Clouded Value of Indian Green Buildings By JLL India

The ever rising cost of natural resources along with the growing concern for the environment is gradually strengthening the need for developing green buildings.

Additional Capital Cost..!

However, the concern over additional capital cost &  uncertainty over returns are daunting investment sentiments in green buildings. In empirical terms, it has been observed that green buildings turn out to be profitable ventures due to savings in energy  and other operational costs, trading and earning of carbon credits and other benefits.

However, the challenge is to translate intangible benefits to cash flow that can be used to assess the value of buildings or project viability. For example, better working conditions can not be translated directly into money & so there is always the risk that green aspects or sustainability measures will be over or undervalued.

Method of Valuing Buildings..!

Every method of valuing buildings has its own challenges in valuing the green or sustainable aspect of a building. Hereunder we highlight the most popular methods of valuation such as Direct Comparison Method, Rent Cap Method &  Discounted Cash Flow (DCF) Method.

In direct comparison method of valuing a green building, the challenge is to find a similar building that has been transacted. If we value it against any conventional building the sustainable aspect of the building cannot be valued. Therefore we have to use proxy measures to derive value.

The rent cap method of valuation, which uses the cap rate driven by market dynamics to find the value of a building based on total earned rents, neglects the green aspects of the building. This method can only be successful if the rent also reflects sustainable aspects.

The discounted cash flow method, which is one of the most accepted methods of valuation, considers cash inflow and outflow. Thus, for a green building, the sustainable aspects of the building can be considered to a large extent in this method of valuation.

Standard Mechanisms..!

There are few standard mechanisms to assess energy & water savings of green buildings. However, DCF method has challenges of translating all benefits in terms of cash flows. For instance, there may not always be a rent premium for green buildings as rents in most cases are driven by demand and supply dynamics. Sustainability is not the most important factor governing rent amongst several other factors.

So, there are many uncertainties regarding the valuation of green buildings due to lack of data and information. However, it is just a matter of time before this changes.

The growing demand from occupiers, due to increased energy cost is putting pressure on developers to develop green buildings. An increase in the number of green buildings will automatically increase awareness &  as the market matures there will be benchmarks and databases to value green aspects of buildings.

This will bring in more clarity and transparency in valuation of green buildings, thus improving investor confidence.

Green Wall ..!

CII (Confederation of Indian Industries) is promoting sustainable landscaping which will be water efficient, low maintenance & blend with local environment

Source: Jones Lang LaSalle Research

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