Periodic Reporting for period 2 - REVALUE (Recognising Energy Efficiency Value in Residential Buildings)
Reporting period: 2016-09-01 to 2019-02-28
For every five buildings that exist today, four will still be standing in 2050. That makes energy efficient refurbishment a top priority for Europe, and an important opportunity for owners and tenants.Despite the potential savings, energy efficiency is rarely the focus of residential renovations in Europe. Adding weight to the issue is an increasing body of evidence that suggests that even when renovations are completed with a view to increasing efficiency, the investments made are routinely suboptimal. The result is a long-term lock-in effect and a great deal of unrealised potential for energy demand reduction.
The REVALUE project, therefore, sought to address the relationship between energy efficiency and values in the residential sector and specifically the rented sector, which in Europe is dominated by social housing providers. Partnering with RICS, the lead valuation professional body the aim of the project was to “to lead the development of appraisal norms and standards that recognise Energy Efficiency Value in social and private residential real estate.” It has done this through a series of interviews and roundtables, in-depth cases studies of selected housing providers, the development of a prototype data modelling tool and a major regression study of social housing stock in the Netherlands and the UK.
The main findings from the project relate to valuation norms and standards; the matter of data, including EPCs; and the motivations and barriers to investment policy motivation and barriers. Among a large number of findings in REVALUE project, some key findings have emerged:
• Valuation methods are inherently flexible and can accommodate the impact of sustainability so whilst there is a need to further develop guidance to valuers, no new techniques are needed.
• Energy efficiency labels do not currently play a key role in determining values in the residential rented sector but some energy characteristics, notably visual ones such as high-quality glazing, are factored in.
• Energy Performance Certificates (EPCs) have raised awareness but could be more effective if consistency and currency were improved.
• Although EPCs do not exert a key role in determining value, there is often limited energy data availability and the data that is available does not readily integrate with valuations.
• Despite this, to encourage investment in greater energy efficiency, valuers need to work with energy experts or/and develop greater knowledge around renewable energy sources and how they change the technology used in buildings.
• The motivation to upgrade is based on a range of factors: for social housing providers; making capital gains through ‘value added’ is not the key driver.
All these have implications for the valuation professional body, for building owners and many for policymakers.
The findings, reflections and lessons learned have culminated in revised guidance to valuers specifically addressing the changing European landscape for residential values.
The REVALUE project, therefore, sought to address the relationship between energy efficiency and values in the residential sector and specifically the rented sector, which in Europe is dominated by social housing providers. Partnering with RICS, the lead valuation professional body the aim of the project was to “to lead the development of appraisal norms and standards that recognise Energy Efficiency Value in social and private residential real estate.” It has done this through a series of interviews and roundtables, in-depth cases studies of selected housing providers, the development of a prototype data modelling tool and a major regression study of social housing stock in the Netherlands and the UK.
The main findings from the project relate to valuation norms and standards; the matter of data, including EPCs; and the motivations and barriers to investment policy motivation and barriers. Among a large number of findings in REVALUE project, some key findings have emerged:
• Valuation methods are inherently flexible and can accommodate the impact of sustainability so whilst there is a need to further develop guidance to valuers, no new techniques are needed.
• Energy efficiency labels do not currently play a key role in determining values in the residential rented sector but some energy characteristics, notably visual ones such as high-quality glazing, are factored in.
• Energy Performance Certificates (EPCs) have raised awareness but could be more effective if consistency and currency were improved.
• Although EPCs do not exert a key role in determining value, there is often limited energy data availability and the data that is available does not readily integrate with valuations.
• Despite this, to encourage investment in greater energy efficiency, valuers need to work with energy experts or/and develop greater knowledge around renewable energy sources and how they change the technology used in buildings.
• The motivation to upgrade is based on a range of factors: for social housing providers; making capital gains through ‘value added’ is not the key driver.
All these have implications for the valuation professional body, for building owners and many for policymakers.
The findings, reflections and lessons learned have culminated in revised guidance to valuers specifically addressing the changing European landscape for residential values.
The project was designed as a series of work packages, collectively supporting changes in the way in which valuers undertake their work and better enable them to reflect energy efficiency within the valuation of residential stock.
First it was considered important to actually review the ‘state of play’ in terms of the standards and norms adopted. The second work stream of REVALUE aimed to develop the data required at the building level, to enable energy efficiency to be appropriately recognised and applied to case studies to test its validity. This was to be done via analysis of a typology of building types and tested against the availability of building owner data. Furthermore, REVALUE was designed to test the relationship that could be observed between value and energy efficiency by use of quantitative techniques finally REVALUE was providing recommendations to the valuation profession to embed the findings.
Via qualitative measures, the REVALUE made series of interviews, roundtables and in-depth discussions with selected portfolio owners yielded the basis for much fruitful discussion among the team, leading to a series of key findings related to both the role of valuation and the motivations of stakeholders. Alongside, this work, a major quantitative study of selected social housing providers, aimed at examining the link between reported values with not just certification, but also data points, was carried out. This work was unique in two ways. First, it was based on book values (rather than transaction prices) of actual portfolios of social housin. Secondly and most significantly, it went beyond energy labels to examine the links to specific building characteristics. It also, uniquely, compared two valuation periods so that it could be established if energy efficiency had gained in value importance over a five-year period during which the reliability of EPCs had been thought to have improved.
Finally, during the REVALUE project, a series of case studies has been undertaken to develop a full understanding of how the REVALUE findings can help social housing providers develop their investment strategies.
As a result of these dialogues and collaboration, REVALUE has not only been able to feed changes into the global Red Book but also into a focused Insight Paper summarising research and recommendations to valuers across Europe in relation to undertaking residential valuations.
First it was considered important to actually review the ‘state of play’ in terms of the standards and norms adopted. The second work stream of REVALUE aimed to develop the data required at the building level, to enable energy efficiency to be appropriately recognised and applied to case studies to test its validity. This was to be done via analysis of a typology of building types and tested against the availability of building owner data. Furthermore, REVALUE was designed to test the relationship that could be observed between value and energy efficiency by use of quantitative techniques finally REVALUE was providing recommendations to the valuation profession to embed the findings.
Via qualitative measures, the REVALUE made series of interviews, roundtables and in-depth discussions with selected portfolio owners yielded the basis for much fruitful discussion among the team, leading to a series of key findings related to both the role of valuation and the motivations of stakeholders. Alongside, this work, a major quantitative study of selected social housing providers, aimed at examining the link between reported values with not just certification, but also data points, was carried out. This work was unique in two ways. First, it was based on book values (rather than transaction prices) of actual portfolios of social housin. Secondly and most significantly, it went beyond energy labels to examine the links to specific building characteristics. It also, uniquely, compared two valuation periods so that it could be established if energy efficiency had gained in value importance over a five-year period during which the reliability of EPCs had been thought to have improved.
Finally, during the REVALUE project, a series of case studies has been undertaken to develop a full understanding of how the REVALUE findings can help social housing providers develop their investment strategies.
As a result of these dialogues and collaboration, REVALUE has not only been able to feed changes into the global Red Book but also into a focused Insight Paper summarising research and recommendations to valuers across Europe in relation to undertaking residential valuations.
The REVALUE project has produced two main outputs; the RICS Red Book and a thematic Insight Paper.
RICS Global Standards
The RICS Global Standards 2017 (the ‘Red Book’) contains mandatory rules, best practice guidance and related commentary for all members undertaking asset valuations. It is used by over 125,000 valuation professionals worldwide. The 2017 edition has been informed by the REVALUE project, as sections were drafted based on inputs by RICS REVALUE team members. This has led to a number of key changes, in particular on sustainability.
RICS Insight Paper: “Energy efficiency and residential values: a changing European landscape”
Insight Papers aim to provide valuers, and other interested stakeholders, with an overview of research and qualified insights on a specific topic, typically resulting in a set of non-obligatory recommendations.
The Insight directly builds on REVALUE research and activities, whilst including selected research by other European and European Commission-funded research projects, leading to the following main conclusions and recommendations:
- The evidence points to energy efficiency beginning to impact value, though very little compared with the traditional value drivers.
- In future, energy is likely to be of increasing importance in the decisions of occupiers and investors and this will be reflected in value. However, much will depend on the approach taken to regulation, availability of grant aid, the attitude of lenders and the transparency of evidence.
- Currently, visible retrofits such as double and secondary glazing appear to attract the most uplift in value per euro / pound spent.
- Within secured lending instructions, as banks and other lenders are becoming more aware of the potential risks that energy inefficient stock presents to any lending decision, it is imperative that valuers recognise their role in assisting banks to determine/specify the property information they need to better assess the credit risk of their proposed lending.
RICS Global Standards
The RICS Global Standards 2017 (the ‘Red Book’) contains mandatory rules, best practice guidance and related commentary for all members undertaking asset valuations. It is used by over 125,000 valuation professionals worldwide. The 2017 edition has been informed by the REVALUE project, as sections were drafted based on inputs by RICS REVALUE team members. This has led to a number of key changes, in particular on sustainability.
RICS Insight Paper: “Energy efficiency and residential values: a changing European landscape”
Insight Papers aim to provide valuers, and other interested stakeholders, with an overview of research and qualified insights on a specific topic, typically resulting in a set of non-obligatory recommendations.
The Insight directly builds on REVALUE research and activities, whilst including selected research by other European and European Commission-funded research projects, leading to the following main conclusions and recommendations:
- The evidence points to energy efficiency beginning to impact value, though very little compared with the traditional value drivers.
- In future, energy is likely to be of increasing importance in the decisions of occupiers and investors and this will be reflected in value. However, much will depend on the approach taken to regulation, availability of grant aid, the attitude of lenders and the transparency of evidence.
- Currently, visible retrofits such as double and secondary glazing appear to attract the most uplift in value per euro / pound spent.
- Within secured lending instructions, as banks and other lenders are becoming more aware of the potential risks that energy inefficient stock presents to any lending decision, it is imperative that valuers recognise their role in assisting banks to determine/specify the property information they need to better assess the credit risk of their proposed lending.