asset strategics

Green Value:Green Value:The Value of SustainabilityThe Value of Sustainability

Meeting of the Minds

Parksville, BC25 May, 2006

Chris Corps MRICSPresident, Asset Strategics Ltd.

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Key AspectsKey Aspects

Crisis? What crisis?

Green Value: the monetisation of Green

The impact of valuation

Green value examples

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About RICSAbout RICS

World's largest real estate professionOver 120,000 members in 123 countries

Formed in 1886• Traces routes to 1086

Qualifications• FRICS, MRICS, TechRICS, Probationers, Students

Multi-disciplinary16 "Faculties" & 187 "Specialisms"

Includes Environmental & Valuation Faculties

ResourcesOver 400 research papers published annually

http://www.rics.org/

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Desirable Waterfront?Desirable Waterfront?

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Desirable Waterfront?Desirable Waterfront?

Source: Digital Globe

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Global Warming:Global Warming:Sea Level to Rise 23ft.!Sea Level to Rise 23ft.!

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Parliament:Parliament:Please Pass the AqualungPlease Pass the Aqualung

New Mean Tide Level?

Photo courtesy of FreeFoto.com http://www.freefoto.com/

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Financial Acceptance:Financial Acceptance:Carbon Disclosure CompaniesCarbon Disclosure Companies

Valero Energy Veolia EnvironnementVerizon Communications Viacom Vinci Vivendi UniversalVodafone VolkswagenVolvo WachoviaWal Mart de Mexico Wal Mart StoresWalgreen Walt DisneyWashington Mutual Waste ManagementWellpoint Wells FargoWestfield Group Westpac BankingWeyerhaeuser Williams CompaniesWoodside Petroleum WyethXstrata XTO EnergyYahoo Japan Yahoo!Zimmer Holdings Zurich Financial Services

Standard Chartered StaplesStarbucks State StreetStatoil STMicroelectronicsStryker SuezSumitomo Metal Inds. Sumitomo Mitsui FinancialSun Hung Kai Properties Sun Life FinancialSuncor Energy Inc Suntrust BanksSurgutneftegas Svenska HandelsbankenSwire Pacific Swiss ReSwisscom SymantecSysco T&D HoldingsTaiwan Semiconductor Manufacturing Takeda PharmaceuticalTalisman Energy TargetTata Consultancy Service Telecom ItaliaTelefonica Telefonos de MexicoTelenor Group TeliaSoneraTelstra TelusTenaris Tepco (Tokyo Electric Power Company)Tesco Teva PharmaceuticalTexas Instruments ThomsonTime Warner Toronto-Dominion BankToshiba TotalToyota Motor TransCanadaTransocean TXUTyco International UBSUnicredito Italiano Unified Energy SystemUnilever Union PacificUnited Parcel Services United TechnologiesUnitedHealth Group US Bancorp

Public Service Enterprise Group QualcommRAS RaytheonReckitt Benckiser Reed ElsevierRegions Financial Reliance IndustriesRenault Repsol YPFResona RichemontRio Tinto Riyad BankRoche Royal Bank of CanadaRoyal Bank of Scotland Royal Dutch Shell plcRWE SABMillerSaint-Gobain Samba Financial GroupSamsung Electronics San Paolo IMISanofi-Aventis Santander Central HispanoSAP Sara LeeSasol Saudi Basic IndustriesSaudi British Bank Saudi ElectricitySaudi Telecom SBC Communications - see AT&TSberbank of Russia Schering PloughSchlumberger Schneider ElectricScottish & Southern Energy Scottish PowerSears Holdings Seven & I HoldingSharp Shell CanadaShin Etsu Chemical SiemensSimon Property Group Singapore TelecomSK Telecom SLMSociete Generale SoftbankSony Southern CompanySprint St. Jude MedicalSt. Paul Travellers Standard Bank

Mitsui & Co Mitsui Sumitomo InsuranceMizuho Financial Group MMC Norilsk NickelMobile Telesystems MonsantoMoody's Morgan StanleyMotorola Munich ReNational Australia Bank National CityNational Grid plc National Thermal PowerNestle Newmont MiningNews Corporation NikeNintendo Nippon SteelNippon Telegraph & Telephone Nissan MotorNokia Nomura HoldingsNordea Bank Norfolk SouthernNorsk Hydro Nortel NetworksNorthrop Grumman NovartisNovo Nordisk NTT DoCoMoO2 plc Occidental PetroleumOil & Natural Gas OmnicomOMV AG OracleORIX Corp PaychexPepsico Pernod-RicardPetroCanada PetrobrasPetroleos (Cepsa) PeugeotPfizer PG & EPhilips Electronics PNC Financial ServicesPOSCO Power Financial Praxair Proctor & GambleProgressive Prudential FinancialPrudential PTT

InBev InditexInfosys Technologies Ltd INGInpex IntelIBM International PaperJapan Tobacco JFE HoldingsJohnson & Johnson JP Morgan ChaseKansai Electric Power KBC GroupeKDDI KelloggKimberly-Clark KohlsKookmin Bank Korea Electric PowerKPN Kraft FoodsKroger L' OrealLafarge Lehman BrosLG Philips LCD Liberty MediaLloyds TSB LoblawLockheed Martin Loews CorporationLowe's Companies Lucent TechnologiesLukoil LVMHManulife Financial Marathon OilMarsh & McLennan Matsushita Electric IndustrialMaxim Integrated Products MBNAMcDonalds McGraw-HillMcKessonMedco Health Solutions MediasetMediobanca MedtronicMerck Merrill LynchMetlife MetroMicrosoft Millea Holdings3M Mitsubishi CorpMitsubishi Estate - AQ Mitsubishi UFJ Financial Group

Fanuc Federated Dept. StoresFedEx Fifth Third BancorpFirst Data FirstEnergyFirstrand Ford MotorFormosa Petrochemical FortisFortum FPL GroupFrance Telecom Franklin ResourcesFreddie MacFuji Photo Film Gannett Gap Gaz de FranceGazprom GenentechGeneral Dynamics General ElectricGeneral Mills General MotorsGeneraliGenzyme Gilead SciencesGillette GlaxoSmithKlineGolden West Financial Goldman SachsGoogle Great West LifecoGuidant GUSHalliburton Hang Seng BankHartford Financial Services HBOSHCA HeinekenHennes & Mauritz Hewlett-PackardHitachi HolcimHome Depot Hon Hai Precision IndustriesHonda Honeywell InternationalHoya HSBCHusky Energy Hutchinson WhampoaHypoVereinsbank Hyundai MotorsIberdrola Illinois Tool WorksImperial Oil Imperial Tobacco

CNOOC Coca ColaColgate-Palmolive ComcastCommerzbank Commonwealth Bank of AustraliaCompanhia Vale do Rio Doce Computer Associates InternationalConocoPhillips CorningCostco Wholesale Countrywide FinancialCredit Agricole Credit SuisseCRH CVSDaiichi Sankyo DaimlerChryslerDanaher DanoneDanske Bank DBS GroupDeere DellDenso Deutsche BankDeutsche Post Deutsche TelekomDevon Energy DexiaDiageo DirecTVDnB NORDominion Resources Dow ChemicalDuke Energy E.ONEADS East Japan RailwayEbay Edison InternationalEI du Pont de Nemours (DuPont) Electrabel - see SuezElectronic Arts Eli LillyEMC Emerson ElectricEncana EndesaENEL ENIEntergy Corp EOG ResourcesEricsson Etihad Etisalat (Mobily)Etisalat ExelonExxon Mobil Fannie Mae

Barrick Gold BASFBaxter International BayerBB&T BBVABCE BellsouthBerkshire Hathaway Best BuyBG Group Bharti Tele-VenturesBHP Billiton BMWBNP Paribas Boc Hong KongBoeing Boston ScientificBouygues BPBradesco BridgestoneBristol Myers Squibb British American TobaccoBritish Sky Broadcasting BT GroupBurlington Northern Santa Fe Burlington ResourcesCadbury Schweppes CIBCCanadian National Railways Canadian Natural ResourcesCanon Capital One FinancialCardinal Health Caremark RXCarnival CarrefourCaterpillar Cathay Financial Holding Cemex CendantCentral Japan Railway CentricaCEZ Charles SchwabCheung Kong ChevronTexacoChina Mobile (Hong Kong) Christian Dior - see LVMHChubb Chubu Electric PowerChungwa Telecom CIGNACisco Systems CitigroupClear Channel Communications CLP Holdings

ABBAbbott Laboratories Abertis InfraestructurasABN Amro Holding AccentureAdobe Systems AegonAeon AetnaAflac AGFAgilent TechnologiesAir Liquide Al Rahji Banking & InvestmentAlcatel AlcoaAlcon AllianzAllied Irish Banks AllstateAlltel AltriaAmazon.com AmbevAmerica Movil American Electric PowerAmerican Express American International GroupAmgen AmtelAnadarko Petroleum Anglo AmericanAnheuser-Busch AP Moller MaerskApache Apple ComputersApplied Materials ArcelorArcher Daniels Midland Astellas PharmaAstraZeneca AT&TANZ Banking Group Limited Automatic Data Processing Autostrade AvivaAXA Group BAE SystemsBaker Hughes Banca IntesaBanco Brazil On Banco ItauBanco Popular Espanol Bank Austria CreditanstaltBank of America Bank of IrelandBank of Montreal Bank of New York Bank of Nova Scotia (Scotiabank) Barclays

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Why Value is ImportantWhy Value is Important

Money makes the world go round…Shareholders/investors require financial audit

No money, no project

Value includes "public good"Parks, views & open space, walkways, amenities add value

If environmental imperatives are demanded it will happen

Value is becoming Triple Bottom Line drivenThe most important bottom line is…?

Impact of financial standards

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Who Cares About Value?Who Cares About Value?

Source: Sustainability and the built environment - an agenda for action, RICS Foundation, October 2004

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Green Value StudyGreen Value Study

Canadian Bankers' Association interestSpurred study

Myth & inaccurate claimsCost savings wrongly described as "value"

Business case for sustainability unclear

The "value gap"Does Green sector understand financials?

Does financial sector understand Green?

OpportunityValue could substantially exceed cost savings

The Restoration Economy beckons…

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Green Value Null HypothesisGreen Value Null Hypothesis

Null Hypothesis:

"There is no relationship between the market value of a real estate asset and its green features and related performance."

Purpose:Analytical neutrality

Lack of data

Simplify assessment

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Green Value SummaryGreen Value Summary

Sponsors:RICS

BC Hydro

Canada Green Building Council

English Partnerships (UK)

Greater Vancouver Regional District

Green Buildings BC

Natural Resources Canada

RealPac

Others:Canada Mortgage & Housing Corp., City of Vancouver

Team: Cushman Wakefield LePage, Busby Perkins+Will, BuildGreen, DTZ (UK)

Best practices & literature review

18 project reviews in:San Francisco, California

Minneapolis, Minnesota

Oberlin, Ohio

New York City, New York

New Westminster, Vancouver, Victoria, BC

Kitchener, Ottawa & Toronto, Ontario

Montreal, Quebec

6 UK projects

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Green Value ProjectsGreen Value Projects

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Value: Not Always UnderstoodValue: Not Always Understood

Example 1: USGBC

"Using the income-capitalization method: asset value = net operating income (NOI) divided by the capitalization rate (return). If the cap rate is 7%,divide the reduction in annual operating costs by 7% to calculate the increase in the building's asset value"

But: This is almost never trueNobody pays the benefit in perpetuity!

Requires gross lease

Gross leases can increase energy consumption

Net leases separate capital investment from the benefit

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Value: Not Always UnderstoodValue: Not Always Understood

Example 2: Institute for Market Transformation

"According to the National Research Council, 60 to 85 percent of a building’s real costs are related to operations; the initial construction cost is 10 percent or less.

As the largest single operating expense in typical commercial buildings, energy costs are typically an important factor in building value."

Is your energy bill really larger than rent or mortgage?

Example shows less than one year's energy savings paid by the buyer

Contradicts USGBC

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It's Not About the Cost:It's Not About the Cost:What's in Operating CostsWhat's in Operating Costs

%Electricity 19.5%Oil 0.3%Gas 5.9%Water 2.8%Sewage 1.0%External building 4.2%Interior systems 27.3%Roads & grounds 4.1%Utility & central systems 6.2%Treatment & environmental systems 3.3%Janitorial 25.5%

External building

Roads & grounds

Utility & central systems

Janitorial

Treatment & environmental systems

Sewage

Water

Gas

Oil

Electricity

Interior systems

Data courtesy of:

International FacilitiesManagement Institute

Energy: 30%Energy: 30%

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It's Not About the Cost:It's Not About the Cost:How Big are Operating CostsHow Big are Operating Costs

$0.0

0

$5.0

0

$10.

00

$15.

00

$20.

00

$25.

00

$30.

00

DOWNTOWN VANCOUVER

BROADWAY C

ORRIDOR

BURNABY

RICHMOND

NORTH SHORE

SURREY

NEW WEST Average net Rent

Average Operating Costs

Data courtesy of:

Average net Rent61%

Average Operating Costs39%

…of which 30% is energy……of which 30% is energyof which 30% is energy

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It's Not About the Cost:It's Not About the Cost:The Total Costs of BusinessThe Total Costs of Business

CONTEXTEnergy = 30% of operating costsOperating costs = 39% of real estate costsReal estate costs = 10-15% of business costs20% energy savings = 0.2-0.6% of business costsFigures are typical, & vary depending on location and other factors

Energy is a small percentage of the costs of operating a typical business

Data courtesy of:

Energy is a small percentage of the costs of operating a typical business

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It's Not About the Cost:It's Not About the Cost:The Relative Value of BuildingsThe Relative Value of Buildings

Source: Executive Briefing on the Prime Office Market in Australia, AXISS Australia

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Examples of Green Value IExamples of Green Value I

Pennsylvania Power and Light conversion's power savings:

Traditional energy saving: 4.1 yrs payback, 24% ROI

Green Value: 69 days payback, 540% ROI

Difference: productivity benefits

Reno Post Office upgrade:Improved productivity gains paid for the $500,000 renovation in under a year

Annual energy savings a 'free bonus'

Mountain Equipment CoMountain Equipment Co--op, Montrealop, Montreal

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Examples of Green Value IIExamples of Green Value II

Hyde Tools' new lighting improves quality control$1 savings = $10 in improved sales

Retrofit worth $250,000 extra sales annually

Value "far exceeding fuel savings"

VITP LEED® Gold benefitsAnalysis shows 30% productivity increase

Project leased but the competition didn't

City of Victoria PoliceStaff suddenly falling ill

VOCs from adjacent development close offices• What's the cost…?• Just staff cost…?• …or crime?

The The SolaireSolaire, New York, New York

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The Green Business CaseThe Green Business Case

"A study by Sheffield University for NHS Estates compared patient outcomes in a newly refurbished orthopaedic unit at Poole hospital with those in a 1960s conventional ward.

The study found that patients treated on the refurbished ward required less analgesic medication than those on the older ward. Patients not undergoing operations were discharged significantly more quickly from the newer ward – after 6.4 days compared with 8.1 days."

The Value of Good Design The Value of Good Design –– CABE 2002CABE 2002

BC Math8.1 days 6.4 days= 21% cost equivalent reduction BC Healthcare = $11bn/year$11bn x 21%= $2.31bn savings/year!…potentially.

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Green Value Overall ConclusionsGreen Value Overall Conclusions

There is a relationship between the market value of a real estate asset, its green features and related performance.

Contradiction, myth & fact proliferateValue assertions from unqualified sources are unhelpful, foster distrust

Financial conclusionsGreen buildings enhance value

The real estate sector is barely engaged but pivotal to success

Green buildings should:Involve the financial and real estate sectors

Focus on the green business case

Focus on informing usersCranberry Commons, BCCranberry Commons, BC

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Green Value Conclusions:Green Value Conclusions:The Main Value BenefitsThe Main Value Benefits

1. Lower operation/maintenance costs

2. Energy & resource savings

3. Grants, subsidies, inducements etc.

4. Attract tenants faster (i.e. absorption)

5. Higher rents, investment/sale value

6. Lower turnover/vacancy

7. Reduced fitting-out costs (i.e. TI's)

8. Lower internal move costs (i.e. churn)

9. Increased productivity

10. Faster, better public process

11. Improved risk, marketability

Vancouver Island Technology Park, BCVancouver Island Technology Park, BC

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Green Value BarriersGreen Value Barriers

"Costs more to build green"

Occupant awareness & education

Knowledge, research and resources not widespread

What Green means is not widely understood

Steep learning curve

Construction companies lack experience

Perception of risk amongst developers, lenders

Not seen as a business benefit & paradigm shift

Shortage of professionals with suitable experience

Incentives questionable

Savings/benefits unlinked from the investor/landlord

Leases don’t take account of green issues

Insufficient understanding of value & appraisal

Outdated regulations

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Green Value Recommendations:Green Value Recommendations:Impact on ValueImpact on Value

21 recommendations including…Strengthen the Third Bottom Line: Economics. It is more than just cost savings

Review how financial aspects can be enhanced, evaluated & communicated

Collect better evidence, make it widely available and target communicating the advantages in financial terms to the public and businesses

Involve lenders, appraisers, realtors & developers more cohesively. Use value in Integrated Design prior to audit

Improve and integrate green rating systems/standards, with improved accounting and valuation standards

Reconsider priorities for communicating Green Value

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The Future of (Green) Valuation?The Future of (Green) Valuation?

Source: "Green Book, Appraisal and Evaluation in Central GovernmSource: "Green Book, Appraisal and Evaluation in Central Government" HMSOent" HMSO

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Valuation MethodologiesValuation Methodologies

Main approaches:Direct Comparison Approach: Difficult or impossible to properly adjust

Income Approach: Most suitable but difficult to use

Cost Approach: Potentially harmful to correct life cycle valuation

Alternate Approaches: Triple Bottom Line, Full Cost Accounting, etc.

Standards:IVS, USPAP, CUSPAP, Red Book etc.

• Not being used properly

Accounting standards problems• "Special Purpose Asset" problematic• Cost approaches problematic• 2010: IFRS change to market value

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Are Standards Sufficient?Are Standards Sufficient?

Current StandardsLittle direct reference to Green

Existing valuation modelsDominantly financialAccounts/valuations adapting?

Sustainable value modelsTriple Bottom LineMultiple Account EvaluationBalanced ScorecardFull Cost AccountingHybrid models

• Development residuals• Investment valuations

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Application Example:Application Example:Riverview Tertiary Mental HealthRiverview Tertiary Mental Health

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Application Example:Application Example:The Riverview Business CaseThe Riverview Business Case

New mental health facility, conceived 1999

Less costly to buildHospital $350,000/bed; Connolly Lodge $100,000/bed

Construction savings: $5m for 20 beds

Less costly to operateHospital $375/diem; Connelly Lodge $142/diem

Operational Savings: $1.7m/year for 20 beds

Overall benefitUnexpectedly, residents return to the community

Projected viable in under 2 years from business savings• Effectively, 14 month payback

Green principles but not LEED™

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Application Example: Application Example: Victoria's Dockside LEEDVictoria's Dockside LEED®® PlatinumPlatinum

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Application Example: Application Example: Thetis Cove, View Royal, BCThetis Cove, View Royal, BC

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Application Example: Application Example: Thetis Cove, View Royal, BCThetis Cove, View Royal, BC

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Application Example: Application Example: Agricultural Agricultural -- BlenkinsopBlenkinsop ValleyValley

StatusFarm ditch

Requires regular dredging

Divides field into three

Little ecological function

Farm increasingly marginal

ProjectFederal and local government funded project

Aim at ecological restoration

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Application Example: Application Example: Agricultural Agricultural -- BlenkinsopBlenkinsop ValleyValley

Benefits1 field

1 irrigation system

1 road/ no bridges

Moat/ hedgerow

7% more arable land

Sinuosity restored

Floodplain restored- less downstream flooding

Enhanced biodiversity

Improved water quality

Reduced pesticide use

3.5 km riparian restoration

East-west trail connector

Before

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Application Example: Application Example: Agricultural Agricultural -- BlenkinsopBlenkinsop ValleyValley

Green Value calculationCost $375,000, 15 acres

Pesticide benefitsSavings $1,650/yr./acre

$24,750/yr. @ say 5% yield…

PV $495,000

Other (unquantified) benefitsPotable water consumption eliminated

Fertilizer drop significant

Vandalism eliminated

Field management efficiency

Etc. etc. After

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Application Example: Application Example: Barnston Island, Surrey, BCBarnston Island, Surrey, BC

Barnston IslandBarnston Island

VancouverVancouver

Issue:Agricultural retention vs.Green industrial.

Issue:Agricultural retention vs.Green industrial.

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Application Example: Application Example: Barnston Island, Surrey, BCBarnston Island, Surrey, BC

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Application Example: Application Example: Barnston Island, Surrey, BCBarnston Island, Surrey, BC

Triple Bottom Line using Balanced Scorecard

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A A RumsfeldRumsfeld MomentMoment…………we know what we know, we don't know what we don't knowwe know what we know, we don't know what we don't know……

What is the impact of water on business?

Has the imperative been made plain and in terms of value?

Are you speaking the language of real estate and finance?

What about the trader-developer?

Has planning been realigned?

What about Council?

What about global warming?

Does what you want to achieve affect value?

Don't know? Better find out.

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Hugging Garry Oaks:Hugging Garry Oaks:Society Values it : it Has ValueSociety Values it : it Has Value

Garry Oak = protected = attractive= increased property value

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Green ValueGreen Value

Resources available onlineSummary Findings

Report

Detailed Case Studies

Presentations

www.rics.org/greenvalue

The mark of property professionalism worldwide

© Asset Strategics, 2006, All Rights Reserved

Chris CorpsChris Corps MRICSMRICS

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