Considerations for Integrating Sustainable Attributes

into Property Valuation

Khaira Amalia Fachrudin

, Elisabet Siahaan

and Hilma Tamiami Fachrudin

Faculty of Economic and Business, Universitas Sumatera Utara, Jl. TM Hanafiah Kampus USU Medan 20155,

Indonesia

Faculty of Engineering, Universitas Sumatera Utara, Jl. Almamater Kampus USU Medan 20155, Indonesia

Keywords: Sustainable Property, Property Valuation, Sustainability Attributes

Abstract: Sustainable property is a property that takes into account the environmental sustainability. In Indonesia,

there has not been a lot of sustainable properties; however, its awareness keeps growing. The value of

sustainable property may differ from conventional property because of their different attributes. This study

aims to integrate sustainable attributes into property valuation. This is useful for development of appraisal

profession in Indonesia. Depth interviews were conducted on Green Building Council Indonesia, sustainable

building managers, and appraisals. The results of this integration can be used by the appraiser or valuer to

recognize the impact of each attribute on the property value and valuation approach to be undertaken.

1 INTRODUCTION

Sustainable development is development that can

meet needs of present generations without harming

the needs of future generations. Sustainable property

or sustainable building is constructed with a higher

urban planning, functional, creative, and technical

quality. Sustainable property is a property that is

built by paying attention to the productive harmony

between humans and nature and fulfilling economic,

social and other requirements from the present

generation to the future generation. Nalewaik and

Venters (2008) suggest that sustainable property is

usually realized in green buildings with eco-friendly

design.

The green property or green building aspects

used for the Greenship Valuation of Green building

Council Indonesia (GBCI) are appropriate site

development, energy efficient and conservation,

water conservation, material and cycle resources,

indoor and health comfort, and building environment

management. Since this property emphasizes the

appropriate site development aspect which is in line

with the concept of highest and best use, it should

have higher value.

Investment is the placement of funds at this

time hoping to generate profits in the future

(Fachrudin and Fachrudin, 2016a). Investment in

sustainable can increase the value of property and

provide financial benefits (Fachrudin and Fachrudin,

2017a). Owner of green building will have their

savings from the lifecycle building and the cost of its

maintenance (Fachrudin and Fachrudin, 2016b). In

a financial standpoint, the economic dimension is

very important; thus, the focus is on long-term

economic success of long-term property

performance (Frank, 2010).

The appraisers need to be aware that

buildings built in accordance with buildings that

meet certain green building standards may be more

valuable than buildings without green standards

(Guidry, 2004). If market participants favor

sustainable property, this should be reflected in

market value (Lorenz and Lützkendorf, 2008).

Market valuation needs to estimate market

data. The appraisers must pay attention to the

sustainable property features if they affect the

competitive position of the asset. The appraiser

have a role to reflect this benefit so that the

valuation report does not indicate a misleading price

(Lorenz and Lützkendorf, 2006).

Warren and Myers (2012) states that there

needs to be a consistent development of ranking

tools to help appraisers be able to evaluate buildings

in the same basic way. The appraisers do not

contribute to speculating on value but to speculating

about what is possible or impossible for certain

assets in the future. The appraisers need to be aware

Fachrudin, K., Siahaan, E. and Fachrudin, H.

Considerations for Integrating Sustainable Attributes into Property Valuation.

DOI: 10.5220/0010078714091412

In Proceedings of the International Conference of Science, Technology, Engineering, Environmental and Ramiﬁcation Researches (ICOSTEERR 2018) - Research in Industry 4.0, pages

1409-1412

ISBN: 978-989-758-449-7

1409

of various change factors while conducting their

valuation and consider all the risk factors associated

with the asset, including building sustainability in

order to evaluate risk factors.

Warren and Myers (2012) also states that the

consideration for a sustainable property valuation is

that the discount rates will be adjusted to sustainable

building risk reduction, lower vacancy rates, lower

depreciation rates, and lower terminal yield.

However, to increase their rental rates, they say

there is no hope.

There are three approaches in property

valuation: market approach, cost approach, and

income approach. Market approach is an approach

that uses sales data of property that are comparable

or almost comparable to the object of valuation,

based on a comparison process. Cost approach

determines the value of the property by assesing the

cost of the land and the cost of replacing the new

development (something built) on it with

comparable utility or adapting the old property with

the same usage without considering the costs due to

development delays and overtime costs. For old

property, cost approach takes into consideration

physical depreciation, functional obsolescence, and

other external obsolescence. Income approach

considers the revenues and costs associated with the

valued property and estimate the value through the

capitalization process.

In Indonesia, there are currently 20 buildings

certified by Green Building Council Indonesia

(GBCI). However, property valuers in Indonesia

have never received a task to appraise that buildings.

Other properties that apply some green concept but

not yet certified by GBCI also exist in Indonesia.

There was a case that one of the properties is valued

too low by the valuer. This case was not urgent,

however, integrating sustainability attributes into

property valuation practice and theory are very

important since in the future, green property will

increase in number as people’s awareness of

environmental sustainability and economic value of

green property. This is a challenge for valuation

professionals to make this profession is always

prosperous.

Fachrudin and Fachrudin (2017b) said that

sustainable building is more flexible and adaptable

so that it can reduce the risk of obsolescence.

Operational costs of water and electricity will be

efficient so as to reduce business interruption risks.

This building is also preferred by the market so that

the rental price may be high. Lorenz and

Lützkendorf, 2011) said that in the cost approach, it

is necessary to pay attention on the technical and

functional quality of the building being investigated

to describe and evaluate its sustainability

performance.

Many things must be considered in integrating

sustainability attributes into valuation.

The objectives of this study is to integrate the

sustainable attributes into property valuation and

considerations that must be taken in each valuation

approach as well as to to know how the

implementation guide is needed for the valuer

profession in Indonesia. It is important so that in due

time the valuer is ready to properly conduct a

sustainable valuation of the property.

2 METHOD

This study uses a descriptive qualitative research

method. Sampling technique is purposive sampling.

The sample used is those who understand or

implement sustainable property. Depth interview

with GBCI are conducted to get an understanding

about green building attributes. Depth interviews

and visits to three companies that implement

sustainability property are conducted to see the

attributes applied and how they manage cash flow

and operating costs. Furthermore, the depth

interview are conducted with 10 Indonesian

appraisers who have already understood the concept

of sustainable property.

3 RESULTS AND DISCUSSIONS

Sustainability attributes are obtained from GBCI.

This is the basis for determining the score for

building certification. Depth interviews and visits to

three companies as well as interviews with

appraisals formulate impact sustainable property on

property value in each valuation approach. The

integration of sustainability attributes and their

impact to the property value and valuation approach

is summarized in the following table:

Table 1: Integration of sustainability attributes and their

impact to the property value and valuation approach

Sustainability

Attributes

Impact on Property

Value

Valuation

Approach

Appropriate site

development,

consists of basic

green area, good

location,

availability of

community

accessibility,

availability of

Properties on

location and

facilities that are

good and in

accordance with the

principle of highest

and best use will

have a high value.

Market

approach

Income

approach

ICOSTEERR 2018 - International Conference of Science, Technology, Engineering, Environmental and Ramiﬁcation Researches

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Sustainability

Attributes

Impact on Property

Value

Valuation

Approach

public

transportation,

bicycle paths,

landscaping,

favorable

climate, and

rainwater

management

Income producing

properties will be

favored by tenant.

The risk of this

property is also

low; thus, it affects

the discount rate.

This may result in

higher net

operating income,

reduced vacancy,

and more stable

cash flow.

Energy efficiency

and conservation,

consists of

electricity

meters,

measurement of

energy

efficiency, the

presence of

natural lighting,

ventilation, and

the presence of

renewable energy

This energy

efficiency will

produce lower

operating cost and

the result is higher

net operating

income.

Income

approach

Water

conservation,

consists of water

meters, water

calculations,

water recycling

systems

availability of

alternative water

sources, and

rainwater

harvesting

Water efficiency

will produce lower

operating cost and

the result is higher

net operating

income.

Income

approach

Material resource

and cycle,

consists of

fundamental

refrigerant,

building and

material reuse,

environmentally

processed

product, certified

wood, prefab

material, and

regional material.

The use of

environmentally

friendly materials is

healthier and can be

appreciated by

tenants; thus, it is

increasing

revenues.

The use of reuse

and regional

materials can save

transportation

costs; thus, the cost

is lower.

Cost

approach

Income

approach

Sustainability

Attributes

Impact on Property

Value

Valuation

Approach

Indor health and

comfort, consists

of outdoor air

introduction,

CO2 monitoring,

environmental

tobacco smoke

control, chemical

pollutants, visual

comfort, outside

view, thermal

comfort, and

acoustic level

A comfortable and

healthy atmosphere

is highly favored by

tenant; thus, it can

increase the rental

value and age of

the building can be

longer. These two

things ultimately

increase the value

of the property.

Income

approach

Building

environmental

management,

consists of basic

and advanced

waste

management,

pollution

management,

proper

commissioning,

submission of

green building

data, fit up

agreements, and

occupant

satisfaction

surveys.

A good building

environment

management will

produce a good

environment; thus,

the tenants favor

and extend the life

of the building and

it increases the

rental value.

Income

approach

The result of the depth interview with the

valuers indicates that sustainable property offers

sustainable attributes only as a facility and most

have not dared to give a rental price or a higher

selling price than conventional property. The results

of the depth interview suggest inputs for each

valuation approach described below.

Market approach can be conducted, but the

comparison data is very limited, and it is difficult to

find comparative data which is really identic with

the property being valued. If there seems to be

identical, it is necessary to have a discussion with

the owner of the comparison data.

Cost approach can be conducted if the

sustainable property is considered at the stage of

under construction. Valuers need to know the type of

materials used and its cost.

In cost approach, it needs to do a cost benefit

analysis. To meet the green specification, it is

necessary to add additional costs and benefits to be

obtained. This analysis includes incentive

considerations that reduce initial costs, as well as

Considerations for Integrating Sustainable Attributes into Property Valuation

1411

depreciation estimation whether there is a difference

of depreciation using green components with the

conversation component. In addition, it needs to note

the functional and economical declines which may

be affected by this green feature as well as building

endurance.

Income approach may be conducted but the

appraisers need to develop reasonable and

acceptable assumptions for the market in preparing

its cash flow projection. The appraisers must

conduct an interview with the client to know the

operational cost.

The appraisers also need to specify the

valuation aspects that can be done, namely the

inspection stage as one of the stages in the valuation

process, appraisers must understand the physical

concepts of sustainable property building such as the

materials used, the building technical design, the

concept of spatial function arrangement, etc. At the

data collection stage, data processing, and the

preparation of working papers, appraisers must be

able to calculate the additional value due to the

application of the sustainable property in the market.

The concept of sustainable property valuation is

still relatively new and will experience many

developments. Therefore, what needs to be made

later is the deployment guide in applying valuation

as a reference rather than as technical standards and

the Indonesia Valuation Standards. This guide is

expected to include the sources that can be referred

to.

4 CONCLUSIONS AND

SUGGESTION

Sustainable property can increase revenue as well as

cost and risk so that in the income approach it will

increase the value of the property. Market approach

can be conducted, but the limitation is the difficulty

of finding similar comparable data. In cost

approach, the valuer must understand the type and

price of the materials used.

Appraisers need to update their knowledge on

sustainable property. Gradually, the appraisal

association should conduct research and make the

deployment guide in applying sustainable property

valuation.

The challenge is application and further

development of methods to gather, process, and

present information related to property. Appraisers

also need to ensure clients to understands the risks

and opportunities related to the sustainability of the

subject property.

ACKNOWLEDGEMENTS

The authors gratefully acknowledge that the present

research is supported by Universitas Sumatera Utara

in accordance with the contract of TALENTA

Universitas Sumatera Utara Fiscal Year 2018 No.

2590 / UN5.R / PPM / 2017 dated March 16, 2018.

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