The Book's Main Theme

The way of perceiving the built environment is undergoing change. It has to, because of the new requirements attached to the sustainable development agenda (since the 1992 Rio Earth Summit, Local Agenda 21 and, more recently, the 2015 Paris Agreement hailed as an ‘historic turning point’) and the proposed policy solutions following the financial crisis of the late 2000s. Unfortunately, because of the complexity in the cause and effect in both our natural climate systems and our modern economic systems, there is unlikely to be a quick fix. However, beyond the complexity in the systems themselves, contributory factors may be intransigence, lack of understanding, lack of commitment or simply that the hegemony of money markets and their short termism makes it difficult to enable a broader-based interpretation of value where the currency of exchange is based on the environmental and social as well as the financial assets of a building.

This book explores the professional foundations on which the valuation exercise and the valuation profession rest. It aims to address this potentially limited understanding of the concept of property value by explaining the intrinsic linkages between economic, environmental, social and cultural measures and components of property value. In this way, it may be possible to pave the way towards a more holistic approach to property value.

Our conceptualisation of value goes beyond price. This is because we examine why a particular price is paid for a property asset, and we investigate in detail how professionals arrive at their estimate of value which will then influence their client's willingness to deal at a given price. Although, of course, price is based on estimates of value, this book attempts to unwrap many of the traditional assumptions that have underpinned market participants' decision-making over the past few decades.

When exploring the price–value association (or discrepancy), the book aims to incorporate social, environmental and economic concepts of value into a broader concept of property value. In doing so, the book puts forward the argument that a blindfold application of valuation theories and approaches adopted from finance is unlikely to be able to cope with the nature of property as an economic and public good. This claim is especially important at this moment in time, in a situation where the sustainability requirements being imposed are changing the decision-making environment concerning investment in the built environment.

Real-estate valuation plays a pivotal role in this decision-making, and we must ask ourselves the following question: how can this new body of knowledge improve the practice in both business and social domains, given the nature of specific professions – in our case, those pertaining to the real-estate industry? Hill and colleagues (2011) see this role ‘embedded in some ideals, professional values, autonomy of practice and independence of opinion’ (p. 315), and to be a professional requires not only a body of knowledge but also ‘a role definition and sense of identity; public interest; and ethical conduct’ (Hughes et al., 2013). Professional identity, independence, public interest and ethics therefore play a crucial role in a professional's assessment of real-estate valuation. As a process, such valuations therefore need to be sustainable in a broad sense. Here, we are concerned with financial sustainability, that is, how robust are the valuations performed to support investment decisions in the direct and indirect markets; environmental sustainability, that is, the impact of real-estate location, use and efficiency on the environment and social sustainability, that is, addressing the growing gap between those who have access and those deprived of access – both wealth creation and poverty creation and the impact on extremism at both ends.

The Book's Key Messages

The role of the valuation professional is to provide professional advice. This is not just about financial value, but it ought to, somewhere, cover the aspects of guardianship through appropriate management of landed and built assets. Too often, the advice is just about the price derived from limited criteria. This is more the role of an agent or a realtor and not of a professional adviser.

The role of the valuation profession is important in the struggle to implement sustainable development principles within the property sector in particular and within society in general. There are two main reasons for this: (1) ‘the building sector contributes up to 30% of global annual green house gas emissions and consumes up to 40% of all energy’ (UNEP SBCI, 2009, p. 3), and it therefore has the potential to provide the most cost-effective opportunities to cut down energy and resource use and to contribute to human health at the same time; (2) mainstream financial professionals and property market participants are less willing to include sustainability issues in property-related decision-making processes unless and until sustainable building features and related performance are integrated into property valuations. Deloitte (2014) believes that there is ‘substantial room for deepening sustainability implementation in certified buildings, where in-use performance can remain stubbornly below design expectations.’ (p. 2)

There are, however, some barriers to implementation. These are as follows:

• A gap exists between the current situation (in which the challenges imposed by sustainable development create new pressures and realities) and state-of-the-art valuation theory, standards and practices.
• Whilst it can be argued that in a growing number of cases, valuations reflect sustainable credentials of buildings, sustainable development thinking needs to be integrated at a deeper level into valuation theory, standards and everyday practice; that is to say, a new protocol or model for valuation and professionalism is needed.
• Financial valuation methods and approaches do not really work for property assets because property is not traded in a perfect market.

We need to better understand what we are doing when assigning value to a particular building or groups of buildings; that is to say, while considerable attention has been paid to focusing on improving the performance of our value prediction models, much less time has been spent on advancing our understanding of the fundamental behavioural underpinnings that drive value and provide explanation as to how the property market works. Valuation methods have to reflect market sentiment as demonstrated through the prices paid. However, the valuer (as professional advisor) has a responsibility to make the investor become aware of all the implications of the value figure derived. How far therefore can a valuer influence value practice and eventual price?

The valuation exercise is not only a positive science; that is to say, valuers are not only here to ‘reflect the market’. Instead, valuers have a normative professional responsibility towards society at large, which adds a moral dimension to the property professional's valuation and consulting work. This is something that is challenged by scientists, scholars and academics trained in neoclassical economics (including more practical minded people such as valuers and business economists). The normative aspect may, for instance, concern the particular developments in terms of ‘value stability’ and ‘economic sustainability’ and the setting of enlightened (adaptable) recommendations for private investment as well as policy and planning.

To expand on the last point, it is not uncommon that policymakers (including policymakers in national governments, multilateral organisations and global corporations) use and look to economic theory and evidence in order to guide policy. Since policies – outlining and guiding humankind's, governments' and corporations' overall strategy and actions – are so vital for sustainable development, the economic discipline plays a crucial role. The increasing extent to which policymaking bears on economics raises the methodological question about the relationship between a positive science concerning ‘facts’ and a normative investigation into what ought to be or what is estimable. ‘Most economists and methodologists believe that there is a reasonably clear distinction between facts and values, between what is and what ought to be, and they believe that most of economics should be regarded as a positive science that helps policy makers choose means to accomplish their ends, though it does not bear on the choice of ends itself.’ (Hausman, 2003, Chapter 2)

This view is questionable, mainly because the discipline of economics is guided by values or by individual's views of what is right and wrong. Consequently, economics is greatly influenced by economic scientists' beliefs as to how people in fact behave (Hausman, 2003, Chapter 2). There is evidence that studying theories that are based on the assumption or principle that individuals are ‘self-interested’ (masters of nature) leads to people – and thus, to societies – who regard self-interested behaviour more favourable and to become even more self-interested (Marwell and Ames, 1981; Frank et al., 1993).

One argument put forward in this book is that ‘taking’ to achieve individual self-interest in itself is not sustainable. There has to be at least an equal level of ‘giving’ to sustain species self-interest. In the restricted area of real estate, this might be through lower profit margins or financial returns to provide higher efficiencies in resource consumption or through the positive embrace of green leases and green education. However, an overriding question in this whole debate is as follows: What is sustainability?

Put simply, sustainability embraces the financial, social and environmental decision-making in the field of real estate. The problem of virtual money becoming confused with real wealth has created a crisis in real-estate investment markets and consumer markets across the world. The impact on political life has been seen through a general lack of confidence and revolt against austerity measures which, in themselves, are attempts to redress the balance and achieve sufficiency against the excesses of the past decade. These measures have spread out into the social arena with protests, unemployment and poverty. Each of these are links in a chain which impinge on real-estate markets, whether residential, retail or commercial.

This evidence suggests that many societies have been living unsustainably (i.e. beyond both sufficiency and beyond affordability). As a whole, in all its dimensions, sustainability seems to be something outside the boundaries of our social systems (whether financial, social, political or physical): something that has a meaning but only in context within its own system. It is not a balance sheet or an air-conditioning system or a green space. Sustainability in the Hmong community in Vietnam is very different to sustainability in the Jewish community in New York City. Its meaning is parochial, but its actuality is universal. It is both inside and outside the system, and as such, it may be difficult to fully understand it. For example, often, we can only describe what is not sustainable, but even that can only be a partial judgement.

The concept, on the one hand, steeped in technical jargon, scientific formulae and inconceivable consequences creates a remoteness which is outside most people's sphere of experience/knowledge. In stark contrast, on the other hand, is the immediacy of a financial crisis, a parenting decision or a space heating solution – all of which have an impact on the levels of sustainability. There is therefore an ambivalence about the concept which allows arguments for ‘business as usual’ to abound. Nevertheless, we should strive to incorporate our own meanings to the concept in our lives (professional, social and private) in order to avoid potential destruction of the conditions of our reproduction (i.e. resources to sustain future generations). Specifically for the valuer, as a professional adviser, the ethics of sustainable solutions should form an important part of any appraisal and judgement when advising a client.

The Book's Methodology and Starting Points

This book necessarily addresses different areas within the property valuation context. We aim at a protocol partly at the higher level and partly at the detailed level of analysis. The book is a comprehensive whole of five parts, but with each part either meant as an essay (Parts 1 and 5) or as a collection of independent (or at least ‘semi-independent’) essays (Parts 2–4). The insights and conclusion from these contributions will eventually be used to strengthen and support the main argumentative chain and the book's key messages (Fig. 1).

The book's starting points are a brief description of the current state of affairs, developments and changes and analysis of likely consequences for valuers, valuation theory and practice as well as an explanation for proposing an alternative protocol to valuation and decision-making processes in the property industry. This is further dealt with in the following:

Brief Description of the Current State of Affairs, Developments and Changes

When describing the current state of affairs, it is difficult not to mention the issues of climate change, economic cycles of boom and bust, worldwide inequality (particularly in an urban context) and the need to tutor the emerging economies. These are just some of the arguments on a macro level where there is an ever-increasing awareness – even worldview – about the set of disturbing problems facing the owners and occupiers alike. Climate change is getting more and more accepted as an overall paradigm – not only in natural sciences but also in social sciences and general economics. Even a relatively ‘hands-on’ discipline such as (spatial) planning has been reconceptualised to the core (see e.g. Bulkeley, 2006).

Ostensibly, climate change is causing glaciers and icebergs to melt as well as increased precipitation and storm floods and, subsequently, water level rise. This leads to flooding and other hazards, mainly in river and coastal zones, which become increasingly risky locations to live in. The inhabitants of these areas move away if they can. As such, the same areas have been economically prosperous for centuries due to the logistic possibilities associated with such locations. How many of the large cities of the world are located by the coast or are situated by the course of a main river? When these areas suddenly become unattractive for people and business alike, they also become prone to multiply increased financial risk (cf. Hill and Lorenz, 2011).

Further changes include the ‘investment climate’, in a situation where private and public investors are increasingly looking for new (i.e. more sustainable) approaches to investment (examples for this can be found in the publications of the United Nations Environment Program Finance Initiative). In these circles, there is a tendency to move away from a fixation on financial metrics and measures of performance alone. However, at the same time, property assets are also increasingly seen as a medium for short-term trading. This potentially can be a significant contributory factor in many of the problems that we are facing.

While there is also a strong focus on sustainability within the current political discourse as well as a tendency to increase the stringency of environmental legislation, these efforts are both neither fully translated into practice (lack of tools and mechanisms, etc.) nor sufficiently powerful to change behaviour (see the Copenhagen Climate Conference).

There is a considerable amount of literature on sustainability-related issues, regarding both the general economy and the property and construction industry in particular. However, whilst the majority of publications identify the problem, there is a lack of guidance on what to do next (i.e. practical courses of actions for individuals and professionals). In general, in professional life, there is more interest in defining and thinking about what professional ethics mean, rather than focusing on what consequences result from them, for professional practice.

Political and social value systems are strong and shape decision-making to a certain extent. An individual's behaviour is usually embedded in a social context. ‘Social and interpersonal factors continually shape and constrain individual preference.’ (Jackson, 2005, p. vii).

It is evident that in some parts of the world, value systems (of individuals and corporate) are changing. Certain businesses and investors start realising/understanding the benefits of taking responsibility towards the environment and society. Corporate Social Responsibility is becoming a factor of success. In some parts of the world, this takes place more rapidly than in other parts. This can happen for a number of reasons, for example, changes in material wealth and education and environmental change.

In general, it can therefore be argued that due to the changes/developments described earlier, there is a conflict/gap between current professional practice and the current business, societal and political reality (see Part 1 – Gap Analysis).

Analysis of Likely Consequences for Valuers, Valuation Theory and Practice

In such circumstances, the role of the professional valuer needs to be more multidimensional and pluralistic than it has tended to be in the past. The body of knowledge that underpins the profession needs to be broadened; stated differently, good (i.e. ethically and politically correct) professionals must update their understanding according to the requirements stemming from the arguments described earlier. To some extent, this is already happening: for example, the RICS has, over the years, produced a range of research publications addressing ‘green’ issues and sustainability, some in the context of valuation. In addition, the RICS has published several Information Papers and Guidance Notes on how to address sustainability considerations within valuation reports. They are intended to help to achieve this broadening of thought processes. For example, VPGA8 of the RICS Valuation – Professional Standards July 2017 (‘The Red Book’) advises that ‘while valuers should reflect markets, not lead them, they should be aware of sustainability features and the implications these could have on property values in the short, medium and longer term’ (p. 138). However, The Standards as a whole tend to emphasis the short term, as encapsulated in the mandatory bases of value set out therein.

At a more general level, we could argue that the knowledge required for professionalism always forms a part of a normative context. This, however, raises issues about professional ethics both at the micro and at the macro level. For example, do valuers have any obligation towards society at large or only towards their clients? In other words, do professionals have any social responsibilities? If so, how does a professional reconcile any conflict between these and the personal responsibilities to clients?

One of the key issues is the role that valuers perform in getting the message across. In the past, this tended to be at a fairly basic level when it comes to market value determination. However, it is a truism that the most direct route is often not the most efficacious. This is especially true where there is a need to assess the value of assets that have historically displayed non-linear performance. Such assessment often relies on a simple model using ‘bandwagon, network and lemming effects’ to arrive at a value. The contagious impact of these effects as they become ‘market data’ leads to ‘mistakes’ and increases their deficiency as comparable evidence when dealing with complex problems (Weil, 2010, p. 1447). At the moment, in many quarters, it seems that, despite all the sophisticated software and hype about sustainability, most valuers just want to ‘do the deal’ (often at any cost). So, is it just about money? Can all aspects of a property (its costs and benefits) be expressed in monetary terms to arrive at a ‘value’?

Jacobs (1994) sees the neoclassical approach turning the environment into a commodity. He goes on to say that ‘while allocating resources “optimally” in an economist’s terms … is certainly one way of conceiving the “most benefit” to society, it is not the only way … it is concerned only with individual preferences, and it measures only totals for all individuals not distributions between them'. This approach is therefore too simplistic. It gives meaning to things, and it ascribes value to those meanings. But meanings are derived from neoclassical logic, and in a way, this simply classifies ‘environment’ as a concept with clear boundaries and may therefore fail to acknowledge its total, global perspective and impact. In a way, we are seeking ontological meaning, not one-dimensional financial meaning. Money ‘translates the many-sided diversity of things … [as] homogenous’ … [and] … empties out ‘the core of things, their singularity, their specific value, their comparability’ (Lash, 1999, quoting Simmel).

In a way therefore, evaluating things in monetary terms deprives them of their primary significance. The sustainable environment exists for itself, it has existential meaning; to then ascribe a market value to it creates a distance between the subject (the environment) and the object (money). Once this becomes culturally accepted then, symbolically, the sustainable environment can be bought and sold as part of any privity of contract real-estate transaction. However, this privatisation fails to deal adequately with the social consequences of degradation to that environment.

Such meanings have to be translated into terms of transaction. This takes place in markets. In developed economies, these markets are sophisticated and exist within mature institutional frameworks. For example, Harvey (2000) identifies the following as the functions of the real-estate market.

• To allocate existing real property resources and interests. In this way, an equilibrium market price is achieved. In this way, the market reflects preferences.
• To indicate changes in demand for land resources and interests. These occur mainly due to expectations of future yields, taxation, income or tastes, institutional factors.
• To induce supply to adjust to changes in demand. This can change by developing real property, changing existing interests.
• To indicate changes in the conditions upon which land resources can be supplied, for example, improved construction techniques.
• To induce demand to respond to changes in the conditions of supply.
• To ‘reward’ the owners of land resources. This is a by-product of the market. There are two kinds of reward: Return on capital invested and Return for risk.