For the purpose of this report, the valuation of both a conventional 10,000m2 gross floor area (GFA) commercial office and a similarly sized sustainable office building have been analysed. The analysis is on the basis of the concept of 'worth', which properly reflects the benefits of sustainable building in terms of:
The analysis depends on a rearrangement of the normal developer's equations as follows:
Costs = Land (L) + Buildings (B) + Finance (F) + Marketing (M) + Profit (P)
These equations are often rearranged in order to calculate the land value for a development. This is known as residual analysis or residual valuation. Thus, the residual land value is found as follows.
In the example in Table 3 the following assumptions have been made:
10,000m2, Grade A city commercial office building in Wellington, 8,500m2 net lettable area.
A 5% rental premium is allocated for the sustainable building to reflect the improved internal environment.
An allowance is also made for improved productivity. A productivity improvement of 2.5% has been assumed, giving an annual staff cost saving of $75 per m2 for the sustainable building.
Outgoings include operating and maintenance costs. The outgoings for the sustainable building have been reduced from $80/m2 to $70/m2 to reflect energy cost savings.
The net operating income is capitalised at 8% for the conventional building and at 7.75% for the sustainable building, which reflects its improved market potential.
Sales commissions and costs are assumed to be 1.5% of the capitalised building value.
Letting commissions and costs are assumed to be 15% of the net capitalised building value.
The developer's allowance for risk and return is treated as a development cost in the residual analysis. Feasibility studies are often undertaken to establish potential profitability.
Ten percent is assumed for the conventional building and 15% for the sustainable building. This reflects an additional risk for the latter despite the improved returns listed above.
The building costs are allowed at $1,800/m2 for the conventional building and $2,000/m2 for the sustainable building to allow for potential premium costs for sustainable features.
Professional fees are allowed at 10% for the conventional building and 12% for the sustainable building to allow for the premium costs of sustainable design.
Construction financing costs have been assumed at 8% for both the conventional and sustainable buildings. The same construction period of 24 months is also used for both the conventional and sustainable buildings. The interest is assumed to be charged on the total construction cost for half the development period (ie, 12 months, assuming constant capital expenditure progress payments for building construction).
Rates includes local authority and water rates.
Holding charges and financing have been assumed at 8% for both the conventional and sustainable buildings. This rate has been charged for the full development period including a pre-construction period of six months and the construction period of 24 months.
The results of this residual analysis are illustrated in Table 3, which shows that the land value for the sustainable building is approximately 40% higher than for a conventional building, and the worth of the sustainable building is approximately 45% higher than for a conventional building.
Table 8: Residual value comparison between conventional and sustainable buildings