Green building valuein the Philippines – an appraiser’s perspectiveOctober 26, 2012 / By
Sustainable development is one of the new trends in Philippine real estate, which aims to minimise the adverse environmental impact of continuous property development.
Nevertheless, is sustainability considered a key factor in property selection in the general Philippine market? Moreover, do green building technologies increase property value? From a valuer’s point of view, we can determine this using the three approaches to property value.
The Market Data Approach compares the transacted rents or sales prices of properties comparable to the subject green building. These prices are adjusted upwards or downwards, based on such considerations as size, location, transaction timing and amenities, among others. These are key considerations commonly regarded by prospective property tenants and/or buyers. Unfortunately, green building features are not necessarily among these factors, at least not within the current Philippine context.
Under the Cost Approach, we estimate the cost to construct a green building, net of estimated accumulated depreciation. Given that construction methods and materials for green buildings are not applied to conventional projects, there is a definite premium applied to their development cost. Project consultants peg this premium as high as 30% over conventional constructions. For depreciation rates: consultants estimate that environmentally sustainable buildings will last longer than traditional counterparts. However, since green building advocacy is still in its early stages here, there is a dearth of useful actual useful benchmarks to determine this rate.
In the Income Approach, operating income of the property is first determined. Based on what we have seen so far, the rents and associated lease terms for green buildings in the Philippines are well within the range of those non-green buildings of the same development grade (i.e. Grade A). Operating expenses which are then deducted are generally within the normal range charged by the non-green buildings. As mentioned earlier, green building generally involves higher development costs translating to higher initial capital expenditure (capex) for developers. Then again, green building technologies are generally more cost effective than conventional constructions, in the longer term the capex for non-green buildings could subsequently be higher as these developments age. Thus using this approach and in the absence of reliable local benchmarks, the net cash flows of green and non-green buildings could have minimal difference when you factor in the higher initial development costs associated with green buildings.
Although there is no palpable rental rate premium directly associated with green building features in the Philippine market, there are fundamental and intrinsic values to adopting green building technologies. Presently, green building developments provide a viable option for occupiers at immaterial price differentials given the substantial supply coming into the market. In the long run, benefits of these technologies are projected to be more cost effective to occupiers and developers alike due to efficient and lower management costs. Correspondingly, rental rate differentials directly associated with green building technologies can become increasingly more acceptable.
As sustainable real estate development in the Philippine market gains more ground and as the cost effectiveness of this approach becomes more apparent, we are optimistic that stakeholders will likewise elevate green building features among primary considerations for property selection; in turn making price premiums directly associated with green building technologies well-founded.