Insights & Research

Placing valuation at the centre of sustainability conversation in commercial property

By Brian Lavery, Managing Director, CBRE NI

By now, very few people in senior positions at the Top 100 companies will be unaware of the importance of sustainability to their business model.

Media commentary has, quite rightly, been awash with warnings of the need for organisations to ensure they are meeting their Environmental, Social and Governance (ESG) requirements, and playing their part in Northern Ireland’s drive to become a more sustainable economy.

With regards to the commercial property market, you do not need to look too far to find warnings of sustainability targets that must be met by buildings in order to comply with regulations, whether current or incoming.

Indeed, at our own Outlook event in January, we provided what some considered to be a stark warning that three-quarters of Belfast’s current office stock may become obsolete by 2030 due to upcoming Energy Performance Certificate (EPC) legislation.

Some business leaders might instinctively bury their head in the sand, perhaps not yet having a full grasp of their exact office requirements, or landlords may be taking the ‘kick the can down the road’ approach, feeling they can deal with the issue at a later date. The thinking being ‘we have tenants in our buildings so why should we worry’.

CBRE NI strongly believes that way of thinking must change.

It is crucial that businesses now think of value when they think of sustainability, particularly with regards to commercial properties. Put mildly, if a building is not where it needs to be from a sustainability perspective, its value is going to suffer – perhaps more than a lot of key stakeholders realise.

In many ways, it is a surprise that it has taken so long for EPC legislation and a building’s valuation to be part of the same conversation. However, the intrinsic link between a building’s environmental credentials and the impact these can have on its value must now be at the forefront of the minds of all stakeholders, from lenders and developers to landlords and tenants.

Valuation is the intersection at which sustainability meets the market, it can no longer be separated from it. Indeed, sustainability is really the protection of future value, which is why there needs to be close collaboration and alignment between the two.

And you don’t have to rely on the word of commercial property agents on the subject. We are having these conversations with clients on a regular basis and many of the leading global corporates with a significant presence in the region have made their feelings on the issue known.

They now know that having offices that perform strongly against ESG requirements is a major factor in being able to attract the best talent, and it has been well documented how much of a challenge recruitment has become across a wide range of sectors.

Many key investors have been vocal on the issue, also, declaring very openly that they will not remain in office buildings that do not align with its sustainable objectives and the drive to net zero.

Lenders are, of course, integral to the valuation process and they are now using assessments of how far along the sustainable journey a building is to guide their decision-making when it comes to where capital expenditure needs to be directed.

We hosted a series of seminars for representatives from all the major banks recently and the conversation focused on how assets that are not aligned with market expectations will depreciate faster.

Taking the discussion a few steps further, how can valuers best position sustainability in terms of valuation? And, perhaps more importantly, how do owners and occupiers of buildings get a plan in place that ensures a property attains what it needs to from a sustainability perspective?

Valuers may have been trying to create an extra category when carrying out valuations, while in fact sustainability is prevalent throughout almost all categories. Valuers must interpret this accordingly if they are going to position sustainability most effectively in the valuation process.

In terms of what owners and occupiers can do to safeguard against EPC factors negatively impacting the value of buildings, the first step is to get a full sustainability assessment report carried out. That is crucial, as it will allow for the development of a plan that will detail how a building is going to address its sustainability shortcomings. This can be prepared for all properties, whatever their use or type.

We are working with clients to formulate such plans that include a full timeline of recommendations of what work that should be done to the property and how much it will cost. Every commercial asset is different so the plan needs to be tailored to each property’s specific needs.

Having a plan will go a long way to removing the uncertainty that currently exists, and uncertainty leads to risk. Lenders and borrowers alike do not like question marks over how much capital expenditure is required to guard against an asset’s value depreciating.

If owners and developers at least have a plan of action that they can present to the bank, it brings more certainty and instils more confidence in a building’s future value.

The Top 100 companies are, very deservedly, being recognised for their success today. Being aware of the impact sustainability can have on their properties value, whether that is their offices, factories, warehouses or operational buildings, can help contribute to their continued success.

Originally printed in Top 100 supplement in Belfast Telegraph, Tuesday 11th June 2024.