Incorporating ESG into property valuations

In April, decision makers and top players across the non-listed real estate industry gathered in Athens to attend the INREV Annual Conference. After two years of holding our flagship event virtually, it was wonderful to see everyone in person, providing the opportunity to catch up with friends, colleagues, and peers. 

With the worst of the pandemic hopefully behind us, our theme for the conference purposefully reflected on the future and how the industry can now work together toward a sustainable recovery. 

One thought-provoking session on the programme included a deep dive assessment into a significant challenge facing the green transition for our industry, that being how to reflect ESG factors into property valuations. 

As it stands, valuation methodologies only consider the estimated exchange price of a property and do not reflect future ESG regulatory requirements. This is due to the significant weight that valuers have traditionally placed on historical evidence – those being rents, yields, supply, and demand – for calculating market value.  

As it stands, valuation methodologies only consider the estimated exchange price of a property and do not reflect future ESG regulatory requirements

This reliance on retrospective factors means that it is now challenging for valuers to quantify the potential impact of ESG value drivers in valuations. However, as we move inexorably closer to the need to deliver net-zero, assessing both current and future sustainability metrics, traditionally non-financial aspects will be vital for helping the industry transition to a low carbon economy, alongside helping investors understand the economic impact of ESG on their portfolios.  

as we move inexorably closer to the need to deliver net-zero, assessing both current and future sustainability metrics, traditionally non-financial aspects will be vital for helping the industry transition to a low carbon economy

During our professional standards open house breakout session, we discussed the factors required to create a new valuation methodology that considers sustainability features and future ESG regulatory requirements. 

While it became evident during the meeting that there are currently more questions than answers at this stage, there was clear consensus on one matter – the transition ahead will require a significant emphasis on transparency.  

the transition ahead will require a significant emphasis on transparency

As a starting point, it was agreed that all parties in the industry will need to begin communicating about the exact ESG evidence they require and how this information will impact valuation outcomes. Secondly, to guarantee consistency, those operating in the industry must start to disclose ESG features within business performance and annual reporting. 

While significant work and collaboration is going to be required, there is a real desire among those in the non-listed real estate industry to solve this problem. Not only will these efforts assist on our pathway to a greener future, but they will also demonstrate to investors the greater benefits and premiums that cleaner buildings can offer.  

We’re now at a tipping point when it comes to tackling the climate crisis and the non-listed real estate industry has a significant role to play. INREV will be here to support our industry on the journey to achieving the greener future that our world needs.