Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
Episode 36 – Part 2: The process of moving towards ESG in valuations with Joël Scherrenberg
45 Plays1 year ago
Are you interested in the intersection of ESG and real estate valuations?
🚀💼 Check out the latest episode of our podcast, where Matt Nally and Joël Scherrenberg dive deep into the complexities of integrating ESG into property valuations.
From understanding the unique challenges different asset classes face to gathering crucial data, this episode is packed with insights you won't want to miss.
Key points include:
1. The varying impact of ESG factors on different real estate asset classes.
2. The challenges and importance of collecting and sharing ESG data for valuations.
3. The role of legislation and market demand in driving ESG compliance and its financial implications.
4. Differences in ESG adoption rates among asset classes and market segments.
5. Advice for surveyors on acquiring technical skills and staying updated on ESG developments.
Recommended
Transcript
ESG Impact on Asset Classes
00:00:00
Speaker
For Topic 2 with Yael, we're looking at the process of moving towards ESG within valuations. um And I think a nice starting point might be to look at, obviously, valuations cover a whole host of different asset classes. So my question there, then, would be, a different asset class is impacted quite differently, say, from residential to to retail to hospitality. Are they very differently affected? Absolutely. they're Absolutely.
00:00:30
Speaker
have different angles you have to look at, different points of interest. And and that's quite logical because the way you use the different kinds of buildings is quite different. and Energy consumption is very relevant or not so relevant at all. ah Pollution risk is relevant or not,
Energy Consumption in Industrial Buildings
00:00:54
Speaker
et cetera. So if you look to all the factors of ESG, depending the kind of real estate,
00:01:00
Speaker
There are completely different cash flow risk drivers or value drivers ah among those categories. but For example, I have an industrial building. Say, for example, the the the steel mills. I can talk hours about energy saving in the building. But who cares? It's 0.0001% of all the energy consumption of the organization.
00:01:30
Speaker
because 99.99% of the energy consumption is in the process.
ESG Factors and Valuation Challenges
00:01:35
Speaker
So I want to talk about energy consumption in steel mill. Don't talk about but because those are open buildings. They don't want to get it closed down to make energy sufficient. Well, in residential building,
00:01:52
Speaker
ah energy consumption is primarily driven by the quality of the building. So there's a lot of interest inval about energy consumption. And so you can make, oh among all those factors, you can look into the different kinds of asset types and say, hey, which are more or less relevant for this kind of real estate. So there there are certain scenarios where ESG wouldn't be considered so heavily in the valuation process, or would it still be considered as much? It's just that its weighting might not be um as important.
00:02:30
Speaker
Now, you still see a difference in in in in how ESG is relevant in valuation. When I look to the residential market, actually, they're only looking at the E. SMG is hardly relevant in the residential market.
00:02:48
Speaker
and yeah true but Within the E, it's for most in residential is energy, and the rest of the E is also much less than the energy. When I look to retail um social and governance are definitely relevant and environmental is not as much about energy but more about the other environmental aspects. While in office buildings energy energy consumption is very relevant. So yes there are differences in in the weight that each of the factors will have among
00:03:29
Speaker
those different kinds of asset types. Yeah. and i and And I suppose why it's not so easy to put a, um and we'll come onto this, I suppose, a framework or guidance in place because it's going to be very different property to property and and type of asset. So I suppose but one of the questions I've got then is around the challenges of moving to ESG based valuations. um How hard is it to, I suppose, one, learn about the yeah ESG factors and and how you need to apply them?
00:03:59
Speaker
um And how hard is it to to get the information about each of those factors to to start sort of generating an ESG-based valuation? um It is quite difficult to gather a lot of information.
00:04:15
Speaker
and and Because traditionally, and it was always a joke amongst failures, there were only three things relevant for the value of the
Standardizing ESG Measurement
00:04:24
Speaker
property. First was location, the second was location, and the second was location.
00:04:31
Speaker
And of course, that's an oversimplifying of the reality. Yes, it was always the joke. um But one thing for sure, you know exactly everything about the location. It was completely transparent, no discussion about it, and all information about the location was publicly available.
00:04:56
Speaker
um Then, of course, the size of the building is relevant. That's quite easy because if there's not a report, yeah just take your your ah your little device and take the measurements of the building. The technical quality, depending on your personal qualities and depending on the kind of asset, you can do it yourself or you might need an independent chart survey surveyor for the the technical due diligence, but it's quite well regulated.
00:05:33
Speaker
a Everybody talks the same language about what is good, what is bad, etc. Yes. And there's a lot of information available. But when we look to other things, the whole life carbon assessment or the greenhouse gas emissions,
00:05:53
Speaker
Everybody knows what it stands for. But having the actual figures of a building might be quite difficult already. Yeah, very true. Let alone that you know what of your references that you have gathered, that you know how these are scoring. Because you don't have any information about that at all. No, very true. Yeah. And what we have said when we wrote the paper,
00:06:23
Speaker
um Some of the failures say there's no information, so don't bother and don't try to say something about it. And we said no, that's not the way moving forward. We need to make ESG measurable. We have to put it in a framework, but also knowing that within the first period that we can identify those Indicators. That we perhaps might be able to find some data about those indicators. But there will be a lot of data missing. Yes, if we don't start collecting now. Yeah, we measure get to the point where we have measurable and reputable data. So it's a continual improvement, I suppose over time. Yeah, yeah so we have said we have to start somewhere
Impact of Energy Ratings on Property Values
00:07:20
Speaker
and we did start now and now
00:07:23
Speaker
The main issue about ESG is gathering and sharing data, because some data are available, but people are very reluctant in sharing it, which makes it very hard to compare one building to another. And what you have seen in some studies is that and what determines a value And you can, from every building, you can determine what are the value drivers. And then you can say, OK, 40% was location, 40% was the size of the building, 10% was the technical quality. And the remaining 10% and then don't take me about the percentage because there's just a bit of expectation. The last 10% is determined by 100 or 200 different aspects.
00:08:22
Speaker
And only when you have a huge amount of data, of a lot of transactions, of a lot of buildings, with all the underlying specific points, you can make a regression analysis and say, okay, this point determines the value of that much percentage. And yes, in the Netherlands, ah the Telberg University has done it several times already in the past,
00:08:51
Speaker
20 years or so, where they regularly measured all the data of the residential market because from the residential market about 70-80% of all transactions are registered in a system with a lot of details. So you have a transaction date and transaction price and about 60 aspects of those buildings.
00:09:20
Speaker
And if you then have 100,000 transactions a year, you can make great statistical analysis. And they have determined that the energy label, where it was 10, 15 years ago, only determined a price difference of 1% or 2% between the worst and the best label.
Future ESG Impacts on Valuations
00:09:40
Speaker
This has now already has made a change of 10% plus or minus between the best but the worst energy rating. So you see change in society.
00:09:51
Speaker
And now there's becoming more and more evidence about um how energy ratings influence the pricing of residential houses. Definitely. One question I've got on that, tying into something you said in in part one. ah Obviously, we if if you're doing a valuation,
00:10:14
Speaker
you're you're giving the market value of today. So for example, let's say it was a long time ago and it affected the the the energy rating, for example, affected the properties value by a percentage, two percentage. um So we're still having to give the valuation today. So in terms of allowing for the ESG aspects, is there an element of um saying, well, this is what it's worth today, but we also have to say, you know potentially it'll be go up or down in value in 10, 20 years by this amount because of these factors, or we're only giving a price based on and no eat index failure You are never allowed to give a value yet tomorrow. You can say what it's worth today or what it has been worth in the past. yeah You can never say what it will be worth tomorrow because you don't know what the market will be tomorrow. no But what you can do is determine risks. yeah And what failures should do more, because that's something they did too little, is say, okay, I have a value.
00:11:13
Speaker
or have a property, it is valued today at a million euros. But be aware
ESG Analysis Requirements in Dutch Finance
00:11:20
Speaker
that if the owner doesn't take the proper measures to change this or this because of the change in legislation in 2025 or 2030, there will be a negative impact on the value at that time. I cannot determine how much. I cannot determine exactly when it will happen.
00:11:42
Speaker
but it will have an effect in the future. And then you give a risk analysis and that's something a creditor should do. Yeah, I can say that's the bit I was trying to understand is how do you both price for today's market and understand the ESG impacts of the future. So that's, yeah, that's very interesting. And what already, for example, in the Netherlands, the financial institute now say, if you value a building,
00:12:09
Speaker
We have to make a full ESG analysis, and in the Netherlands we call it the DUPA 2.0. The sustainability paragraph is the translation. ah So in in English it would be the SUPA instead of the DUPA. And there you have to assess a building on a certain amount of aspects. And if your building is not having the proper ah score,
00:12:40
Speaker
You'll also have to make an assessment and say, what would it cost today to change the building, to bring it to the level as required? Therefore, to make it more tangible, a building has a label C. What would it cost to bring bring it up to like label A? And what would the value be today if the building would have had the qualities required in the future. yes yeah So you're still not saying what it will be worth tomorrow, but you're saying, and that's a special assumption, what if the building would have had these qualities? What would have been the value then and which investments have to be done to reach that level? And that's already a standard question for the financial institute to the failures today in commercial real estate.
Trends in Low Energy and Smart Buildings
00:13:40
Speaker
Awesome. Okay. So I suppose the one of my next questions just sort of potentially moving on from that is, I suppose what are the buildings of the future going to look like in terms of obviously allowing for um yeah the types of things that would make a building an A for example?
00:13:57
Speaker
and all the other factors. I know there's obviously lots of changes around yeah smart buildings being built or um buildings upgraded to have all the sensors in to measure all these different things. ah but Whilst we're sort of, I suppose, discussing surveyors, learning more about ah ESG in valuations, are we also including perhaps, I don't know, architects and developers and and so on in that process so they can also factor in changes to buildings over time?
00:14:25
Speaker
yeah yeah how How the buildings will change, there will be a difference in in development also among the different asset categories, ah partially driven by legislation, partially driven by market, and within an asset category also in the kind of users. What we already see here, for example in the office market, the primary office for the larger um organizations are ahead of the market, where the smaller
00:14:56
Speaker
Offices are leaning a little bit more back in and in in their investments um The difference in speed will will remain So yes, the entire portfolio of the entire market will change But the speed will be different within an asset category and between asset categories of course Yeah, yeah that makes complete sense and um what the general trend will be. Low energy consumption partially driven by environmental concerns, but also driven by financial concerns and and uncertainty. All the d the everything was happening in Russian Ukraine.
00:15:51
Speaker
is affecting how people are thinking about ah how certain is my energy delivery of my building. And they want to become less dependent of the grid.
00:16:04
Speaker
um
00:16:08
Speaker
Technical developments will help changing the buildings. um so and and And another one will be also the whole life carbon assessment, because when we really are going to price carbon, people will become more ah open to take steps to lower their carbon deposit. Yeah, absolutely. Then also, and it's also the same combination of environmental responsibility and financial consequences. Yeah.
00:16:44
Speaker
Yeah, absolutely. I suppose my but my final question and around around this is, are you seeing certain asset classes that are ah implementing this faster because they're more affected by it? like Is it residential with energy, for example, or are there... Yeah, but where where you see the most changes are happening are related to the building, are the offices, and driven by investors and financial institutes.
00:17:13
Speaker
and but residential market driven by energy crisis. and For example, in the retail market, you see a lot of changes, in especially where people have a grocery store and all the equipment which is in the building. So it's not much about the building itself, but ah making doors before the cool the cooling, etc. That's changing what's inside of the building, not the building itself.
00:17:44
Speaker
and industrial, they're mostly looking at their process because the building is hardly relevant in their cost structure.
Sector-Specific ESG Implementation
00:17:53
Speaker
Yeah, no, that makes complete sense. And the the uses and the makeup are very, very different between. Yeah. Yeah. So they are therefore, residential is an energy driven commercial wheels of the office market, partially driven by energy consumption, but mostly driven by investors.
00:18:10
Speaker
Yeah, makes complete sense. Yeah. Okay. ah that's but I think it's been really interesting. I think my final question on this is a topic. If you if you are a surveyor that's doing valuation work and you're starting to look at how you can improve your ESG factors within within the valuation you're producing, is ah where's the best place to start learning about it? Is there CPD courses you can go on or ways to get your valuation sort of checked by someone? First of all,
00:18:40
Speaker
Follow the newspapers. Be aware of what's happening in society. Be aware of what's happening in legislation. And then, of course, you will need to improve your skills. And it will be divided into developing technical skills. Because if you are not aware of, for example, a heating purpose, you won't recognize it when you see one. So you will need And because you don't you know what all the installations look like, you also need to know how the new ones look like. And then of course you have to make sure that you are understanding what's happening in market. And therefore you need interaction with colleagues, read market reports, and follow of course CPD. because and and and And they will help you to improve your skills, to improve your knowledge,
00:19:36
Speaker
um And depending on what kind of part of the market you're acting in, you might dive into the deep in specific parts and more in a glance in other parts, but that will be different depending the kind of work, the kind of market, the the location you are, et cetera. Yeah, completely. That makes complete sense.
Conclusion and Contact Information
00:19:57
Speaker
ah Thank you very, very much for coming on today and sharing your insights across the two topics. ah If anyone wants to get in touch or or yeah learn more about your paper, what what's the best thing, the best way to get in touch? or but Feel free to share my email address and they can contact me by email. That's the best way. It was a great that this contribution today. Awesome. Well, anyone looking for the email address will have it on the at the episode details. So ah check those out and then you can you can get in touch. But yeah, thanks again for coming on. It's been really interesting.
00:20:27
Speaker
Okay, thank you very much and see you next time.