SPR Roundtable: How Valuations are Changing 
Legal & General, 24 May, 2023
Putting a value on sustainability

I was fortunate to be among the dozen or so SPR members attending the third of the Society’s roundtable events, on this occasion hosted by Legal & General Investment Management at their Coleman Street office in the City of London.  Focusing on current valuation practices, the roundtable format followed those previously held by the SPR on the topics of ESG data and the Metaverse.

The latest roundtable also had a strong ESG theme, with the bulk of the meeting devoted to the recent AREF paper on sustainable value (https://www.aref.org.uk/resource/sustainable-valuations-report-ukcre.html), which was presented by its author Sam Carson of CBRE.

Carson explained that the report surveyed AREF members for their views on how any ‘green premium’ to more sustainable buildings should be reflected in the valuation process, with the aim of setting some guidelines on the factors that need to be taken into account.  Clearly, valuers would already be implicitly reflecting such factors – eg building configuration or obsolescence – in their practices; the important next step was to ensure that they are considered explicitly as well.  Carson has already delivered over 1200 hours of training to CBRE valuer colleagues setting out these principles – which he suggested had been positively received – but the practical impact was likely to take time, particularly as ESG factors are only slowly starting to be reflected in market pricing.

A wide-ranging discussion then followed involving many of the audience, which is very much the intention of these roundtable meetings.  Leading the discussion, Cleo Folkes of Property Overview noted that carbon emissions remain a minor influence in the pricing of buildings in many UK markets, where super prime rents often reflect the location and not so much energy efficiency. Simon Durkin of Blackrock suggested that investors are already starting to consider the liquidity risks associated with unsustainable buildings in their purchase decisions, but that these risks are difficult to price.

Sustainability certifications – most notably EPCs, BREEAM and NABERs – were discussed at length.  Carson suggested that EPCs, although flawed, help sustainability to be considered and are helping investors to allocate capex, whereas in his opinion BREEAM is not sufficiently transparent to be useful.  Philip Walker, himself a very experienced valuer, noted that an accurate reflection of potential capex can only come from discussing the valuation with clients. In general, this was considered a thorny area: can valuers realistically be expected to take such future influences into account when they are just supposed to look at the building in its current state?

In another area of discussion, Matt Soffair of LGIM questioned whether social factors were considered in the paper. Carson commented that those aspects of a property relating to ‘placemaking’ would be considered in a valuation but were inherently difficult to quantify. Folkes suggested that the work of the Social Value Portal, which she recently joined, should soon be providing data measuring the social impact of buildings in financial terms, providing a valuable input in this context.

Moving on from sustainability considerations to valuation practice more widely, Walker gave a brief overview of the changes that had taken place during his working life. This started with the RICS Red Book, which made the services that clients could expect more explicit, while subsequent reports by Mallinson and Carsberg had taken this further.  Meanwhile Peter Pereira Gray’s recent report advocated more transparency and sophistication in identifying valuation comparables.  Among his 13 proposals, one controversial point was for discounted cash flows (DCFs) to be the primary method of valuation.

Professor Colin Lizieri of the University of Cambridge, who joined the discussion online, questioned the assumptions on the definition of valuation inherent in this proposal.  Specifically, where would the market comparables be found for a DCF?  This was also an issue when considering EPCs or capex in a valuation, as both of these would lie in the future, while the role of the valuation is to reflect the current market. Dr Cath Jackson of the University of Sheffield, also online, concurred: DCF valuations still need a rent and a yield – where would the data for these come from?

However, Soffair noted that as real estate sectors evolve to encompass a variety of new uses, there may not be as much market evidence available – this could also apply to mixed use assets.  Ray Adderley of Nuveen agreed that it was important to be transparent about the assumptions being made in such cases.

The session ended with many questions still hanging in the air and ripe for further discussion.  No doubt the SPR will be returning to these topics in due course.

Tim Horsey