Valuing sustainability

A hint of green

13 January 2012

In the context of a new RICS information paper, Paul Cutbill considers how sustainability will affect residential property values and when Red Book valuations should become tinged with green

After several significant hikes in the cost of energy last year, and with the long-term prospect of bills continuing to rise, home owners and tenants have good reason to consider the costs of heating and running a home, even at the buying stage. According to the consumer website Moneysupermarket, gas bills have risen by an average of 82% since 2005 – a stark warning of what the future might hold.

Of course, energy efficiency information is readily available by way of EPCs, but the truth is that energy ratings are often ignored by those for whom such energy-related information is intended: buyers and tenants at the point of new occupation.

RICS valuers have also been able to disregard the implications of energy ratings when assessing value, as there has been little, if any, clear evidence that mainstream buyers were willing to pay more for an energy-efficient property than for a less efficient one. Given the growing awareness of rising energy costs, is this about to change?

Certainly, the UK government remains committed to driving up the energy efficiency of the country’s housing stock as a means of reaching its well-publicised carbon-reduction targets. Green Deal legislation due to be enacted in October this year will provide the means of delivering greater energy efficiency to homes, but it is the public as home owners or tenants who must be encouraged to get involved if such legislation is to prove effective.

It is not easy to forget earlier attempts by government to influence the property market, but this time, RICS, the major lenders and other stakeholders have been in consultation with DECC and CLG for more than a year as part of the development process. Under the auspices of the Cabinet Office and DECC, four large-scale field trials are being run by local authorities and businesses to test the uptake of energy-efficient products. The trials and their objectives are documented in a recent report entitled Behaviour Change and Energy Use, which sets the scene for Green Deal legislation to follow.

RICS has a clear duty to alert consumers to the potential for energy efficiency to influence value in future

Having contributed to the development of energy-efficient initiatives, RICS has a clear duty to alert consumers to the potential for energy efficiency to influence value in future, so that dwellings with high efficiency ratings command a premium over those with low ratings.

To some degree, the scene was set for RICS-registered valuers by the RICS Valuation Standards, Global and UK, 7th edition, in which the residential mortgage specification effective from May specifically states that ‘the energy efficiency rating provided by the EPC is to be considered when providing valuation advice to a lender’. This is a significant change from the 2010 Red Book, which required the valuer to disregard the EPC.

However, RICS valuers do not drive the market, but must reflect transactional evidence and tone. Therefore, as buyers begin to attach a value to green technologies, such as solar PV panels and high insulation, evidence will become available and a differential will develop between high-rated and low-rated properties.

The information paper

To further inform and assist valuers, RICS published the Sustainability and residential property valuation information paper last year, with the following main features:

  • an outline of the UK legislative and regulatory provisions that impact, or are likely to impact, on residential value
  • information on how environmental factors (including energy, waste, water and flooding) and social factors (such as accessibility) might influence the value of residential property
  • a look ahead at how awareness of sustainability factors might work through the marketplace into purchaser/tenant perceptions
  • suggestions as to the investigations and considerations that might be relevant when preparing a valuation.

We are unlikely to see the valuation of domestic dwellings changing rapidly or dramatically to reflect standards of energy efficiency, and comparable evidence and well-reasoned justifications will remain the keystones of sound valuation methodology. However, the trend is clear, and RICS valuers need to be prepared for a time when – inevitably – sustainability factors will work their way into the decision-making process of prospective buyers and tenants.

Paul Cutbill is Chairman of the RICS Residential Survey and Valuation Group and is responsible for compliance and professional development at Countrywide Surveying Services, part of Countrywide plc

Further information

Related competencies include: M009, T083