, this drops to 9%
rapid changes in user requirements as working at a rental of £330/m2 (approximately £210/m2).
practice innovations are adopted in a bid to make Office occupiers paying upwards of £200/m2 for
space more cost effective (Warren, 2003, Vaan accommodation and seeking to expand may find
der Voordt 2004). new office organisation to be a more cost-effective
solution. Space that does not enable them to do
The trend appears to be towards higher densities this, or makes it prohibitively expensive will begin
in use of office space being achieved through greater to represent poor value for money when compared
use of flexible working techniques supported by with a more adaptable alternative. If occupiers can
technology. Bon et al’s 2003 survey of corporate achieve 12% higher occupancy levels by adapting
real estate practices identifies the incidence of their space, property that cannot accommodate
teleworking policies as increasing from 19% of this effectively becomes 12% more expensive than
respondents in 1993 to 80% in 2002. Desk sharing the most efficient space, and rental levels for such
policies have also increased over this period, although space can be expected to adjust accordingly.
incidence remains lower, 46% of organisations in
the survey have a desk sharing policy. The occupiers most likely to be aware of and
affected by these changes are those with mobile,
Space that is not easily able to support the variation technology proficient personnel. Warren’s work
in working practices now being adopted will be identified sales teams as achieving the highest
subject to costly refits in order to counteract occupancy densities, which complies with this
functional obsolescence and maintain occupier analysis. He also identified private sector business
demand. Conversely property that is adaptable will and services and communications sectors as
suffer less functional obsolescence, avoid the refit achieving higher densities than the industrial and
costs, maintain better occupier demand and thus public sector occupiers. This suggests the
demonstrate better sustainability. expanding sectors of the UK economy are those
most likely to be able to take advantage of the
This presents two ways of analysing the impact of space efficiencies reaped by new working
adaptability on worth: practices and office organisation. Office property
a) through the impact on rental growth as more that cannot fulfil these requirements will require
functional space can accommodate better earlier refurbishment and refitting than perhaps
densities; initially anticipated. Where shorter lease structures
b) through the extra burden of refits necessary to are in place the impact on cash flow could be
maintain occupier demand in less adaptable significant in the short- to medium-term.
property.
6.4.2 Estimating an impact on worth
Research has found the majority of UK respondents
occupying at 10–13 m2/employee (Warren, 2003). The upwards-only rent review inevitably protects
BCO currently suggest 14m2/person in their office the investor from mid-term negative fluctuations
fit-out guide (BCO, 2000). The highest densities in rent. However, with average lease lengths
were reported on business parks from which the currently standing at approximately 11 years for
research inferred higher efficiencies are being offices, the effect of the changes outlined above
achieved in the more modern space available at are already pertinent to investment returns. Office
these sites. The new work styles were found to be accommodation letting at more than £200/m2 will
enabling density to be increased by as much as be expected to be adaptable within the next
12% in the UK. 10–15 years. Any that is not will suffer reduced

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rental levels or require refurbishment if it is to management and storage. This is likely to be more
continue to compete at that level. significant for industrial and manufacturing property
than office and retail, but might be expected to
The parameters for adaptability within the impact on rental growth in the long term.
Sustainable Property Appraisal Tool are based on
this estimate of 12% efficiency gains and impact The anticipated introduction of the EU Waste,
on any property let at more than £200/m2. The Electrical and Electronic Directive may impact
Sustainable Property Appraisal Tool is currently rapidly on retailers’ requirement for storage facilities,
set to reflect a maximum change in rental growth as they become responsible for the end-of-life
of +/-6%, giving 12% across the full range of safe disposal of electrical and electronic products
performance. The rent at which the property lets (King Sturge, 2004). Property that fails to support
will not fall in nominal terms but some change is businesses in waste management through
anticipated in the rate at which this rent grows. If insufficient and/or inaccessible waste storage,
the property scores particularly well for adaptability minimisation and management facilities will become
its rental growth prospects may be better than for less attractive to some occupiers over time.
the standard within its class.
In functional terms, property needs to be capable
This percentage adjustment is then amortised over of supporting the occupier’s waste management
10 years to give a maximum figure to apply to the policy. This will normally require appropriate and
non-adjusted, market rental growth figure. A accessible waste storage and management facilities,
multiplier is again applied to reflect the fact that and a centralised recycling service (either privately
adaptability of space is less significant in terms of or municipally run). From the investor perspective
occupier requirements than locational and cost the extent to which the occupier makes use of such
issues. The impact on rental growth is again unlikely facilities is irrelevant (other than perhaps in CR terms).
to be £1:£1 so the figure is reduced to reflect this, Sustainability of the property is thus assessed on the
the deduction from rental growth being subject to basis of the existence of these facilities. Property that
a multiplier of less than 1. It is possible for individual performs poorly in this area will, over time, become
investors to adjust this multiplier according to their less attractive to occupiers, particularly as waste
own assessment of the potential impact of the management costs increase. This will have the
criteria on rental growth. effect of increasing the depreciation rate of such
property, compared with similar but better served
property within its class. Remedying the situation
6.5 Waste management may require the allocation of space for recycling
storage potentially reducing the net ‘lettable’ area
Increasing regulatory pressure affecting waste of the building and requiring capital expenditure.
management is making waste a significant issue for
many businesses. Landfill Tax on active waste is 6.5.2 Estimating an impact on worth
currently £18 per tonne and will rise by at least £3
per annum until it reaches a ‘medium-to-long-term The extent to which depreciation will change can
rate of £35 per tonne’ (HM Treasury, 2004). For many only be estimated through the importance of waste
businesses this is a significant business cost and management to the occupier group. Waste
has driven a move to recycling where possible. management is a more significant issue for retailers,
particularly in shopping centres than for most office
6.5.1 Significance across property occupiers, for example, and this is reflected within
type the parameters of the Sustainable Property
Appraisal Tool. More data is needed on the
The prohibition of co-disposal of hazardous and significance and financial implications of waste
non-hazardous waste since August 2004 has also management in order for the issue to be reflected
raised awareness of waste management as an with greater accuracy within the appraisal. It is
issue. Waste must now be sorted before it leaves anticipated that increased waste regulation and
a facility, raising waste management costs and taxation will focus further attention in this area.
increasing the space required for waste

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6.6 Water management 6.7 Accessibility9

The relatively low unit cost of water in the UK, Accessibility is fundamental to both property
particularly in relation to other property costs, renders value and worth. It is currently reflected in
water management a low priority for the majority standard valuation and appraisal processes.
of office occupiers when reviewing occupancy However, the extent to which the accessibility of
costs. Recent figures for air-conditioned offices in a property might be impacted by policy directed
the City of London and West End estimate water at changing transport patterns is not currently
costs as 10p per square foot per annum (Jones explicitly reflected in the standard property
Lang LaSalle, 2004). Corporate Responsibility (CR) appraisal process. The Sustainable Property
policies are consequently a much more significant Appraisal Tool addresses this by making an
driver for water management facilities than cost at assessment of the impact reduced accessibility
the present time within the UK. This is manifesting might have for a property.
itself through increasing interest in equipment
designed to reduce consumption, such as spray Transport is increasingly subject to Government
taps, and the use of grey water and harvested policy, regulation, subsidy and incentive. Both
rainwater, particularly for maintenance of The Transport Act, 2000 and PPG 13 seek more
landscaped areas. sustainable solutions to commuting as a means
of mitigating the environmental consequences of
6.6.1 Significance across property type increased car travel. The Energy White Paper (DTI,
2004) identifies “better vehicles and lower carbon
Being driven by CR policies makes water fuels” (p12) as key to the reduction of carbon
management important for occupiers who publish emissions over time.
CR reports and use their CR credentials within
their marketing strategies. The types of property Existing measures have yet to bring about much
most likely to require water management systems change in commuter behaviour. Across the UK,
are consequently those likely to be owned or 71.2% of commuters travel to work by private
occupied by these types of organisation: prime vehicle. In London the figure is substantially lower
office buildings and major retail centres for example. at 40.5% but this is still high given the mass
Standard office buildings and smaller retail centres transport alternatives of a substantial underground
are still likely to be affected but less acutely. and bus network (ONS, 2002). The requirement for
occupiers to develop Green Travel Plans, particularly
6.6.2 Estimating an impact on worth where expansion is planned, has been identified as
having some success in reducing car use, (BCO,
Prime property without water resource management 2004). However, the costs to business associated
facilities, particularly that designed for major with achieving this are extremely variable and the
corporate occupiers, will require upgrading in order effect on productivity is as yet unmeasured.
to maintain maximum occupier demand, most
likely at the next point of refurbishment. This will This administrative and economic context makes it
increase the cost of refurbishment and is most imperative that the accessibility characteristics of a
effectively reflected up until the point of property are considered carefully. The triple bottom
refurbishment, within the depreciation rate. Where line approach to sustainability adopted throughout
property under-performs in comparison to others this work requires the acceptance that whilst car-
within its class the depreciation rate should therefore based travel may be environmentally damaging, it
be increased by an amount reflecting the extra cost is an important form of access in both social and
incurred in installing water management equipment. economic terms for a large proportion of the
These costs can be kept minimal, particularly existing property stock. It is clear that, whilst it may
where dual, low volume flush toilets and spray be desirable in environmental terms for property to 9 Accessibility here refers to the ease with

taps are installed at refit. Installation of greywater be accessed by foot or public transport by its users, which a property can be reached, as
and rainwater recycling systems comes at greater this is not possible for the majority of existing real opposed to ingress, egress and circulation
cost but would not be appropriate for all property. estate in the UK. Furthermore, in terms of business which is the subject of the Disability
efficiency, restricting access to these transport Discrimination Act.

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modes may undermine productivity and • employee retention,

compromise employee recruitment and retention. • customers visits.

Fiscal and regulatory policies focused on transport, It is likely that employee productivity is impacted
along with real increases in fuel costs make it by accessibility. However, so far, research has
crucial to environmental, social and economic failed to produce a robust means of measuring
performance that property is accessible via a changes in employee productivity. Until this is
range of transport forms. Ideally this should developed the potentially major impacts on
include public transport, local pedestrian access, productivity made by different working environments
private transport and adequate parking provision can not be quantified and will not be reflected in
where mass public transport is not available. Any property appraisals.
property accessible only or predominantly by
car/road will be increasingly vulnerable to Employee recruitment does have measurable
regulatory change and rising fuel costs, which are attributable costs. A property characteristic, for
likely to impact business productivity and therefore example ease or difficulty of access, that causes
occupier demand. an occupier’s recruitment or retention figures to
move away from the average for the organisation
6.7.1 Impact across property type (either up or down) therefore has a quantifiable
cost attached to it. However, this is only effective
For office property, proximity to good national and for office premises. Retail and industrial property
local rail networks can substantially improve has a much lower worker/space ratio and would
accessibility and reduce the risk attached to be more affected by accessibility for customers
uncertainty with regards transport policy and and deliveries respectively.
energy prices. Research into commuting identifies
longer public transport journeys, particularly train Offices
journeys, as less stressful for commuters than long
car journeys and more popular (Junnila, 2004, The costs associated with employee recruitment
McLennan and Bennet, 2003). Legal and General (and therefore saved through employee retention)
Property’s research into accessibility placed similar can be costed. They manifest themselves through
importance on the availability of strong rail links tangible expenses in the form of management
(Legal and General Property, 2004). time, administration and training, for example.
According to the Chartered Institute of Personnel
Whilst many retail centres provide important local Development 2004, the average cost of recruiting
facilities, many are also linked to and supported by managers and professionals is £7,000 including an
a regional catchment area. This makes adequate amount attributable to loss of turn-over.
parking provision and car accessibility for
shoppers fundamental. Two points can be drawn Research by Opportunity Now in a quite detailed
from this. The first is that real increases in fuel breakdown of administrative and management
costs may impact on consumer travel patterns as costs, estimate the replacement cost of a junior
they search for economies; retail property located manager earning £25,000 p.a. to be £21,930
close to other compatible functions may be less (Opportunity Now, 2001). These estimates provide
vulnerable to falling trade. The second point is the an initial foundation from which the impact of
importance of the availability of at least one mass limited or compromised accessibility might be
public transport node for the continued success assessed through increased staff recruitment costs.
(economic sustainability) of retail centres.
Average staff turnover in the UK was 16% in 2003,
6.7.2 Estimating an impact on worth stable since 2002 (CIPD, 2004). Recruitment and
retention are significant issues for all businesses.
Four measures of the impact of accessibility on Taking a mid point between the two estimates of
business profitability have been identified: recruitment cost, £14,465, and an average staff
• employee productivity, turnover of 16%, for each employee a business
• employee recruitment, might spend £2,314.40 on recruitment. Assuming

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a density of 14m2/person (BCO 2000) this equates visitors by 1%, the impact on turnover would be
to £165/m2 for office space. If lack of accessibility 50p x 2.5 million shopping groups; £1.25 million
increases staff turnover from 16% to 17% per annum.
recruitment costs will increase to £175/m2 an
increase of 9.4% or £10/m2. If an occupier suffers Given an estimate of the number of visitors to a
an increase in staff turnover as a result of centre and its area, it is possible to estimate the
accessibility, this will equate to an extra cost per impact in terms of spending, and therefore potential
square meter of space that they will not be impact on rental growth, of a percentage change
willing/able to pay in rent. Conversely, a highly in the number of shoppers due to a change in a
accessible property may reduce the level of staff retail centre’s accessibility.
turnover, contributing to business profitability by
reducing recruitment costs in similar fashion. The parameters within the tool are based on an
average footfall/m2/pa of 250 persons and 4 people
Retail in each shopper group. Based on the broad
averages of shopper spend outlined above, each
The most important accessibility issue for retail square meter generates:
property is for customers. Broad averages suggest
that for each shopping trip non-food spending per 250/4 x 50 = £3,125 per annum of spending.
shopper group is £50 and food spending £80.
Spend will inevitably differ considerably from centre If the number of shoppers falls by 1% the impact
to centre, but using these averages as a starting would be to reduce retail spend by £31.25/m2 per
point it is possible to begin to estimate the impact annum. This can be translated into a potential
of reduced shopper accessibility on retail property. impact on rental growth over time (see Example 5,
bottom left).
Focusing on non-food spending, every 1%
change in number of visitors could impact turnover Research by the Centre for Transport Studies at
by 50p per shopper. A non-food based shopping Imperial College indicated a 5.52% reduction in
centre achieving say 10 million visitors per annum business at John Lewis’s Oxford Street store in
with an average shopper group size of 4, might be the 6 months following the introduction of the
expected to achieve non-food spending of congestion charge (Bell et al, 2004). Whilst
approximately £125m per annum: research by Transport for London (TFL, 2004,
2005) suggests the impact is much more limited,
10 million people just a 1% reduction in business is clearly significant
2.5m shopper groups of 4 people x £50 non-food for retailers and therefore ultimately for retail rental
spending per group growth in individual centres.
£125m
If restricted accessibility reduces the number of For a major destination shopping centre such as
Bluewater, for example, which has approximately
27 million visitors each year, the impact would be
Example 5 scaled up substantially. It would ultimately feed
through to rental growth as occupier demand
1% reduction in shoppers = -£31.25/m2 began to reflect the poorer trading conditions.
As a proportion of an overall rent of (say)
£500/m = 6.25% Manufacturing / Industrial
Amortized over 10 years = 0.625%
Reduced by say 50% to reflect impact on rental Manufacturing and industrial occupiers rely heavily
negotiation = 0.3125% on a labour force that must have good access to
its property and the delivery and dispatch of raw
In this example, the rental growth would be materials and goods. In many instances the labour
reduced by 31.25 basis points to reflect a loss force will require public transport access and
of 1% in customer visits. clearly good road network access is necessary.
However, increasing uncertainty over fuel prices

23
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 24

suggests manufacturing/industrial property that is already screen out particular occupiers suggesting
only accessible by road will subject its occupiers an existing acceptance of the impact of occupier
to increased haulage costs and either reduced on asset value. Once public awareness and
labour supply or higher labour costs. Whilst it is approbation becomes focused on a particular
accepted that changes to accessibility will impact organisation the impact on property worth could
on rental growth, it is not possible yet to price these be significant. It will be felt through an increased
for industrial and manufacturing space. It might be yield on the subject property and reduced value of
possible to do this through haulage costs and the any adjoining property as lettings become harder
impact of any anticipated increase in fuel costs. to achieve. It may also increase voids if the
property is stigmatised by association.

6.8 Contextual fit Occupiers are increasingly aware of the risks that
neighbours can represent, particularly in multi-
Contextual fit refers to the extent to which a tenanted properties and schemes. Some occupiers
property is appropriate for its surroundings and have a clear understanding of who they do and do
provides a successful point of interaction with the not want as neighbours. However, whilst
local community. There are clearly instances where understanding of this issue and the importance of
the presence of a particular property enhances or occupier to risk and reputation is increasing, it is
degrades a location. The London Eye fits so well not yet possible to quantify the impact this criteria
within its environmental context or setting that it might have on property worth. No sufficiently robust
could be described as having had a catalyst effect, link has been established between the reputation
triggering new and increased business activity and of the occupier and the investment function of
social activity in its neighbourhood. property to be able to quantify it for the Sustainable
Property Appraisal Tool.
In contrast, a property which does not ‘fit’ within
its local environmental context can deter social
and business activity in the area, or simply fail to
generate the level of activity anticipated at
development stage.

These are subtle issues that in many instances

will not be relevant to a calculation of worth.
However, in some instances contextual fit can
have a significant impact on long-term investment
worth of a property. It is not currently possible to
make any realistic estimate of what this impact
might be in monetary terms. Contextual fit has
therefore not been developed as a parameter for
the Sustainable Property Appraisal Tool.

6.9 Occupier
This criteria examines the impact the reputation
of the occupier might have on property worth. A
tenant with a particularly high profile, poor
reputation might reduce the liquidity of the asset
by reducing demand from other investors.

Conversely a tenant with notable CSR credentials

could have the opposite affect. Some investors

24
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 25

7 Applying the Sustainable Property Appraisal Tool

The changes the Sustainable Property Appraisal Good Performers, with the poorest performer in
Tool makes to the calculation of worth variables terms of Future-Proof rating generating the
are the most complex element of this research. biggest negative difference in NPV when these
The rationale behind these parameters has been characteristics are taken into account.
set out above and the figures currently
incorporated are based on this and a series of The variations in the ratings and NPV’s highlight
consultations and pilot studies. However there are how important it is to look at the scores achieved
two important points to note with regards these under each sustainability criterion. This gives a
parameters: clearer indication of where a property’s
a) this is the first step in producing anything that vulnerabilities might lie in terms of sustainability
so specifically links sustainability through to and future investment return. For example the
worth. Whilst the rationale has been carefully NPV of a retail property with a low score in energy
thought through, researched and discussed, it is efficiency will be more severely affected than an
presented as a starting point for further debate. office or industrial property with a similar score
Better means of linking sustainability with worth because energy costs, which drive the change, are
will be developed over time and we welcome normally a higher proportion of retail rents. Similarly
such developments; a high score in accessibility would outweigh the
b) the parameters will change with the political- impact of low scores in some other categories.
economic context and the tool must be
constantly monitored and updated to remain The results produced by the Sustainable Property
current. The sustainability agenda itself is driven Appraisal Tool are useful as a means of analysing
both by public and private sector policy, often in the implications a property’s future-proof rating
response to external stakeholder groups as well might have in terms of worth. The spreadsheet
as fundamental issues such as climate change generates different rental growth, depreciation
and resource depletion. and risk rates depending on the data input and a
property’s scores under each category within the
Appendix B contains a series of 8 case study Future-Proofing Property Questionnaire. It is
properties that have been appraised using the however, only a tool. It is intended as an aid to
Future-Proofing Property Questionnaire and the analysis, it does not attempt to provide a definitive
Sustainable Property Appraisal Tool. These include answer to the risk issues raised by sustainability.
a range of different properties, including business As in the case of other multifarious risks and
parks, shops, shopping centres and offices. With considerations affecting a property’s worth,
one exception these are not properties where individual investors will ultimately determine these.
sustainability was a design issue. They display a
range of Future-Proofing labels from Poor Performer
to Good Performer and reveal over and under
estimates of worth; positive sustainability
characteristics are ignored alongside negative ones
in the standard appraisal process at present. So Pilot Future-Proofing Standard Sustainability %
far the differential in net present value generated Property Property Rating NPV explicit NPV change
using the Sustainable Property Appraisal Tool, has
ranged from -5% to +1.85%. But it must be Retail 1 Poor £81,941,626 £78,044,073 -4.99
reiterated, the sample of properties is very small (8). Retail 2 Typical £84,904,908 £81,377,074 -4.34
Retail 3 Typical £6,578,254 £6,316,856 -4.14
Table 3 adjacent shows the Future-Proofing Rating Retail 4 Typical £114,198,367 £110,767,540 -3.10
band for each property and the Net Present Values Offices 1 Typical £73,768,044 £71,852,635 -2.67
(NPV’s) generated using a standard appraisal and Retail 5 Typical £2,072,871 £2,041,604 -1.53
a sustainability appraisal. These results highlight Offices 2 Good £196,869,962 £197,727,958 0.43
some interesting points. The overall Future-Proof Offices 3 Good £11,372,296 £11,509,583 1.19
Rating is a useful tool that can be used to divide Offices 4 Good £18,528,247 £18,876,900 1.85
properties into ‘bands’ of performance. These
properties range from Poor Performers through to Table 3: Pilot Study Results

25
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 26

8 Conclusion

Consultation with industry has indicated that the accurate parameters, that the industry continues
outputs of this research project resonate with to work in this area. Establishing more data and
property investors’ desire for progress in clearer quantifiable links is fundamental to
understanding how sustainability might affect developing the industry’s understanding of this
property worth. The tools enable analysts to area of risk to potential investment return.
interrogate the implications sustainability has for
property investment performance explicitly and the The research has also identified sustainability
use of a standardised set of criteria has been criteria that are important to the sustainable
welcomed as delivering a potential robustness to performance of property but that are as yet not
the process that was not available before. This in possible to quantify; no clear link can be
turn presents new opportunities to analyse established between two of the criteria identified
performance against particular sustainability criteria within the research and a property function that
and to identify key areas of vulnerability within the can be priced. However, this does not mean these
property stock. criteria will not impact on worth, simply that we
cannot make any estimate of what this impact
Over time such analysis should drive demand for might be yet. It is important the industry continues
property that performs better under key to examine these criteria with a view to developing
sustainability criteria, as these assets will be a means of quantifying that impact and thereby
expected to perform better under standard reducing the unknown risks attached to investing
investment criteria, impacting on worth. Increasing in property.
demand for sustainability within commercial
property assets is key to raising the sustainability The Future-Proofing Property Questionnaire has
of the property stock as a whole. Sustainability strong potential to move the industry forward in
criteria will become more commonly reflected in assessing and analysing sustainability. Whilst the
refurbishment and refit programmes as they questionnaire might be criticised as limited in
become recognised as providing an additional technical scope and detail, it is strong in terms of
means of ensuring long term investment return. relevance to the property investment sector and
The tool is available, on request, to the investment has been very favourably received by industry. The
community for study and further feedback. relative speed and ease with which it can deliver
data on sustainability across a commercial
The parameters established through this project property portfolio makes it particularly useful in
are presented as work in progress and not as a addressing sustainability within the broader
definitive answer to the link between sustainability property stock as well as the small handful of
and worth. It is key to developing a keener properties that might be considered sustainable
understanding of sustainability and better, more according to current thinking.

26
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 27

Appendices

Appendix A: The Future-Proofing Property Questionnaire (completed for a hypothetical property)

Appendix B: 8 Case Studies

27
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 28

Property Sector Retail

Property Type E Single Shop Unit Appendix A:
Property Grade Prime Total Score 24 Future-Proofing
Location Type City Centre Rating: Typical Property Questionnaire

Sustainability Assessment
1 Operational Energy Efficiency
Which of the following features does the property have:
• Modern building management system [x] Subject score
• Movement sensitive/auto-off lighting [x]
• Low energy lighting [x] 4
• Access to a local renewable energy source [ ] Typical
• A CHP plant [ ] Performers

2 Adaptability – do not tick for Retail properties

Which of the following features does the property have:
• Regular footprint [ ]
• Plant depth 15–18m [ ]
• Column grid >7.5m [ ]
• Floor – Ceiling height >=2.7m [ ]
• Raised floors [ ] 0
• VAV, fan coil or no air-conditioning [ ] N/Applicable
• Is this property adaptable across use [ ] 0

3 Climate Control
How is the interior climate controlled?
• A/C <5 years old [x] Tick one only
• A/C 5–9 years old [ ]
• A/C 9+ years old [ ]
• Mechanical ventilation <5 years old [ ]
• Mechanical ventilation 5+ years old [ ] 6
• Natural ventilation [ ] Good
• Capacity for alternative cooling system [x] Performers

4 Water Management
Which of the following water management features does the property have?
• Low flush toilets [ ] Tick one only
• Dual flush toilets [x]
• Controlled taps [ ]
• Controlled flush urinals [ ]
• Washroom control system [ ] 0
• Rainwater harvesting [ ] Very Poor
• Greywater recycling [ ] Performers

5 Waste Management
The property is serviced by:
• Accessible waste storage facilities [ ]
• Adequate waste storage facilities [ ] 2
• Centrally controlled recycling service [x] Typical
• Municipal recycling service [ ] Performers

6 Accessibility
By which of the following forms of transport can the property be accessed (no more than 1/4 mile away)
• Car [ ]
• Train (local terminus) [ ] Tick one only
• Train (major terminus) [x]
• Bus [x]
• Underground [x]
• Foot [ ]
• Bicycle [x]
The property has:
• Adequate parking [ ] 12
• Bicycle racks [x] Good
• Showers [x] Performers

7 Pollution – tick for Industrial property only

• Does the property present a risk in terms of pollutants? [ ]
If yes, please select the most appropriate level of liability for insurance cover:
£1m [ ] Tick one only
£5m [ ] 0
£10m [ ] -
>£10m [ ] N/Applicable
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 29

Basic Details:
Property Sector Office
Property Type D Business Park
Property Grade Prime Appendix B:
Location Type Out of Town Case Study 1

Date of Valuation 25–Dec–04

Tenure Freehold
Purchase Costs 5.75%

Sale Assumptions Standard Worth Sustainable Worth

Sale date 25–Dec–14
Years to sale 10.00
Exit yield 7.75% 7.26%
Exit costs 1.00%
Return
Depreciation 1.00% 0.975%

Risk free rate 5.00% 5.00%

Risk premium 3.75% 3.75%
Discount rate 8.75% 8.75%
Growth Rates Standard Rental Growth Sustainable Rental Growth Net Sustainable Rental Growth
Year 1 1.00% 1.49% 0.52%
Year 2 1.50% 2.24% 1.26%
Year 3 1.50% 2.24% 1.26%
Year 4 1.25% 1.87% 0.89%
Year 5 onwards 1.00% 1.49% 0.52%
Market Rent per m2 £285.00
Other Factors
Refurbishment costs: £0
Building inflation 6%
Other Costs – Fees & Management
Rent review fees 7.00%
Management costs 0%
Void service charge psq ft £0.00
Rates per sq ft £0.00
Inflation on costs 3%

Sustainability Factors Impact Line Office Energy Rating

Operational Energy Use Rental growth A Office A/C Prime 2
If energy cost is known enter Cost per sq m 4 Poor Performer

Property Type D Business park

Score from Questionnaire Total Score
Adaptability Rental growth 8 27
Climate control Depreciation 3 3 Typical
Waste Depreciation 2 -
Water Depreciation 0 -
Accessibility Rental growth 12 -
Industrial Only
Pollution – Environmental 1 Premium
Insurance Premiums <£60,000
Pollutants Rental growth 0
Contextual fit Rental growth -
Occupier impact Risk premium -

Sustainable Criteria Sustainable Criteria Office Basis Points Adjustment

Energy Use Rental growth 2 -0.82141
Adaptability Rental growth 8 1.13973
Pollutants Rental growth 0 0.00000
Accessibility Rental growth 12 0.17407
Contextual fit Rental growth 4 0.0000
Occupier impact Risk premium 4 0.0000
Climate control Depreciation 3 -0.10000
Waste Depreciation 2 0.02500
Water Depreciation 0 0.10000

Results Gross Net % Change

Standard Worth £131,596,558 £124,441,190 -
Sustainable Worth £135,567,399 £128,196,122 2.93
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 30

Basic Details:
Property Sector Office
Property Type D Business Park
Property Grade Prime Appendix B:
Location Type Out of Town Case Study 2

Date of Valuation 25–Dec–04

Tenure Freehold
Purchase Costs 5.75%

Sale Assumptions Standard Worth Sustainable Worth

Sale date 25–Dec–14
Years to sale 10.00
Exit yield 8.25% 8.26%
Exit costs 1.00%
Return
Depreciation 1% 0.9250%

Risk free rate 5.00% 5.00%

Risk premium 4.25% 4.25%
Discount rate 9.25% 9.25%
Growth Rates Standard Rental Growth Sustainable Rental Growth Net Sustainable Rental Growth
Year 1 1.00% 0.99% 0.06%
Year 2 1.50% 1.48% 0.56%
Year 3 1.50% 1.48% 0.56%
Year 4 1.25% 1.23% 0.31%
Year 5 onwards 1.00% 0.99% 0.06%
Market Rent per m2 £150.00
Other Factors
Refurbishment costs: £0
Building inflation 6%
Other Costs – Fees & Management
Rent review fees 7.00%
Management costs 0%
Void service charge psq ft £0.00
Rates per sq ft £0.00
Inflation on costs 3%

Sustainability Factors Impact Line Office Energy Rating

Operational Energy Use Rental growth A Office A/C Prime 2
If energy cost is known enter Cost per sq m 4 Poor Performer

Property Type D Business park

Score from Questionnaire Total Score
Adaptability Rental growth 8 31
Climate control Depreciation 3 2 Good performer
Waste Depreciation 4 -
Water Depreciation 2 -
Accessibility Rental growth 12 -
Industrial Only
Pollution – Environmental 1 Premium
Insurance Premiums <£60,000
Pollutants Rental growth 0
Contextual fit Rental growth 4
Occupier impact Risk premium 4

Sustainable Criteria Sustainable Criteria Office Basis Points Adjustment

Energy Use Rental growth 2 -1.48060
Adaptability Rental growth 8 1.13973
Pollutants Rental growth 0 0.00000
Accessibility Rental growth 12 0.32844
Contextual fit Rental growth 4 0.0000
Occupier impact Risk premium 4 0.0000
Climate control Depreciation 3 -0.10000
Waste Depreciation 4 0.00000
Water Depreciation 2 0.02500

Results Gross Net % Change

Standard Worth £6,940,200 £6,562,836 -
Sustainable Worth £6,900,032 £6,524,853 -0.58
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 31

Basic Details:
Property Sector Office
Property Type A Office City Centre
Property Grade Prime Appendix B:
Location Type City Centre Case Study 3

Date of Valuation 25–Dec–04

Tenure Freehold
Purchase Costs 5.75%

Sale Assumptions Standard Worth Sustainable Worth

Sale date 25–Dec–14
Years to sale 10.00
Exit yield 8.00% 8.50%
Exit costs 1.00%
Return
Depreciation 1% 1.50%

Risk free rate 5.00% 5.00%

Risk premium 4.00% 4.00%
Discount rate 9.00% 9.00%
Growth Rates Standard Rental Growth Sustainable Rental Growth Net Sustainable Rental Growth
Year 1 1.00% 0.50% -1.00%
Year 2 1.50% 0.75% -0.75%
Year 3 1.50% 0.75% -0.75%
Year 4 1.25% 0.62% -0.88%
Year 5 onwards 1.00% 0.50% -1.00%
Market Rent per m2 £375.00
Other Factors
Refurbishment costs: £0
Building inflation 6%
Other Costs – Fees & Management
Rent review fees 7.00%
Management costs 0%
Void service charge psq ft £0.00
Rates per sq ft £0.00
Inflation on costs 3%

Sustainability Factors Impact Line Office Energy Rating

Operational Energy Use Rental growth A Office A/C Prime 2
If energy cost is known enter Cost per sq m 4 Poor Performer

Property Type D Business park

Score from Questionnaire Total Score
Adaptability Rental growth 4 19
Climate control Depreciation 0 4 Poor performer
Waste Depreciation 0 -
Water Depreciation 1 -
Accessibility Rental growth 12 -
Industrial Only
Pollution – Environmental 1 Premium
Insurance Premiums <£60,000
Pollutants Rental growth 0
Contextual fit Rental growth -
Occupier impact Risk premium -

Sustainable Criteria Sustainable Criteria Office Basis Points Adjustment

Energy Use Rental growth 2 -0.63371
Adaptability Rental growth 4 0.00000
Pollutants Rental growth 0 0.00000
Accessibility Rental growth 12 0.13254
Contextual fit Rental growth 4 0.0000
Occupier impact Risk premium 4 0.0000
Climate control Depreciation 0 0.50000
Waste Depreciation 0 0.05000
Water Depreciation 1 0.05000

Results Gross Net % Change

Standard Worth £47,223,690 £44,655,971 -
Sustainable Worth £45,447,466 £42,976,327 -3.91
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 32

Basic Details:
Property Sector Office
Property Type B Office Town Centre
Property Grade Prime Appendix B:
Location Type Town Centre Case Study 4

Date of Valuation 25–Dec–04

Tenure Freehold
Purchase Costs 5.75%

Sale Assumptions Standard Worth Sustainable Worth

Sale date 25–Dec–14
Years to sale 10.00
Exit yield 7.50% 7.25%
Exit costs 1.00%
Return
Depreciation 1% 1.05%

Risk free rate 5.00% 5.00%

Risk premium 3.50% 3.50%
Discount rate 8.50% 8.50%
Growth Rates Standard Rental Growth Sustainable Rental Growth Net Sustainable Rental Growth
Year 1 1.00% 1.25% 0.20%
Year 2 1.50% 1.88% 0.83%
Year 3 1.50% 1.88% 0.83%
Year 4 1.25% 1.57% 0.52%
Year 5 onwards 1.00% 1.25% 0.20%
Market Rent per m2 £247.50
Other Factors
Refurbishment costs: £0
Building inflation 6%
Other Costs – Fees & Management
Rent review fees 7.00%
Management costs 0%
Void service charge psq ft £0.00
Rates per sq ft £0.00
Inflation on costs 3%

Sustainability Factors Impact Line Office Energy Rating

Operational Energy Use Rental growth A Office A/C Prime 2
If energy cost is known enter Cost per sq m 4 Poor Performer

Property Type D Business park

Score from Questionnaire Total Score
Adaptability Rental growth 8 29
Climate control Depreciation 2 3 Typical
Waste Depreciation 0 -
Water Depreciation 1 -
Accessibility Rental growth 16 -
Industrial Only
Pollution – Environmental 1 Premium
Insurance Premiums <£60,000
Pollutants Rental growth 0
Contextual fit Rental growth -
Occupier impact Risk premium -

Sustainable Criteria Sustainable Criteria Office Basis Points Adjustment

Energy Use Rental growth 2 -0.93716
Adaptability Rental growth 8 1.13973
Pollutants Rental growth 0 0.00000
Accessibility Rental growth 16 0.05005
Contextual fit Rental growth 4 0.0000
Occupier impact Risk premium 4 0.0000
Climate control Depreciation 2 0.00000
Waste Depreciation 0 0.00000
Water Depreciation 1 0.05000

Results Gross Net % Change

Standard Worth £13,123,557 £12,409,983 -
Sustainable Worth £13,321,411 £12,597,079 1.49
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 33

Basic Details:
Property Sector Retail
Property Type F Parades & Terraces
Property Grade Prime Appendix B:
Location Type Town Centre Case Study 5

Date of Valuation 25–Dec–04

Tenure Freehold
Purchase Costs 5.75%

Sale Assumptions Standard Worth Sustainable Worth

Sale date 25–Dec–14
Years to sale 10.00
Exit yield 6.50% 6.75%
Exit costs 1.00%
Return
Depreciation 1.20% 1.41%

Risk free rate 5.00% 5.00%

Risk premium 2.50% 2.50%
Discount rate 7.50% 7.50%
Growth Rates Standard Rental Growth Sustainable Rental Growth Net Sustainable Rental Growth
Year 1 1.00% 0.75% -0.66%
Year 2 1.00% 0.75% -0.66%
Year 3 1.00% 0.75% -0.66%
Year 4 1.00% 0.75% -0.66%
Year 5 onwards 1.00% 0.75% -0.66%
Market Rent per m2 £350.00
Other Factors
Refurbishment costs: £0
Building inflation 6%
Other Costs – Fees & Management
Rent review fees 7.00%
Management costs 0%
Void service charge psq ft £0.00
Rates per sq ft £0.00
Inflation on costs 3%

Sustainability Factors Impact Line Office Energy Rating

Operational Energy Use Rental growth K Retail (non food) 0
If energy cost is known enter Cost per sq m 5 Worst Performer

Property Type F Parades & Terraces

Score from Questionnaire Total Score
Adaptability Rental growth 0 18
Climate control Depreciation 1 4 Poor performer
Waste Depreciation 3 -
Water Depreciation 0 -
Accessibility Rental growth 14 -
Industrial Only
Pollution – Environmental 1 Premium
Insurance Premiums <£60,000
Pollutants Rental growth 0
Contextual fit Rental growth -
Occupier impact Risk premium -

Sustainable Criteria Sustainable Criteria Office Basis Points Adjustment

Energy Use Rental growth 0 -0.38778
Adaptability Rental growth 0 0.00000
Pollutants Rental growth 0 0.00000
Accessibility Rental growth 14 0.14195
Contextual fit Rental growth 4 0.0000
Occupier impact Risk premium 4 0.0000
Climate control Depreciation 1 0.10000
Waste Depreciation 3 0.00000
Water Depreciation 0 0.07500

Results Gross Net % Change

Standard Worth £4,876,342 £4,611,198 -
Sustainable Worth £4,768,176 £4,508,914 -2.27
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 34

Basic Details:
Property Sector Retail
Property Type F Parades & Terraces
Property Grade Tertiary Appendix B:
Location Type Town Centre Case Study 6

Date of Valuation 25–Dec–04

Tenure Freehold
Purchase Costs 5.75%

Sale Assumptions Standard Worth Sustainable Worth

Sale date 25–Dec–14
Years to sale 10.00
Exit yield 7.50% 7.77%
Exit costs 1.00%
Return
Depreciation 0.50% 0.4875%

Risk free rate 5.00% 5.00%

Risk premium 3.50% 3.50%
Discount rate 8.50% 8.50%
Growth Rates Standard Rental Growth Sustainable Rental Growth Net Sustainable Rental Growth
Year 1 1.00% 0.73% 0.24%
Year 2 1.00% 0.73% 0.24%
Year 3 1.00% 0.73% 0.24%
Year 4 1.00% 0.73% 0.24%
Year 5 onwards 1.00% 0.73% 0.24%
Market Rent per m2 £440.00
Other Factors
Refurbishment costs: £0
Building inflation 6%
Other Costs – Fees & Management
Rent review fees 7.00%
Management costs 0%
Void service charge psq ft £0.00
Rates per sq ft £0.00
Inflation on costs 3%

Sustainability Factors Impact Line Office Energy Rating

Operational Energy Use Rental growth K Retail (non food) 1
If energy cost is known enter Cost per sq m 5 Worst Performer

Property Type D Business park

Score from Questionnaire Total Score
Adaptability Rental growth 0 22
Climate control Depreciation 3 3 Typical
Waste Depreciation 4 -
Water Depreciation 0 -
Accessibility Rental growth 14 -
Industrial Only
Pollution – Environmental 1 Premium
Insurance Premiums <£60,000
Pollutants Rental growth 0
Contextual fit Rental growth -
Occupier impact Risk premium -

Sustainable Criteria Sustainable Criteria Office Basis Points Adjustment

Energy Use Rental growth 1 -0.38778
Adaptability Rental growth 0 0.00000
Pollutants Rental growth 0 0.00000
Accessibility Rental growth 14 0.11306
Contextual fit Rental growth 4 0.0000
Occupier impact Risk premium 4 0.0000
Climate control Depreciation 3 -0.10000
Waste Depreciation 4 0.00000
Water Depreciation 0 0.07500

Results Gross Net % Change

Standard Worth £2,284,967 £2,160,725 -
Sustainable Worth £2,237,353 £2,115,701 -0.98
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 35

Basic Details:
Property Sector Retail
Property Type H Shopping Centres 20+ Units
Property Grade Secondary Appendix B:
Location Type Town Centre Case Study 7

Date of Valuation 25–Dec–04

Tenure Freehold
Purchase Costs 5.75%

Sale Assumptions Standard Worth Sustainable Worth with Matrix

Sale date 25–Dec–14
Years to sale 10.00
Exit yield 6.50% 6.72%
Exit costs 1.00%
Return
Depreciation 0.50% 0.70%

Risk free rate 5.00% 5.00%

Risk premium 2.50% 2.50%
Discount rate 7.50% 7.50%
Growth Rates Standard Rental Growth Sustainable Rental Growth Net Sustainable Rental Growth
Year 1 1.00% 0.78% 0.08%
Year 2 1.00% 0.78% 0.08%
Year 3 1.00% 0.78% 0.08%
Year 4 1.00% 0.78% 0.08%
Year 5 onwards 1.00% 0.78% 0.08%
Market Rent per m2 £300.00
Other Factors
Refurbishment costs: £0
Building inflation 6%
Other Costs – Fees & Management
Rent review fees 7.00%
Management costs 0%
Void service charge psq ft £0.00
Rates per sq ft £0.00
Inflation on costs 3%

Sustainability Factors Impact Line Office Energy Rating

Operational Energy Use Rental growth K Retail (non food) 0
If energy cost is known enter Cost per sq m 5 Worst Performer

Property Type H Shopping Centres 20+ Units

Score from Questionnaire Total Score
Adaptability Rental growth 0 23
Climate control Depreciation 2 3 Typical
Waste Depreciation 3 -
Water Depreciation 0 -
Accessibility Rental growth 18 -
Industrial Only
Pollution – Environmental 1 Premium
Insurance Premiums <£60,000
Pollutants Rental growth 0
Contextual fit Rental growth -
Occupier impact Risk premium -

Sustainable Criteria Sustainable Criteria Office Basis Points Adjustment

Energy Use Rental growth 0 -0.38778
Adaptability Rental growth 0 0.00000
Pollutants Rental growth 0 0.00000
Accessibility Rental growth 18 0.16543
Contextual fit Rental growth 4 0.0000
Occupier impact Risk premium 4 0.0000
Climate control Depreciation 2 0.30000
Waste Depreciation 3 0.00000
Water Depreciation 0 0.10000

Results Gross Net % Change

Standard Worth £105,662,568 £99,917,322 -
Sustainable Worth £102,449,189 £96,878,666 -3.14
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 36

Basic Details:
Property Sector Retail
Property Type J Retail Warehouse (single unit or whole park)
Property Grade Secondary Appendix B:
Location Type Out of Town Case Study 8

Date of Valuation 25–Dec–04

Tenure Freehold
Purchase Costs 5.75%

Sale Assumptions Standard Worth Sustainable Worth with Matrix

Sale date 25–Dec–14
Years to sale 10.00
Exit yield 6.50% 6.89%
Exit costs 1.00%
Return
Depreciation 0.50% 0.65%

Risk free rate 5.00% 5.00%

Risk premium 2.50% 2.50%
Discount rate 7.50% 7.50%
Growth Rates Standard Rental Growth Sustainable Rental Growth Net Sustainable Rental Growth
Year 1 1.00% 0.61% -0.04%
Year 2 1.00% 0.61% -0.04%
Year 3 1.50% 0.92% 0.27%
Year 4 1.50% 0.92% 0.27%
Year 5 onwards 1.50% 0.92% 0.27%
Market Rent per m2 £360.00
Other Factors
Refurbishment costs: £0
Building inflation 6%
Other Costs – Fees & Management
Rent review fees 7.00%
Management costs 0%
Void service charge psq ft £0.00
Rates per sq ft £0.00
Inflation on costs 3%

Sustainability Factors Impact Line Office Energy Rating

Operational Energy Use Rental growth K Retail (non food) 0
If energy cost is known enter Cost per sq m 5 Worst Performer

Property Type J Retail Warehouse

(single unit or whole park)
Score from Questionnaire Total Score
Adaptability Rental growth 0 12
Climate control Depreciation 0 4 Poor performer
Waste Depreciation 4 -
Water Depreciation 0 -
Accessibility Rental growth 8 -
Industrial Only
Pollution – Environmental 1 Premium
Insurance Premiums <£60,000
Pollutants Rental growth 0
Contextual fit Rental growth 4
Occupier impact Risk premium 4

Sustainable Criteria Sustainable Criteria Office Basis Points Adjustment

Energy Use Rental growth 0 -0.38778
Adaptability Rental growth 0 0.00000
Pollutants Rental growth 0 0.00000
Accessibility Rental growth 8 0.00000
Contextual fit Rental growth 0.0000
Occupier impact Risk premium 0.0000
Climate control Depreciation 0 0.25000
Waste Depreciation 4 0.00000
Water Depreciation 0 0.05000

Results Gross Net % Change

Standard Worth £76,534,644 £72,373,186 -
Sustainable Worth £71,571,736 £67,680,129 -6.93
SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 37

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Printed on 150 gsm ‘Take 2 Silk’. 100% recycled paper, distributed by the James McNaughton Group. SS(1236)B

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SS(1236)B-SustainPAP08AW2 2/4/07 10:19 Page 40
The Sustainable Property
Appraisal Project
School of Surveying
Kingston University
Penrhyn Road
Kingston upon Thames
Surrey KT1 2EE
Telephone 020 8547 7047
Directline 020 8547 8876
Fax 020 8547 7087
Email [email protected]
www.sustainableproperty.ac.uk
Project Director: Prof Sarah Sayce
Project Manager: Louise Ellison
ISBN 0-9554744-0-X