In our experience, we have been involved in a number of ‘retail’ schemes that did benefit from specific development opportunities and the valuation approach needed to be a little more fluid than the traditional approach to a shopping centre, with a more hybrid approach involving a traditional investment valuation with a cross-check approach that considered the underlying development opportunities displayed by the scheme.
SUSTAINABILITY AND ESG
Valuers are also monitoring the expectations of market participants with regard to ESG and sustainability resilience. We are seeing widespread adaptation of Green Lending Principles and Sustainability-Linked Lending Principles across the debt markets, and in order to finance retail property investment and development, the ESG credentials of buildings will need to be demonstrated and monitored1. There have been a number of green finance products released, and also prominent credit facilities created between the larger clearing banks that are ESG-linked. Going forward, we expect to see adoption of Green Lending Principles and SustainabilityLinked Lending Principles becoming the norm in all finance products, rather than loans and finance being specifically badged as
“Green”. We’re actively engaged with several banks in discussing how valuation and lending will align with ESG going forwards.
Retail property is inherently linked with the community, and therefore there is a great opportunity here for owners of retail property to not only improve the environmental elements of the building, but also to demonstrate under the social expectations the importance of their property with regard to community support and engagement.
As valuers, the RICS is now directing us to focus more on the impact of sustainability and ESG within our valuation advice, and therefore valuers will be looking for these characteristics and assessing whether there is an impact on value, based on market evidence. It is not so much about trying to prove green premiums and brown discounts, but considering the performance of a building against the expectations of market participants. The introduction of widely adopted benchmarks and ratings will be crucial to valuers. In the UK we are currently gauging energy efficiency through Energy Performance Certificates, a regulatory requirement
that has subsequently seen adoption across all property markets. However, this does not enable us to assess operational energy performance, just the rating of the building on the day of the assessment. Keeping aligned with different approaches to certification is a clear challenge for the wider industry to insure the benchmarking and ratings are relevant.
One of the key challenges we are increasingly being asked to advise upon is with the potential capital expenditure required to reduce the risk of obsolescence as we move towards the 2030 deadline. The costs of meeting environmental regulations and certifications can vary significantly and requires assessment of what is practical, viable and how much additional funding is needed. This adds an entirely new dimension to the valuation process. With 83% of retail property requiring some level of improvement ahead of the 2030 deadline, this is likely to set the tone for the rest of the decade.
Clearly the market is focused on the benchmarks detailed above, but it is worth noting that sustainability management is a much broader topic; there are many other areas that can be referenced. In particular, climate risk is a good example, and we believe this to be another ESG issue facing valuations – for example, climate change modelling tells us that a property will be under the sea in 50 years, but as we can only do valuations on the current market, this is not currently factored into valuations.
A NEW APPROACH TO VALUING RETAIL?
Rather than using an investment approach, there have been calls for retail property to be valued on a more operational basis. For example, trade related property (e.g. hotels) is valued on a profit basis: the valuer will not only consider the property but also the business linked to that property through examination of current and historic accounts data. Shouldn’t we approach some retail in the same way, on the assumption the business and the property are interlinked? In some sectors, such as outlet store retail parks, there has been a use of turnover rents, where the rent is tied to the turnover of the business. However, there are complications with adopting turnover rents, one of largest being the analysis of online retail sales to provide a true picture of profitability and a reluctance from occupiers to provide full transparency.
There isn’t a protocol for Green Valuation per se, but more an alignment with the principals of ESG that are likely to govern the valuation process going forwards.
Valuers are all bound by our commitment to Continual Professional Development as chartered surveyors, but there will definitely have to be investment in “upskilling” valuers in relation to all of these issues. We’re meeting these goals through increased collaboration between our own inhouse sustainability consultants Savills Earth and building surveyors, who meet these challenges every day, to allow us to provide insight on the unrecoverable expenditure required to meet changing ESG requirements. If, as expected, government regulation is tightened and the Minimum Energy Efficiency Standards are revised, we need to ensure that our valuation process is sufficiently fluid to adapt to these changes.
