New RICS Valuation Guidance Could Slash The Worth Of Less Green Assets

The RICS has issued a new guidance note for valuers about how they should take sustainability into account when valuing commercial property, and it could lead to real estate assets that emit more carbon or are hard to upgrade having a lower valuation placed on them.

The guidance note, "Sustainability and ESG in commercial property valuation and strategic advice, global 3rd edition’" was issued this week by the body responsible for The RICS Red Book — the set of standards by which valuers go about calculating the worth of a property.

It is the first time the RICS’ advice on how to take sustainability into account when calculating valuations has been updated since 2013. It also means sustainability will play a much bigger role in determining the value banks and investors will put on a property. The RICS started a review of how to address sustainability in valuation in February 2020. The new guidance becomes effective from 31 January 2022. 

In the eight years since the last guidance note was published, sustainability has rocketed up the agenda for property investors. A survey from ESG data and analysis consultancy Deepki this week showed 95% of institutional investors it surveyed said the ESG credentials of a property are important in their investment decision-making process. Three-quarters said it is going to get even more important next year. 

The 36-page guidance note lays out how valuers should think about factors such as what it will cost to upgrade a property to meet regulatory requirements like Minimum Energy Efficiency Standards; the impact on a building’s value if it becomes obsolete from a sustainability point of view; and what kind of discount investors might apply if they have high sustainability benchmarks, like net-zero carbon emissions for their portfolio.

When reporting a valuation valuers should "assess the extent to which the subject property currently meets the sustainability and ESG criteria typically expected within the context of its market standing and arrive at an informed view on the likelihood of these impacting on value, e.g. how a well-informed purchaser would take account of them in making a decision as to offer price," the note said.

They should also "provide a statement of their opinion on the relationship between sustainability factors and the resultant valuation, including a comment on the current benefits/risks that are associated with these sustainability characteristics, or the lack of risks."

“This seems like a landslide shift that will lock in losses for those big asset managers that have big legacy portfolios,” Fore Partnership Managing Partner Basil Demeroutis told Bisnow. Fore is a B Corporation focused on sustainable and social impact real estate. “Santa may be leaving ‘stranded assets’ under the Christmas tree.”