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Sustainable property investment: valuing sustainable

buildings through property performance assessment
a a
Thomas Lützkendorf & David Lorenz
a
Department of Economics and Business Engineering, Sustainable Management of Housing
and Real Estate, Kaiserstrasse 12, University of Karlsruhe (TH), Karlsruhe, D-76128,
Germany
Version of record first published: 17 Feb 2007.

To cite this article: Thomas Lützkendorf & David Lorenz (2005): Sustainable property investment: valuing sustainable
buildings through property performance assessment, Building Research & Information, 33:3, 212-234

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 BUILDING RESEARCH & INFORMATION (2005) 33(3), 212–234

Sustainable property investment: valuing

sustainable buildings through property
performance assessment

Thomas Lu«tzkendorf and David Lorenz

Downloaded by [University of New Hampshire] at 01:50 01 March 2013

University of Karlsruhe (TH), Department of Economics and Business Engineering, Sustainable

Management of Housing and Real Estate, Kaiserstrasse 12, D-76128, Karlsruhe,Germany
E-mail: thomas.luetzkendorf@wiwi.uni-karlsruhe.de

How can the property and construction industry meet the current and forthcoming challenges posed by sustainable
development? The perception of property as a commodity is changing to emphasize building characteristics and
performance as major determinants of a property’s worth and market value, thereby requiring new ways of assessing
worth and value. Commercial property valuation represents a major mechanism that could allow environmental and
social considerations to be more closely aligned with economic return. In particular, the rationale and
initial considerations are explored for the incorporation of environmental and social issues into valuation theory and
practice. A system that allows for the description, measurement and assessment of various aspects of building
performance is conceptualized. Possible sustainability key performance indicators are identified and the basic
principles for assessing performance along the life cycle of buildings are explained. It is argued that the environmental
and building research community has a central role in determining a standardization of terminology and improving
the exchange of ideas between financial and environmental research disciplines. Then, the simultaneous consideration
of economic, environmental and social issues can provide a more profound knowledge about property characteristics
and associated performance. This will create a more robust assessment approach and lead to greater reliability of
assessment results. Finally, the opportunities afforded by the synergies between sustainable design and risk
management are identified and implications for property risk assessment for lending and insurance purposes are
highlighted.

Keywords: environmental performance, key performance indicators, life cycle analysis, life cycle costing,
post-occupancy evaluation, property valuation, risk assessment, sustainable buildings, sustainable
development, trends

Comment la propriété et l’industrie de la construction font-elles face aux challenges présents et à venir posés par le
développement durable? La perception de la propriété comme un produit change pour accentuer les caractéristiques
de construction et la performance en tant que déterminants majeurs du prix d’une propriété et de sa valeur de
marché, demandant de ce fait de nouvelles méthodes pour estimer le prix et la valeur. La valorisation de la propriété
commerciale représente un mécanisme majeur qui pourrait permettre aux considérations environnementales et
sociales d’être plus étroitement alignées avec la rentabilité économique. En particulier, le raisonnement et les
considérations initiales sont étudiés pour incorporer des sujets environnementaux et sociaux dans la pratique et la
théorie de l’évaluation. Un système permettant la description, la mesure et l’estimation de nombreux aspects de la
performance de la construction est conceptualisé. De possibles indicateurs de performance clés de durabilité sont
identifiés et les principes fondamentaux pour estimer la performance durant toute la vie des bâtiments sont expliqués.
L’on débat sur le fait que la communauté de recherche du bâtiment et de l’environnement joue un rôle majeur dans la
détermination d’une standardisation de la terminologie et dans l’amélioration des échanges d’idées entre les
disciplines de recherche financières et environnementales. La considération simultanée des sujets économiques,
environnementaux et sociaux peut donc apporter une connaissance plus profonde des caractéristiques de la propriété

Building Research & Information ISSN 0961-3218 print ⁄ISSN 1466-4321 online # 2005 Taylor & Francis Group Ltd
http: ⁄ ⁄www.tandf.co.uk ⁄journals
DOI: 10.1080/09613210500070359
 Sustainable property investment

et de la performance associée. Ceci créera une approche de l’estimation plus forte et mènera à une plus grande fiabilité des
résultats d’estimation. Enfin, les opportunités offertes par les synergies entre conception durable et gestion du risque sont
identifiées et les implications pour l’évaluation du risque de propriété pour des raisons de prêt et assurances sont mises en
exergue.

Mots clés: performance environnementale, indicateurs de performance clés, analyse de cycle de vie, coût de cycle de vie,
évaluation post-occupation, évaluation de la propriété, estimation de risque, constructions durables,
développement durable, tendances

Introduction the definition provided within the Brundtland Report.

Two emerging trends within the international property For a closer examination of this debate, see Dresner
and construction sector are to regard buildings holisti- (2002) and Doughty and Hammond (2004). Nonethe-
cally over their entire life cycle and to implement the less, sustainable development can be seen as a journey
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principles of sustainable development. In most deve- towards a destination: ‘sustainability’. Although, it is

loped countries, a variety of private and governmental difficult to define ‘sustainability’ from a scientific per-
initiatives and programmes are being implemented to spective, Porritt (2000) argues that the realization of
provide sustainable development within planning, sustainability can be measured against a set of four
construction, management, refurbishment and demoli- ‘system conditions’:
tion of buildings. For an overview of activities in
member countries of the Organization for Economic . finite materials (including fossil fuels) should not be
Co-operation and Development (OECD), see, for extracted at a faster rate than they can be redepo-
example, DCAT (2001), Drouet (2003) and OECD sited in the Earth’s crust
(2003).
. artificial materials (including plastics) should not
What is sustainable development and what are sustain- be produced at a faster rate than they can be
able buildings? A large number of formal definitions of broken down by natural processes
sustainable development can be found in literature;
Parkin (2000) refers to more than two hundred. . biodiversity of ecosystems should be maintained;
However, the most prominent and universal definition whilst renewable resources should only be con-
can be found in the Brundtland Report (1987), which sumed at a slower rate than they can be naturally
represented the outcome of four years of study and replenished
debate by the World Commission on Environment
and Development (1987, p. 43) led by the former . human needs must be met in an equitable and
Prime Minister of Norway, Gro Harlem Brundtland. efficient manner
The Commission defined sustainable development as
development ‘which meets the needs of the present In this context, the authors interpret the term ‘sustain-
without compromising the ability of future generations able development’ as a desirable model or overall
to meet their own needs’. Thus, this concept comprises concept for the process of economies’, societies’ and
two strong elements: (1) that of satisfying human needs
and requirements (quality of life) and (2) that of intra-
and intergenerational ethics (do not cheat your fellow
citizens and children). To operationalize this concept
the expression of the so-called ‘triple bottom line’ of
sustainable development has evolved, i.e. sustainable
development involves balancing economic and social
development with environmental protection. However,
there are discrepancies in the interpretation of sus-
tainable development. The three dimensions can be
considered equal or the environment can be viewed as
the dominant dimension that sets the preconditions for
the others (Rydin, 2003). These two approaches are
shown in Figures 1 and 2.

Furthermore, the notion of sustainable development

is open to criticism; the term has been called an
oxymoron and not all writers on this subject follow Figure 1 Venn diagram model of sustainable development

213
 Lu«tzkendorf and Lorenz

help classify sustainable buildings. These requirements

are shown in the upper part of Table 1.

The requirements formulated in the lower part of

Table 1 have not yet been explicitly addressed within
international discussions on sustainable buildings.
However, with regard to Brundtland’s definition of
sustainable development, it is apparent that the issue
of satisfying users’ and occupants’ needs (i.e. the maxi-
mization of the building’s serviceability and functional-
ity) is another central requirement for the classification
of sustainable buildings. Therefore, the authors argue
that serviceability and functionality should be seen as
an integral part of a building’s contribution to sustain-
able development. Taking all these requirements men-
tioned above into account, allows viewing property
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Figure 2 Nested (or ‘Russian doll’) model of sustainable

development
from a full ‘cost–benefit’ or ‘input–output’ perspec-
tive, respectively, including commonly accepted
values and the interests of all stakeholders involved.
individual humans’ development or evolution respect-
ively. Questions related to the description, assessment Typically, construction industry participants who
and influencing of sustainable development, for strive for sustainable development have been strongly
example, can be applied to corporate processes. In focused on environmental considerations and the
this regard the contribution of products and services model described in Figure 2 has been the prevailing
to sustainable development is increasingly being one. Considerable progress has been made in the deve-
described and assessed. This is usually done by an lopment of various methods and tools for assessing the
assessment of both their ability to meet current and environmental quality and performance of so-called
future requirements as well as their capability of ‘green’ buildings (e.g. Todd et al., 2001). But the
keeping current and future impacts, expenses and demand for the results of environmental assessments
risks within certain limits or boundaries. If the assess- in the form of eco-labels and building certificates has
ment results are positive, such products and services been limited to a small group of individuals and
are colloquially named ‘sustainable’. This also applies companies. Also, within the scope of post-occupancy
for buildings and constructed works. Buildings and
the investments in buildings have the potential to con-
tribute (to a lesser or greater extent) to sustainable
development. For the purpose of this paper, the term Table 1 Requirements to classify sustainable buildings
‘sustainable building’ is used for simplicity instead of
the term ‘buildings that contribute to sustainable † Minimization of life cycle Economic, environmental,
costs/cost effectiveness and social aspects
development’. from a full ¢nancial
cost-return perspective
To classify sustainable buildings, it is possible to start † Reduction of land use and
with the general areas of protection, which can be use of hard surfaces
† Reduction of raw material/
deduced form the three dimensions of sustainable resource depletion
development: † Closing of material £ows
† Avoidance/reduction of
hazardous substances
. protection of the natural environment/ecosystem † Reduction of CO2 emissions
and other pollutants
. protection of basic natural resources † Reduction of impacts on
the environment
† Protection of health
. protection of human health and well-being and comfort of building
occupants/users
. protection of social values and of public goods as well as of neighbours
† Preservation of buildings’
. protection and preservation of capital and material cultural value
goods † Maximization of the building’s Aspects related to
serviceability the ful¢lment of users’
† Maximization of the building’s and occupants’ needs
Transferred to buildings and their associated plots of functionality
land, several requirements can be formulated that
214

evaluation (POE) research activities, very successful
efforts have been made to address some social consider-
ations and to demonstrate the positive effect of certain
building characteristics and attributes on occupants’
productivity (e.g. Zimmermann and Martin, 2001).
But again, the demand for POE studies has been
limited and is – for example in the UK – only slowly
growing due to corresponding recommendations of
Egan’s Construction Task Force (Egan, 1998) and
due to the success of Probe (Post-occupancy review
of Buildings and their Engineering) studies: ‘After
decades of neglect, a new research agenda is slowly
emerging for POE in Britain’ (Cooper, 2001, p. 161).
Furthermore, it must be noted that social aspects and
considerations related to sustainable buildings are not
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yet fully explored due to the complexity of the issue. For
example, social aspects also include the interrelation
between single buildings and community-level issues
like urban design quality, social segregation, urban
sprawl, etc. For more detailed insights into this debate,
see, for example, Brindley (2003) and Bentivegna et al.
(2002). Since the present authors’ focus lies on the
single building and the associated plot of land, an
examination of these community-level issues would
lead far beyond the scope of the paper. Buildings,
however, are both working and living environment
and their characteristics and attributes determine the
quality of life. The social aspects besides productivity
that are of importance with regard to single buildings
are health, comfort, security and user satisfaction
(WHO, 2004; ISO CD 21929, 2004a). Within pro-
perty markets where buyers and tenants increasingly
gain stronger bargaining positions (e.g. in Germany)
these aspects are becoming more important since they
influence tenants’ turnover rates, letting and selling
prospects as well as the risk of loosing the tenant, i.e.
these social aspects do have direct and measurable
economic effects.
However, the majority of the international investment,
finance and banking industries (the key driver behind
the property and construction sector) have not
addressed or explicitly taken into account environ-
mental and social issues relating to property. They
have been focused on pure economic considerations
and are only beginning to consider social and environ-
mental issues. This is because very little has been done
to align environmental and social considerations with
economic return in property. Thus, it is argued that
real progress can only be achieved towards sustainable
development in the construction and property sectors
by regarding the economic dimension along with the
environmental and social considerations and not as
an afterthought (Figure 2).
Only this multifactoral approach will provide valid
assessments for decision-making processes (e.g.
property investments, strategic portfolio decisions,
Sustainable property investment
maintenance strategy, etc.). This view is also shared
by Sayce et al. (2004a) and is shown in Figure 1.
Commercial property valuation is the major mechan-
ism that allows environmental and social consider-
ations to be aligned with economic return. This paper
explores the rationale and initial considerations for
incorporating environmental and social issues into
property valuation theory and practice. Furthermore,
the implications concerning property risk assessment
for lending and insurance purposes are highlighted.
This paper can be regarded as an interim result of the
authors’ current research activities in this area. It is
planned to investigate the raised issues in much more
detail during the following years. The ideas formulated
in the following are intended for discussion by research
colleagues as well as by practitioners and by a wider
public.
Towards a sustainable property market
Despite the already mentioned trend to implement the
principles of sustainable development within the pro-
perty and construction sector, sustainable buildings
or building projects are not yet explicitly offered and
requested by the majority of market participants due
to various reasons. Among others these are a lack of
awareness and knowledge about the performance of
buildings in general and the benefits of sustainable
design in particular, a lack of mechanisms to align
environmental and social issues with economic return
and a lack of vocabulary to express particular needs
and requirements. Currently, however, various inter-
linking developments and movements on an inter-
national and European level as well as recent
research findings indicate that this will change. These
are explained in more detail in the following and are
grouped into four coherent sections.
Motivation in the ¢nancial and investment sectors
Within international financial and investment circles
there is an increasing awareness of sustainability
issues and for the importance of implementing Corpo-
rate Social Responsibility (CSR) or Socially Respon-
sible Investment (SRI) policies. Some significant
examples of this trend are as follows:
. Within the scope of the United Nations Environ-
ment Programme (UNEP) 192 members of the
financial services industry (e.g. Citigroup, Barclays
Group, HSBC, Lloyds, UBS, Credit Suisse,
Deutsche Bank, etc.) issued the Statement by
Financial Institutions on the Environment & Sus-
tainable Development. ‘We recognize that identify-
ing and quantifying environmental risks should be
part of the normal process of risk assessment and
215
 Lu«tzkendorf and Lorenz

management, both in domestic and international by investor organizations, accounting bodies,

operations.’ and ‘We encourage the financial ser- trade unions, etc. and more than 130 companies
vices sector to develop products and services from 21 countries have used the guidelines to
which will promote environmental protection’ shape their sustainability reports (GRI, 2002).
(UNEP, 1997a).
These activities are supported by research conducted
over the last decade demonstrating a clear correlation
. Within the scope of UNEP 86, members of the
between corporate profitability and environmental per-
insurance industry (e.g. AXA Group, Gerling,
formance of business operations and offered products
HSB Group, NPI, R&V, Dominion of Canada
and services. Murphy (2002) reviewed a large
General Insurance Company, etc.) issued a similar
number of relevant studies and concludes that ‘compa-
Statement of Environmental Commitment stating:
nies that score well according to objective environ-
‘We will reinforce the attention given to environ-
mental criteria realize stronger financial returns than
mental risks in our core activities. These activities
the overall market (S&P 500), and companies that
include risk management, loss prevention, product
score poorly have weaker returns’. In a study analysing
design, claims handling and asset management’
companies’ adherence to environmental regulations,
and ‘We support insurance products and services
Murphy states that
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that promote sound environmental practice through

measures such as loss prevention and contract terms
companies that go beyond legal compliance
and conditions’ (UNEP, 1997b).
realize stronger stock price gains and market
value growth than the S&P 500. In contrast,
. In June 2003 some of the world’s biggest banks
laggard companies that are threatened by actual
(ABN AMRO, Barclays, Citigroup, HSBC Group,
or impending environmental laws have been
Rabobank, etc.) signed an agreement to adopt the
shown to experience weaker returns.
World Bank’s ‘Equator Principles’, a framework
for banks to manage environmental and social
The property sector represents the world’s largest
issues in project financing. The banks agreed to
industry. Rough estimates assume that property invest-
provide credit only to projects that are neither
ment volume in new and existing buildings per annum
environmentally nor socially harmful and for
is in Europe around E900 billion, in the USA around
which the borrower has completed an extensive
E800 billion and in Asia around E700 billion, i.e.
environmental assessment (see http://www.equa-
‘more than every second dollar, euro or yen is spent
tor-principles.com/index.html).
on real estate’ (Trotz, 2001). In developed nations,
the operation of the built environment accounts for
. Two recent surveys on SRI, one conducted by the
40 –50% of total energy consumption and resource
UK Social Investment Forum and the other one
depletion (Bruhns, 2003; OECD, 2003). Given the
by Deloitte & Touche (an international manage-
huge significance of property assets as an investment
ment consultancy), reveal high expectations for sig-
medium and the large potential contribution of build-
nificant SRI growth in Europe. Deloitte & Touche
ings to sustainable development, it is astonishing to
(2002, p. 5) concluded that there is a clear message
see that the awareness of the financial and investment
for listed companies: ‘Investors see value in a
world for sustainability issues (which has been
robust approach to corporate social responsibility’.
described above) is not yet focused on the property
Additionally, services have been developed that
and construction sector.
allow investors and customers to know more about
the behaviour of companies. For example, the
Ethical Investment Research Service (ERIS) can
be used to examine a company’s attitude and per- Property researchers’ success in empirically proving
formance across a wide range of environmental, the ¢nancial bene¢ts of sustainable buildings
social and ethical issues (see http://www.eiris.org). An empirical demonstration of the financial benefits of
The financial performance of the leading sustain- sustainable buildings is difficult to obtain due to the
ability driven companies worldwide is now lack of detailed information on different building
tracked by the ‘Dow Jones Sustainability Index’ characteristics and associated performance. Typically,
(see http://www.sustainability-index.com). researchers describe the benefits and tried to illustrate
this with some sample sustainable building projects.
. The Global Reporting Initiative (GRI), a joint For example, Wilson et al. (1998), Heerwagen
initiative of the US non-governmental organization (2000), Yates (2001) and Lützkendorf and Bachofner
Coalition for Environmentally Responsible Econ- (2002) point out that sustainable buildings are more
omies (CERES) and UNEP, developed a set of cost efficient, effective, profitable and marketable.
Sustainability Reporting Guidelines in order to There has been little representative empirical evidence
enhance the quality, rigour and utility of published to date. The first came from an American
sustainable reporting. The initiative is supported study. Nevin and Watson (1998) calculated that
216

market values of residential homes increases US$20 for
every US$1 decrease in annual utility cost and that
cost-effective energy-efficiency investments do appear
to be reflected in residential housing market values.
Kats et al. (2003) produced a comprehensive and
well-documented cost benefit analysis of sustainable
buildings. They concluded that minimal increases in
upfront costs of about 2% to support sustainable
design on average would result in life cycle savings of
20% of total construction costs. For example, an
initial upfront investment of up to E100 000 to incor-
porate sustainable building features into E5 million
project would result in a saving of E1 million in
today’s euros over the life of the building, assumed
conservatively to be 20 years.
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From a life cycle savings standpoint, savings
resulting from investment in sustainable design
and construction dramatically exceed any
additional upfront costs.
(Kats et al., 2003, p. vii)
Furthermore, recent extensive research conducted by
Kumar and Fisk (2002) and Heerwagen (2002) identi-
fied strong correlations between sustainable design
features (e.g. natural lighting, thermal comfort, air
quality, worker-controlled temperature and venti-
lation, etc.) and reduced illness symptoms, reduced
absenteeism and significantly increases of measured
productivity of workforce. These findings support
earlier findings of the Probe studies and a resulting
statement by Leaman and Bordass (1999) that losses
or gains of up to 15% of turnover in a typical office
organization might be attributable to the design,
management and use of the indoor environment.
The results of a study conducted by the Rocky Moun-
tain Institute (1998) were as follows: productivity gains
of 6 –16%, including decreased absenteeism and
improved quality of work, from energy-efficient
design. Since companies spend an average of 70 times
as much money (per square foot per year) on employee
salaries as on energy, an increase of just 1% in pro-
ductivity can nearly offset a company’s entire annual
energy bill.
There are now a number of studies that refute the com-
monly held misbelief that sustainable buildings cost up
to 15% more in terms of capital cost to build from the
outset than conventional buildings. For example,
Matthiessen and Morris (2003) found that many build-
ing projects can achieve sustainable design within (!)
their initial budget, or with very small supplemental
funding (,3% of initial budget). Other sources for
information on the costs of sustainable buildings are
Bartlett and Howard (2000), Bordass (2000),
Mackley (2002) and Kats et al. (2003).
Sustainable property investment
Governments’endeavour to introduce
energy-ef¢ciency codes and regulations and
other regulatory mechanisms
The Commission of the European Union (EU) is
heavily committed to advancing sustainable develop-
ment within the property and construction sector. A
new EU Directive approved in January 2003 on the
energy performance of buildings (2002/91/EC) will
force Member States to take major steps to make build-
ings more energy efficient. The Directive requires
Member States to introduce legislation that will affect
both new and existing buildings. In particular, Member
States must introduce legislation for the implemen-
tation of an ‘Energy Performance Certificate’ to be
renewed for each eligible building every 10 years.
The certificate must be clearly displayed in public
buildings over 1000 m2 and must be issued for all
buildings on completion or whenever there is a change
of owner or tenant. The certificate must include refer-
ences to the building’s current energy performance,
current legal minimum standards regarding energy
performance as well as recommendations on how the
building can be improved to meet these standards if
necessary. The deadline for the implementation of the
directive is September 2005. It is obvious that this
directive will have a significant impact on the EU prop-
erty market (e.g. tenants will be able to compare build-
ings on that basis) and will increase the significance of
building passports and certificates. In addition, many
countries outside the EU (e.g. the USA, Canada and
Australia) are implementing or improving building
related energy-efficiency codes and regulations and
also using economic instruments (subsidy programmes
and tax credit schemes, etc.) in order to create sustain-
able property markets (e.g. DCAT, 2001; Beyer, 2002).
Even in Russia efforts are made to implement regional
and federal building energy performance codes
(Matrosov et al., 2003). Furthermore, governments
start introducing unified codes and guidelines of
sustainable building which bring together best practice
in a measurable way and which will raise standards
over time. First examples can be observed in the UK
and in Germany; see Sustainable Buildings Task Group
(2004) and Federal Ministry of Transport, Housing
and Building (2001).
The European Commission’s goals and intentions con-
cerning sustainable development in construction are
expressed within the scope of the development of a the-
matic strategy on the urban environment (Commission
of the European Union, 2004a). To achieve an area-
wide realization of sustainable construction, the Com-
mission suggests incorporating the concept of
sustainability into national building codes and regu-
lations. Furthermore, the Commission is encouraging
Member States to introduce sustainability require-
ments into their own tendering procedures and in
relation to the use of public funds for buildings and
other construction works. The Commission suggests
217
 Lu«tzkendorf and Lorenz
facilitating the following incentives for sustainable
buildings and construction works:
. lower taxation
. favourable banking products and of advantageous
interest rates for lending purposes
. favourable insurance products and of advan-
tageous insurance rates
These incentives perfectly correspond to the two com-
mitments issued by the financial services and insurance
industries within the scope of UNEP (see above). The
EU Expert Working Group, Sustainable Construction
Methods & Techniques (2004, p. 5) states that:
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taxes and all other regulatory mechanisms at
global, regional and local political levels need
to be adapted (transformed into incentives) and
used to help motivate the actors in contributing
to achieve more sustainable construction.
A recent study commissioned by the Paris Region
Environmental Agency (ARENE, Ile de France) identi-
fied further economic and financial instruments in
addition to preferential taxation, credit and insurance
conditions, which can be used to promote sustainable
construction (Drouet, 2003). These instruments
are as follows:
. reimbursement, rebates and investment aid offered
by water or energy utilities, equipment suppliers,
etc.
. establishing specialized funds for sustainable
construction
. heavier fiscal burden on non-sustainable
construction
. grants and subsidies for sustainable construction
. density bonus and/or accelerated building permit
processing for sustainable construction
. business rating indexes including sustainable build-
ing management criteria
. Carbon dioxide (CO2) certificate trading
Standards organizations efforts to standardize and
harmonize indicators and assessment schemes
On a European and international level, efforts are
being made to identify, define and standardize
methods, criteria and indicators that allow for an
assessment of various aspects of a building’s
218
performance. For example, the International Standard-
ization Organization (ISO) is concerned with this issue
and the EU-funded research projects like (HOPE,
Health Optimizing Protocol for Energy-efficient Build-
ings and PeBBU, Performance Based Building) and
gave a mandate to CEN (the European Committee
for Standardization) to develop methods for an ‘assess-
ment of the integrated environmental performance of
buildings’ (Commission of the European Communities,
2004b). Furthermore, an international collaborative
effort called the Green Building Challenge (GBC) is
developing a building environmental assessment tool
that exposes and addresses controversial aspects of
building performance based on harmonized criteria
and indicators. (The issue of performance criteria and
indicators will be dealt with in more detail in the
fourth section.)
The various activities outlined above can be taken as
trends for sustainable development in property and
construction. They can be grouped into those which
create a demand for building related information (e.g.
in order to report sustainable performance of business
activities) and into those which supply or support the
supply of building related information (e.g. the deve-
lopment of indicators and assessment schemes forms
the basis for measuring building performance).
However, it can be argued that these activities take
place uncoordinated and in relative isolation from
each other. Within each group of activities, the problem
of transferring information, data, knowledge and
experience exists. The role of information in property
markets and the problem of information asymmetries
between different groups of market participants (e.g.
buyers and sellers; owners and tenants) has been dis-
cussed by Bruhns (2003) and Lützkendorf and Speer
(2005) and will therefore not be reviewed here in
more detail. However, regarding the activities
described above it must be stressed that an integrated
approach is necessary to overcome existing communi-
cation gaps and to assure compatibility of information
supply and demand.
These activities that highlight the widespread concerns
over environmental, social and ethical issues, put
pressure on companies and investors to behave in a
more responsible manner with respect to the commu-
nities they affect and operate within. They demonstrate
that it is financially illogical and disadvantageous to
invest in property assets or to do any other kind of
business without taking into account sustainability
issues, and suggest that substantial risks and costs are
associated with increasingly stringent environmental
legislation. This leads to the prediction that the
market for sustainable buildings and building projects
will expand dramatically. In fact, there is evidence
from the UK that major corporate occupiers are begin-
ning to want more sustainable buildings (St. Lawrence,

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Figure 3 Trends for sustainable development in property and construction
2004). This, in turn, indicates consequences and impli-
cations for property and valuation professionals which
will be dealt with in the following.
Property valuation and calculation of worth
The basic goal of any property valuation is to issue a
well-founded prognosis of a property’s selling price
for a hypothetical property transaction on a particular
date. In other words, to ascribe a value to a building
without knowing if the free market would accept this
estimate. However, this describes property valuation
only in its simplest form. To give a more precise prop-
erty valuation the distinction between price, value and
worth is crucial. Price is the amount asked, offered or
paid for a good or service. It is important to bear in
mind that the price paid for goods or services by an
individual with particular motivations or special inter-
ests ‘may or may not have any relation to the value
which might be ascribed to the goods or services by
others’ (IVSC, 2003, p. 36). Any observed price from
a comparable sale is not indicative of market value
because property trades in a relatively inefficient
market. Moreover, prices from particular transactions
depend on the perceptions of worth and the negotiating
strengths of the buyer and seller (Fisher, 2002). There-
fore, the terms ‘price’ and ‘value’ are not synonymous,
although they are frequently used as if they were. Value
is an economic concept referring to the monetary
Sustainable property investment
relationship between goods and services available for
purchase and those who buy and sell them. The
economic concept of value reflects a market’s view of
the benefits that accrue to one who owns the goods
or services as of the effective date of valuation
(IVSC, 2003).
Most property valuation methods are designed to
determine a property’s market value, which is defined
in International Valuation Standards as:
the estimated amount for which a property
should exchange on the date of valuation between
a willing buyer and a willing seller in an arm’s-
length transaction after proper marketing
wherein the parties had each acted knowledge-
ably, prudently, and without compulsion.
The first step in the determination of market value is to
estimate the highest and best use or the most probable
use of the property. Then valuation methods and pro-
cedures have to be applied which reflect the nature of
the property and the circumstances under which the
given property would most likely trade in the open
market (Assimakopoulus et al., 2003). To conduct
the valuation, it is crucial to have market evidence
(i.e. transaction data) and/or to have insight into the
estimates of worth of the different market participants.
The term worth is used to describe the underlying
219
 Lu«tzkendorf and Lorenz
investment value or the inherent worth (value in use) of
the property to the individual, group of individuals or
organization and is based on individual specific
inputs which may diverge significantly from market
consensus. For example, whether the potential purcha-
ser is considering investment or occupation will have
difference consequences for the assessment of worth.
An investor’s view of worth can be described as the dis-
counted value of the cash flows generated by the prop-
erty whereas the owner–occupier regards the property
as a factor of production. In contrast, the owner–
occupier’s view of worth depends on the property’s
contribution to the profits of the business and on sub-
jective issues such as image, identity and other personal
preferences. However, both groups will also be mindful
of the property’s potential resale price to a purchaser
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from the other group. For a closer examination of the
fundamental concepts of price, worth and value, see
Adair et al. (1996).
Assimakopoulus et al. (2003) point out that valuation
professionals with insufficient access to transaction
data (which is the case in most property markets)
can only attempt to replicate these calculations of
worth in arriving at an estimate of exchange price,
i.e. market value. Thus it appears that property valua-
tion should always take into account any changes in
the market participants’ view of the benefits associated
with the ownership of property assets; such as the
benefits in the ownership of sustainable buildings. Fur-
thermore, property professionals are not hired solely to
estimate a property’s market value but also to advise
clients on individual buy or sell decisions and to iden-
tify mispriced assets which requires a calculation
of worth on behalf of the client. The calculation of
worth requires investor or client specific inputs. If
these inputs comprise the client’s wish to take advan-
tage of the benefits of sustainable buildings, to mitigate
the risks and costs associated with increasingly strin-
gent environmental legislation and to implement
Socially Responsible Investment policies then property
professionals need to find effective ways to incorporate
sustainability issues into their appraisal processes and
methods.
Value and worth can be regarded as aspects of the
economic dimension of sustainability but since value
and worth are intended to represent the market’s/indi-
vidual’s view of the benefits that accrue from the own-
ership of property, value and worth are, at least in
theory, the central concepts that allow summarizing
and expressing the benefits of sustainable buildings in
monetary terms. However, this is limited by the follow-
ing considerations:
. although it is obvious that certain building charac-
teristics and features contribute positively to value
and worth of property it is very difficult to
220
isolate these effects and to determine mutual
interdependencies
. transaction data or rent levels (i.e. market evi-
dence) for sustainable buildings are a scarce source
due to insufficient research on this issue
. there is difficulty in gaining consensus on what
exactly a sustainable building is and which indi-
cators and measures are a sign of good
performance
. traditional property valuation and appraisal
methods are not (yet) suitable with regard to a
building’s performance to meet environmental or
social requirements
Indicative problems that may arise when addressing
sustainability issues in property valuation and apprai-
sal reports are as follows:
. What adjustments have to be made to rental
growth estimates for an office building with high
thermal and acoustic comfort and with high
quality of the indoor-air indicating higher pro-
ductivity and reduced absenteeism of workforce?
. What risk premiums are appropriate for fully air-
conditioned offices if increasing energy costs and
the risk of power outages is accounted for?
. What is the level of risk for vacancy reductions
in offices with low energy consumption (during
occupation) indicating lower operating costs for
potential tenants?
. What additional income can be generated by
the trade of CO2 emission certificates from
‘CO2-neutral’ buildings?
. To what extent is it necessary to adjust discount
rates in order to reflect a higher stability of cash
flows due to improved marketability of sustainabi-
lity buildings?
This is just a sample of relevant issues, and their con-
sideration leads to further questions. For example: To
what extent are any of these issues addressed in
current property valuations? Does this mean that
property is presently mispriced and to what extent
(McNamara, 2002)? An initial answer to the latter
question is provided by a recent research project
funded by the UK Department of Trade and Industry
and a consortium of UK commercial property industry
representatives. This project aimed to develop an
appraisal model that would allow incorporating sus-
tainability issues into calculations of property worth
(Sayce et al., 2004b). The basis of the appraisal
model forms a method of calculating worth developed

by the Royal Institution of Chartered Surveyors
(RICS). For reasons of simplification, this method
assumes that all the characteristics of a property invest-
ment can be reflected through four key variables: rental
growth, depreciation, risk premium and cash flow
(RICS, 1997). It has now been assumed that specific
sustainability criteria impact on one or more of these
key variables. Selection, classification and weighting
of the sustainability criteria were based on consul-
tations with property professionals, investors and
occupiers who participated in the research project.
Nine sustainability criteria (Table 1) have been selected
and integrated into the appraisal model.
In the next stage of the research project appraisals of
selected properties have been carried out. Once based
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on the RICS standard appraisal method and once as a
weighted sustainability appraisal with adjusted
figures for the four key variables. As expected, the
application of the standard appraisal method to
‘average’ properties resulted in an over-valuation in
comparison to the results of the sustainability apprai-
sal. In contrast, the application of the standard
method to a building performing particularly well
under the sustainability criteria would lead to an
under-valuation in comparison to the results of the
sustainability appraisal. In this context the authors’
concluding remark of the study is of major interest:
What is clear, however, is that a deeper analysis
of property characteristics is necessary if apprai-
sals are to keep pace with the investment risk
implications of changing occupier demands.
(Sayce et al., 2004b, p. 20)
This research project is unique because it is the first
time that major property market players are making
substantive efforts to introduce sustainability issues
into their investment decision processes and its value
Table 2 Sustainability criteria linking through to worth
Sustainability criteria Conduit
Building adaptability risk premium, cash £ow,
rental growth, depreciation
Accessibility rental growth, depreciation
Building quality rental growth, cash £ow,
depreciation
Energy ef¢ciency rental growth, risk premium,
cash £ow, depreciation
Pollutants rental growth, risk premium,
cash £ow, depreciation
Contextual ¢t rental growth
Waste and water rental growth, cash £ow,
depreciation
Occupier satisfaction risk premium
Occupier impact risk premium
Source: Sayce et al. (2004b).
Sustainable property investment
for increasing sustainable development in the property
sector is recognized. However, with respect to sustain-
ability variable selection and weighting, the project
represents the assumptions of a particular group of
investors and is driven by the view that the property
market currently offers huge opportunities for inves-
tors to exploit pricing inefficiencies because many
market participants just start realizing the benefits of
sustainable design.
The intention of this paper is to lay the basis for includ-
ing sustainability issues into estimates of market value
in order to produce more accurate and reliable valua-
tion results, and by doing so serving property pro-
fessionals to analyse property related information in
a more efficient manner. This will make their assump-
tions much more explicit and thereby produce better
value for clients who intend to act on the valuation.
The authors argue that before it is possible to draw
any conclusions from the effects of particular building
characteristics on property values, it is necessary to
create a well-founded multidimensional system of
property performance criteria and indicators that inte-
grates economic, environmental and social consider-
ations. A system of property performance criteria and
indicators (i.e. one that allows for an assessment of a
building’s sustainability) will need to address the ques-
tions of what constitutes building quality, energy effi-
ciency, occupier satisfaction, etc. This, in return,
leads to the problem of describing, measuring and
assessing those aspects of property performance along
the life cycle stages of buildings and within different
market environments. A system designed to assess
overall property performance is not only necessary
when dealing with the issue of integrating sustainabil-
ity issues into property valuations but also to support
various other activities during the life cycle of buildings
(e.g. strategic portfolio decisions, due diligence
processes, lending, insurance, controlling, etc).
Furthermore, it is argued that weighting and selection
of sustainability issues that are to be included within
the estimation of market value will change over time
and depend on the characteristics of the particular
market segment because they must reflect market’s par-
ticipants’ preferences and the degree of awareness for
the benefits of sustainable buildings. Therefore and in
contrast to the procedure concerning the calculation
of worth, they must not be determined by the assump-
tions and views of certain individuals or groups of indi-
viduals. Rather, they must be determined by using
other means of assessment, i.e. by applying advanced
property valuation techniques like hedonic pricing.
These issues will be dealt with in the following.
Overall property performance assessment
In connection with a trend towards performance-based
building, the performance approach is currently being
221
 Lu«tzkendorf and Lorenz
discussed in the construction sector and performance-
based building regulations are in use or under develop-
ment in numerous countries worldwide (e.g. Bakens,
2005; Meacham, 2005; Sexton and Barret, 2005).
Property performance is a very broad concept and
performance means different things to different
people. But in a very general sense, it may be defined
as behaviour in use. More precisely, performance can
be understood as the degree of compliance of user/
owner requirements with corresponding building
characteristics and attributes. The performance
approach has its seeds in the area of describing and
assessing the fulfilment of functional requirements
(functionality and serviceability) and its development
has strongly been influenced and affected by F. Szigeti
and G. Davis (e.g. Szigeti and Davis, 2003; Szigeti
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et al., 2004). Currently, there are a variety of efforts
being made on an international and European level to
define criteria and indicators that determine several
aspects of property performance. Among many
others, these are as follows:
. Two European-funded projects, HOPE (Health
Optimizing Protocol for Energy-efficient Buildings)
and PeBBU (Performance Based Building), aim to
develop a framework for performance criteria for
healthy and energy-efficient buildings. HOPE is a
three-year pre-normative socio-economic research
project that started in January 2002 under the pro-
gramme ENERGIE. PeBBU is a thematic network
under the Competitive and Sustainable Growth
programme that started in September 2001 and
will run for four years. While PeBBU focuses on
gathering all available information on health and
energy-efficiency issues in order to come up with
a state-of-the-art report, HOPE’s aim is to quantify
particular performance criteria for health and
energy efficiency in order to allow for an assess-
ment of these parameters in current and future
office and apartment buildings (Bluyssen and
Loomans, 2003; Bluyssen et al., 2003). For more
information on HOPE and PeBBU, see http://
hope.epfl.ch and www.pebbu.nl
. CRISP is a European thematic network on con-
struction and city-related sustainability indicators
that aims to develop and validate harmonized
criteria and relevant indicators to measure the
sustainability of construction projects. An exten-
sive database of indicators is provided on the
CRISP homepage: http://crisp.cstb.fr
. Within the scope of ISO TC 59 SC 17 ‘Sustainabil-
ity in building construction’ the International
Organization for Standardization tries to standar-
dize criteria and indictors for the performance of
buildings; various working groups are presently
dealing with questions concerning building per-
formance measurement (e.g. ISO CD 21929,
222
ISO CD 21930, ISO CD 21931 and ISO WD
15392; 2004a –c, e).
In sum, there are an unwieldy number of criteria and
indicators that introduce various ways of measuring
various aspects of sustainable development and build-
ing performance. There is a strong need to reduce com-
plexity and concentrate on a set of key performance
indicators (KPIs), which can be understood and
applied by a wider public (e.g. by participants and
practitioners of property and financial markets) and
not only by specialized researchers and academics.
Lützkendorf and Speer (2005) and Then and Clowes
(2004) provide initial proposals in determining so-
called overall property performance and in defining
property specific KPIs. However, the transference of
the performance approach on questions addressing all
dimensions of sustainable development simultaneously
is quite new. In this context property performance can
be expressed by determining (assuming a consistent
extension of the original performance approach) the
degree of compliance of requirements concerning sus-
tainability formulated by stakeholders (e.g. awarding
authorities, building owners/users, public, govern-
ment, etc.) with the corresponding building charac-
teristics and attributes. In cases where it is not
possible or appropriate to formulate stakeholder
requirements (which can be justified scientifically or
by any other means), property performance can be
expressed by solely declaring and measuring key
performance indicators, i.e. relevant building charac-
teristics and attributes in the form of unvalued (e.g.
results of an inventory analysis), valued (e.g. results
of an impact assessment) or qualitative information.
Figure 4 shows the different aspects of property
performance.
Although the focus lies on assessing a building’s sus-
tainability (i.e. its economic, environmental and
social performance), a detailed description of the func-
tional unit or an assessment of the functional and
technical building performance (i.e. object perfor-
mance) is pivotal for two reasons. First, the interpre-
tation of results of an assessment of a building’s
economic, environmental and social performance can
only be made based on information on the building’s
functional and technical performance. Second, object
performance strongly interacts with or influences the
other three aspects of property performance. Further-
more, property performance must be viewed within a
wider context, which includes issues of process,
design and technical quality. For example, a building
designed with strong emphasis on sustainability issues
may not reach its targets because of poor operation
and management. Conversely, an ‘average’ building
may perform better due to good operation and man-
agement. The description and assessment of a buildings
economic, environmental and social performance can

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Figure 4 Aspects of property performance within a system of
building-related information
be established, for instance, based on the following
methodical basics:
. life cycle costing (LCC)
. life cycle assessment (LCA)
. post-occupancy evaluation (POE)
The terms ‘life cycle assessment’ and ‘life cycle costing’
(sometimes referred to as whole life costing) are often
used interchangeably, which creates a great deal of
confusion. The concepts of LCA and LCC within the
construction and property industry have developed
independently in response to either economic or
environmental issues. LCC was originally developed
in the mid-1960s to assist the US Department of
Defense in the procurement of military equipment
(Cole and Sterner, 2000). Today the application of
LCC is much more widespread and encompasses all
those techniques that take into account both initial
costs and future costs and benefits (savings) of an
investment over a certain period of time (e.g. the pro-
jected lifetime of a building). These techniques system-
atically consider all relevant costs and revenues
associated with the acquisition and ownership of an
asset and they are used to facilitate the effective
choice between different project or building alterna-
tives, e.g. to asses which design and construction
Sustainable property investment
technology choices have the greatest influence over
the life cycle of a building, and by focusing on these
areas, to evaluate if and how significant improvements
can be made (Kishk and Al-Hajj 1999). LCC calcu-
lations usually consist of the following elements:
. initial capital cost for design and construction or
acquisition
. management and operating costs
. costs for maintenance and renovation
. costs incurred or benefited from the building’s
disposal
Recently, however, attempts are being made also to
include the income generated by the property within
the calculation. An ISO Standard Under Development
currently investigates these issues (ISO DIS 15686-5,
2004d). With LCC techniques it is possible to demon-
strate economic benefits of sustainable design because a
smaller plant and equipment are required and buildings
also consume fewer resources for their construction
and during operation. But LCC techniques have
several limitations that have to be understood in
order to interpret the results. For example, it is very dif-
ficult to estimate future maintenance and operation
costs. Observation and longitudinal evidence are also
needed to determine the life of building materials and
components. Furthermore, very few owners pay all
the costs of the acquisition and ownership of a building
and therefore regard some costs more important than
others. There is an ongoing discussion about the appro-
priate form of representation of LCC results depending
on its application (e.g. capital value for general com-
parison, investment plans for the scheduling of
payment flows, etc.). But despite these limitations,
the well-founded prognosis of life cycle costs is now
seen as indispensable for the purpose of investment
decisions and will continue to gain significance with
the rising prevalence of BOT (built–operate –transfer)
models. Currently, computer-aided prognoses of life-
cycle costs have been implemented in the Netherlands
(Kostenreferentiemodel), Norway (Arskostnadsanalyse)
and Finland (Kiiteistötieto).
Investment appraisal using cost data are relatively
straightforward compared with appraisal and com-
parison on the basis of environmental information,
due to the wide range of data available and imprecise
and diverging perceptions of good environmental per-
formance (Edwards et al., 2000). LCA has been devel-
oped as a result of a more responsible attitude towards
the environment.
LCA methodologies have emerged as a means
to profile the environmental performance of
materials, components and buildings through
223
 Lu«tzkendorf and Lorenz
time and have been generally accepted within
the environmental research community as the
only legitimate basis to compare competing
alternatives.
(Cole and Sterner, 2000, p. 368)
Usually LCA examines energy and mass flows in order
to provide information on resource consumption and
determine the origin of harmful environmental loads
which have potential effects on global warming, acidi-
fication, ozone depletion, biodiversity, eco-toxicity,
human toxicity and on occupational and living
health. There are now a number of LCA-based assess-
ment methods and tools that have emerged worldwide,
e.g. BREEAM and ENVEST (UK), Eco-Quantum
(the Netherlands), Okoprofil (Norway), ESCALE
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(France), SimaPro (the Netherlands), etc. But most of
these tools assess buildings after they are designed
and do not account for future life cycle costs of the
building. Due to the complexity of integrating LCA
and LCC methodology, only a few tools exist that
allow for a combined determination and assessment
of cost, environmental and occupational health issues
in the planning phase. The basic goal of these com-
bined assessment approaches is to allow professionals
to appreciate a design or building solution simul-
taneously from different points of view and within
different life cycle scenarios. First examples of com-
bined tools are LEGOE/LEGEP (Germany) and
OGIP (Switzerland). For a detailed description of
approaches for an ‘integrated life-cycle analyses’, see
Kohler and Lützkendorf (2002). The software BEES,
a building materials selection tool developed by the
US Government’s National Institute of Standards and
Technology (NIST), allows measuring environmental
and cost performance of single building products.
One major problem, however, associated with com-
bined or/and mere LCA-based assessment approaches
is the lack of standardization in terms of scope, defi-
nition of performance indicators and weighting of
different environmental aspects (Todd et al., 2001).
While current assessment schemes take the issue of
occupant health into consideration, there is less focus
on occupant satisfaction, functional fit and pro-
ductivity. They do not provide information on what
kind of building solutions work best in practice and
why. This is the goal of POE.
Zimring and Reizenstein (1980) defined POEs as
‘examinations of the effectiveness for human users of
occupied design environments’. The methodology,
development and benefits of POE are explicitly
described in Preiser (2002), Derbyshire (2001) and
Zimmermann and Martin (2001). POE can be charac-
terized (at least in theory) as follows:
. design aid: as a means of improving building pro-
curement, particularly through ‘feed-forward’
into briefing
224
. management aid: as a ‘feed-back’ method for
measuring building performance, particularly in
relation to organizational efficiency and business
productivity
. benchmarking aid for sustainable development: for
measuring progress in the transition towards sus-
tainable production and consumption of the built
environment (Cooper, 2001)
Although the use of POE is widely advocated as best
practice in guides to construction and facility man-
agement, POEs are far from being a ‘mainstream’
activity within the construction and property
sector. The Probe studies are one of the first
systematic and rigorous attempts to investigate the
performance of buildings, modern workplace
environments and their occupant’s responses
(Bordass et al., 1999). They gave valuable insights
into the functioning and performance of buildings
and led to the identification of four ‘killer variables’
that positively correlate with occupant’s comfort,
satisfaction and perceived productivity (Leaman
and Bordass, 1999):
. personal control: occupants’ perception of control
over their workplace environment (i.e. heating,
cooling, lighting, ventilation and noise)
. responsiveness: the building’s capability to meet
occupants’ needs very rapidly either in anticipation
or as they arise (e.g. adaptability of spaces to
accommodate change, speed of response to com-
plaints by the facilities management, etc.)
. building depth: the building’s depth of space (a
depth of about 12 m across the building seems
optimal for human performance; the deeper the
building gets, overall satisfaction and productivity
tend to go down)
. workgroups: relates to room size and workspace
organization; productivity is higher in smaller (less
then four people) and more integrated workgroups
Derbyshire (2001, p. 81) summarized the significance
of the results of Probe:
If we take the Probe findings seriously we must
rigorously prune unnecessary complexity and
acknowledge that users will be more tolerant of
their internal environment if they can control
some aspect of it themselves by throwing a
switch or opening a window. Users like buildings
that like them!
From a synthesis of the research reviewed above, a set
of possible sustainability KPIs are provided in Table 3.

Table 3 Possible sustainability key performance indicators
Criteria Indicators for the design stage
Object characteristics/object performance
Technical performance Planned heat insulation class
Planned sound insulation class
Planned ¢re safety class
Planned load carrying capacity
Ease of conducting maintenance,
servicing and recycling activities
Functional performance Functionality and serviceability
Adaptability and responsiveness
Suitability for planned service life
Accessibility
Environmental performance
Energy use Primary energy demand during
occupation (calculated)
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Raw material depletion Use of fossil fuels
Use of mineral resources
Use of biotic/renewable resources
Land use Planned degree of sealing of the lot
Ecological value of the lot/change
of ground quality
Planned land use per unit
(e.g. number of workstations)
Impacts on the environment Global warming potential (GWP) 100
(CO2-equivalent)
Ozone depletion potential (ODP)
Acidi¢cation potential (AP)
(sulphur dioxide (SO2)-equivalent)
Eutrophication potential (EP)
Photo-oxidant formation potential
Waste production Waste production during construction
processes
Total waste accumulation (by categories)
Impacts on soil and Material selection subject to separate
ground water of lot checklist
Economic performance
Life cycle costs Construction costs
Projected maintenance and
operating costs
Projected disposal costs
Development of income,
value and/or worth
Social performance
Health of occupants/users
Comfort and well-being of e.g. thermal comfort measured
occupants/users as PPD/PMV
Safety of occupants/users
Indoor air quality
Material selection subject to
separate checklist
Comfort and well-being of
neighbours
Cultural value
Note: PPD, predicted percentage dissatis¢ed; PMV, predicted mean vote; BRI, building related illness; TVOC, total volatile organic compound.
These indicators and the information derived from
their use fit into a system of building related infor-
mation that allows for an integrated assessment of
property (Figure 3). The idea is to have a ‘building
information system’ that contains building-related
Sustainable property investment
Indicators for the assessment of existing buildings
Realized heat insulation class
Realized sound insulation class
Realized ¢re safety class
Realized load carrying capacity
Ease of conducting maintenance,
servicing and recycling activities
Functionality and serviceability
Adaptability and responsiveness
Suitability for remaining service life
Accessibility
Primary energy demand during
occupation (measured)
Use of fossil fuels
Current degree of sealing of the lot
Current land use per unit
(e.g. number of workstations)
GWP 100 (CO2-equivalent)
ODP
AP (SO2-equivalent)
EP
Photo-oxidant formation potential
Waste production during occupation and use
Total waste accumulation (by categories)
Impacts on soil and ground water of lot
Costs for refurbishment and modi¢cation
Effective maintenance and operating costs
Effective/projected disposal costs
Income stream/current market
value/current calculation of worth
Appearance of Sick Building Syndromes/BRI
Appearance of black mould
Occupant/user satisfaction
Number of building related accidents
Olfactory freshness
Concentration of selected substances (TVOC)
Concentration of radon
Disturbance through building/use
and occupation of building
Existing monumental protection
information of every aspect and in great detail. Then,
depending on the purpose and viewpoint of the user
(e.g. asset and facility managers, valuers, tenants,
etc.), information can be retrieved at different levels
of aggregation. This idea has been conceptualized in
225
 Lu«tzkendorf and Lorenz
Lorenz et al. (2004) and in Lützkendorf and Speer
(2005).
Within the scope of further work it is necessary to
find a balance between quantitative and qualitative
measures and to develop rules and guidelines concern-
ing inquiry and assessment of each indicator, including
a determination of system boundaries. To assure com-
parability of different assessment approaches and a
certain degree of quality and amount of required infor-
mation, it is essential to reach agreement on a ‘minimal
list’ of indicators within an international or European
framework respectively. Furthermore, it is necessary
to develop appropriate schemes and software tools
that allow for a simultaneous assessment of these indi-
cators. In this regard, the authors suggest taking into
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account the following recommendations.
Any existing LCA-based assessment scheme presents a
‘snap-shot’ picture of the building’s performance,
which may not be a realistic one. Performance assess-
ment must be seen as a continuous exercise along the
building’s life cycle. Subsequent to an initial assessment
during the planning stage or short after completion on
the basis of assumptions and scenarios the assessment
results must be endorsed by collecting and assessing
‘actual-values’ after commissioning. Merely putting
assessment results on record is not sufficient. The
basic principles for describing and assessing perfor-
mance within the life cycle of single buildings are
affected by:
. the cause of assessment (e.g. support of decision-
making processes during the planning stage;
lending; appraisal; transaction; controlling within
the process of continuous improvement)
. the point in time (e.g. during the planning stage;
within and/or during the building life cycle; during
the planning of refurbishment or revitalization)
. the object to be assessed (e.g. new building in the
planning stage; new building after commissioning;
existing building which has been regularly assessed
during its past life cycle; existing building without
any information and past assessment results
available)
Those ancillary conditions determine the amount and
type of information available. For example, during
the planning stage the expected demand for heat
energy can only be calculated based on assumptions
and scenarios, whereas real energy consumption can
be measured during the stage of occupation and use.
Therefore, it is likely to happen that data and infor-
mation from the planning stage can be specified,
replaced or amended with completely new information
(e.g. results of a post-occupancy evaluation) during the
stage of occupation and use. At the same time, those
226
ancillary conditions also influence the choice of
system boundaries. For example, regarding an old
building retrospectively calculating primary energy
consumption during the past manufacture of the build-
ing products is no more useful (Lützkendorf and
Lorenz, 2004). Consequently, indicators and the infor-
mation obtained by their assessment can be group into
four different categories:
. information and data that can be taken over from
the planning stage but which become less important
through the subsequent life cycle of the building
. information and data from the planning stage that
need to be constantly updated during the building’s
life cycle
. information and data that can be taken over from
the planning stage and which gain importance
through the subsequent life cycle of the building
. information and data that can only be assessed
during occupation
Figure 5 illustrates different assessment scenarios,
different points in time within the life cycle of buildings
(displayed by the black dot) at which assessments can
be conducted, comprised life-cycle stages as well as
corresponding flows of information.
The frames express the phases of the building life cycle
that are usually considered for each analysis. However,
depending on the applied assessment method, partial
modifications can be made on the manner and the
extent of the detail available on different phases of
the building life cycle; this variability is displayed by
the dashed frames. For this reason it is important to
declare which phases of the building life cycle have
been actually regarded for the assessment. Addition-
ally, the arrows within the frames provide information
on the nature of the data underlying each assessment,
i.e. the arrows indicate whether the assessment is based
on an analysis of past measurements (‘retrospective
evaluation’), on current data (‘snap-shot evaluation’) or
on a well-founded prognosis of future developments
(‘anticipatory evaluation’). The type of evaluation must
also be determined, otherwise a valid interpretation of
the assessment results can not be guaranteed.
Most existing assessment schemes focus either on cost
or on environmental performance. What is required is
a complex description and assessment of buildings,
covering all aspects and dimensions of sustainability.
Current standardization activities need to be taken
into account in order to offer indicators that are in
compliance with evolving standards. For example,
the results of ISO 59 TC 17 WG 4 should be taken
into consideration in order to offer an ISO-compliant
description of a building’s environmental performance.

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Figure 5 Assessment scenarios and £ows of information
In connection with the discussion about LCA-based
assessment schemes, it is often argued that a high level
of complexity may not be appropriate to reach a wide-
spread propagation of the tools because the market
often adopts simple, inaccurate tools which are easy
and cheap to deploy even if their answers are not as
reliable. The authors argue that it is not appropriate
to decide between simple and complex tools: it is
important to have complex and powerful tools but it
is necessary to display assessment results in various
levels of aggregation and in communication formats
designed to meet different users’, e.g. academics’, prop-
erty professionals’ and households’, specifications and
requirements.
A forum to discuss these recommendations will be pro-
vided by the forthcoming Sustainable Building 05 Con-
ference to be held in Tokyo, Japan, in September 2005.
Advanced property valuation
The assessment scheme proposed above and the results
provided by its application regarding property per-
formance will only prove meaningful if benchmarks
and appropriate weights for indicators can be assigned.
This is important not only for the assessment of a
building’s environmental performance, but also for
the determination of a building’s market value.
The market price (and therefore value) of commercial
property primarily depends on the income generated
Sustainable property investment
by the property, with market price being some multiple
of income.
Price depends on income, but income depends on
the features of the property. This creates a
relationship between market prices on the one
hand and property characteristics on the other.
(Janssen et al., 2001, p. 343)
Therefore, in addition to appropriate weights and
benchmarks, it is necessary to identify those aspects
of building performance that significantly affect price
and that are crucial for the financial success of property
projects. Of course, location is paramount but other
factors are becoming more important.
The list of possible sustainability KPIs still is quite large
and it probably might not be necessary to assess all
indicators; selecting only a few of them might be
appropriate. And if so, which ones? Assuming that
building occupiers have an increasing awareness of
the space that they use and occupy (which affects
their view of what they are willing to pay), this will
be reflected in the market over time. So-called
advanced property valuation techniques can (must)
be used to monitor this process because increasingly
global and faster changing property markets – in
which decisions are based on valuation reports and
expert opinion – require that valuation methodology
and procedures anticipate these market movements
227
 Lu«tzkendorf and Lorenz
by reflecting the thought processes of the players in the
market. This also accounts for real estate due diligence
processes that try to explicitly assess risks and chances
of a property investment by investigating a large
number of aspects in great detail (e.g. legal and tax
issues, location, tenants, facilities management, etc.).
However, current due diligence practice (at least in
Germany) lacks attempts to analyse a building’s per-
formance under many of the sustainability indicators
mentioned above. Advanced valuation techniques can
be used to close this gap.
Current property valuation methods can be classified
as ‘traditional’ and ‘advanced’. The ‘traditional’
valuation methods include the comparable, invest-
ment, profits, residual and cost methods. All these
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methods rely on comparison as the principal
tool of analysis. Although the most common
method for valuing income producing property is
called the ‘investment method’, it is in fact a
method of simple comparison. This comparison can
only be relied upon if there is a degree of uniformity
in the market. French and Wiseman (2003) have
argued that the traditional reliance of valuers to
use methods of comparison to determine a prop-
erty’s market value has led to an artificial divergence
of a property’s worth (or ‘value in use’) and
its market value or ‘value in exchange’. This is
because comparison is becoming more difficult to
obtain due to both the diversity of lease contracts
and the variety of different building qualities
offered in the market place. However, in an efficient
market (e.g. financial and stock markets) exchange
prices are determined by the buyer’s perception of
worth, i.e. price and worth should ideally coincide.
Since property is considered increasingly as an
asset class that has to compete with other financial
investment options like stocks and bonds it can be
assumed that market efficiency increases. Therefore,
relying on traditional valuation methods will lead
to an unbalanced approach for determining a prop-
erty’s exchange price or market value. In other
words, ‘the valuation profession has forgotten how
to determine the ‘worth’ of a property from the
viewpoint of the user’ (French and Wiseman, 2003,
p. 25).
‘Advanced’ valuation methods comprise artificial
neural networks, hedonic pricing methods, spatial
analysis, fuzzy logic, autoregressive integrated
moving average and rough set theory. For a more
detailed description of these valuation methods, see
Curry (2002), Amato (2002), Assimakopoulus et al.
(2003) and Kauko and d’Amato (2004). The most
promising methods to address sustainability issues
in property valuation seem to be hedonic pricing
methods, which are currently used to explain the for-
mation of house and land price levels (for some
examples of their application, see Kauko, 2003a).
228
The theory of hedonic price functions provides a
framework for the analysis of price formation of differ-
entiated products, e.g. housing units, office buildings,
etc., whose individual features or quantitative and
qualitative characteristics do not have observable
market prices. It is assumed that different quality
characteristics have particular relationships to the
price of the product that are defined in a hypothesized
formal model. The analysis is conducted by using
multiple regression techniques on large data sets
whereby different products are compared to assess
the value of their differences, so-called ‘shadow
prices’, with respect to all the factors determining the
price (Kauko, 2003b). The aim is to measure (using
objective data) the value market that participants
place on these different quantitative and qualitative
characteristics. However, the dilemma is that one
often does not know what an appropriate formal
model is. The procedure is then to choose another
model, perform the analysis and study the results;
provided the results do not disprove the model,
appear reasonable and logical, and are in agreement
with accepted beliefs, the model is then regarded as
appropriate (Janssen et al., 2001). For a more detailed
explanation of multiple regression techniques applied
to property valuation, see Linne et al. (2000).
The absence of a case study to demonstrate the func-
tioning of hedonic pricing techniques and that verifies
the authors’ assumptions is a criticism that may be
made. But hedonic pricing techniques can only
provide valid results if two preconditions are fulfilled:
the first one addressed above is the existence of a
system to describe and assess different building
features or quantitative and qualitative characteristics
to guarantee the fit of the target property to the
comparables, or expressed in other words, to avoid
comparing apples and oranges. The second one is
the availability of large and appropriate data sets,
i.e. detailed building related information including
rent levels, transaction prices and information on
the building’s performance as defined above.
However, such data sets do not yet exist. Therefore,
it simply is not yet possible to provide any meaningful
case study. Of course, property databases with infor-
mation on rent levels and transaction prices of com-
mercial buildings do exist (e.g. Investment Property
Databank (IPD), UK; Deutscher Immobilienindex
(DIX), Germany) but there is a need for and a
benefit to be gained from linking them with evidence
on building performance.
The application of hedonic pricing techniques is,
however, additionally hampered by the circumstance
that many valuers (especially the smaller valuation
offices) might not have the facilities (e.g. access to
appropriate property databanks), required skills and
probably motivation to use those techniques. They
are therefore likely relying on traditional valuation

approaches for the foreseeable future. Relying on their
experience or evidence from past transactions, it is
likely that valuers will try addressing sustainability
issues by adjusting the so-called All Risks Yield
(ARY), which is used in connection with the invest-
ment method, the most widespread valuation
method. The basic approach of the investment
method for determining market value for a property
let at its full market rental value is simply rent
divided by yield. One of the main failings of this
method is that all risks and chances associated with
the property, including rental growth potential, obso-
lescence and the risk of loosing the tenant, etc. are
implied within the yield. The basis for deriving the
ARY is also dubious. Adjustments to the ARY are
insufficiently analytical and the mathematical model-
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ling lacks both rigour and validation.
Property valuation is often said to be ‘an art and not a
science, but it is not astrology’ (Jacob, 1996). There-
fore, using the ARY to address more risks and
chances from additional sustainability issues cannot
be regarded as an appropriate solution. Instead, the
application of hedonic pricing techniques allows con-
tinuously monitoring market behaviour and offers a
more scientific basis for the price or value adjustments
that have to be made to account for the benefits of sus-
tainable design features not solely reliant upon the
knowledge, judgement and experience (or inexperi-
ence) of the individual valuer. In other words:
hedonic pricing takes some art out of property valua-
tion practice and replaces it with science.
Implications for real estate lending and
insurance
St. Lawrence (2004) found that in the UK, banking and
insurance institutions (as well as valuation pro-
fessionals and real-estate agents) are least engaged
and concerned with sustainable property development
and that they do not incentivize or reward sustainable
design. Research conducted by Drouet (2003) found
that the situation is similar in most other countries
and that only very few examples exist where preferen-
tial insurance or credit conditions are offered for sus-
tainable buildings (e.g. Hanover Insurance Company,
United States, offers a 10% credit on homeowner
property insurance premiums for energy-efficient
homes). These findings are contradicted by the fact
that the largest banking and insurance organizations
participate in the United Nations Environment
Programme mentioned above. However, it can be
argued that most insurers and risk managers have not
yet made the connection between sustainable design
and reduced financial risk because they do not yet
have appropriate assessment schemes and still need
to be convinced by further long-term research on
this issue.
Sustainable property investment
Kats et al. (2003) identified considerable opportunities
by the synergies between sustainable design and risk
management:
. Worker health and safety: lower workers’ compen-
sation costs and reduced risks through avoidance
of litigations caused by Sick Building Syndromes.
For example, the German newsmagazine Der
Spiegel (2002) reported substantial share prices
losses (up to 50%) of companies such as ABB,
Bayer, DaimlerChrysler, Fresenius Medical Care
and Saint-Gobain during July and October 2002
caused by expected compensation claims of build-
ing occupants who suffer health damages from
asbestos.
. Property loss prevention: many sustainable design
features reduce the likelihood of physical
damages and losses in facilities. For example,
Mills (2003a) identified a wide a range of energy-
efficient and renewable energy technologies that
offer loss prevention benefits.
. Liability loss prevention: business interruption risk
(e.g. caused by power outages) can be reduced by
facilities that derive their energy from on-site
resources and/or have energy-efficiency features.
. Natural disaster preparedness and recovery: a
subset of energy-efficient and renewable energy
technologies make buildings less vulnerable to
natural disasters, especially heat catastrophes
(Mills, 2003b).
Furthermore, concerning loans secured by real estate, it
can be argued that the benefits of sustainable design
mentioned above (increased marketability, more
stable income stream, etc.) can reduce the probability
of credit default. Conversely, loans secured by un-
sustainable buildings will have a higher probability of
default. This view is shared by the New York State
Energy Research and Development Authority
(NYSERDA), which funded a report on the recognition
of energy costs and energy performance in commercial
property valuation. The report clearly states that
‘lenders should request energy performance documen-
tation with property appraisals for both new and exist-
ing buildings’ (IMT, 2003, p. 6).
In this context, it is necessary to mention a recent
development within international banking. In June
2004, the Basel Committee on Banking Supervision
published a revised framework of the existing Basel
Capital Accord. This framework (often referred to as
‘Basel II’) contains new capital adequacy rules for
international banks. It is designed to strengthen
further the soundness and stability of the international
banking system by addressing banking risks much
more explicitly and by introducing stronger risk
229
 Lu«tzkendorf and Lorenz
management practices. At first glance, capital ade-
quacy in international banking may have nothing in
common with sustainability in property and construc-
tion. However, these capital adequacy rules (which
are applied by nearly all banks worldwide) determine
how much capital a bank must hold against their
loans. At the moment, the minimal capital requirement
is 8%, i.e. the maximum amount of loans banks can
issue is 12.5 times their capital. Under the new rules
of the Basel II Accord, loans are categorized into differ-
ent risk classes and depending on the risk class the
capital requirement is either lower, equal to or above
8%. Consequently, the interest rates on property
loans will be determined analogically in relation to
the risks associated with the property. The riskier the
loan, the higher the interest rate will be. To determine
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the degree of risk or the so-called probability of default
of loans, the Basel Committee on Banking Supervision
has created a classification system for real estate and
project financing. Unfortunately, this classification
system does not address a building’s quality ade-
quately. The issue of sustainability is not even men-
tioned. However, since the Basel Committee does not
have any regulatory power, the framework and the
standards it contains must be implemented by central
bank governors and/or heads of banking supervision.
For this reason, the European Commission is reviewing
the framework in order to amend the Consolidated
Banking Directive (2000/12/EC) and the Capital
Adequacy Directive (93/6/EEC), which are currently
determining banking capital adequacy rules within
the EU Member States. In this regard, the authors
strongly recommend that the Commission takes into
account the issue of sustainability as well as the associ-
ated implications for real estate risks within this review
process. At the same time, making sustainability
considerations mandatory within lending procedures
would substantially push the European Commissions
goal to reach an area-wide realization of sustainable
construction.
The Basel Committee on Banking Supervision regards
loans secured by real estate assets and project financing
very risky. In the worst case, Basel II would require
banks to hold 2.50 times more capital for financing a
commercial real estate project than they have to hold
at the moment. This is probably not a major problem
in the Anglo-American countries as capital market
financing is common practice. However, in Germany,
property developers and property professionals are
concerned because real estate in Germany is mainly
financed by banks and therefore interest rates for real
estate project financing are expected to rise. To avoid
such an unfavourable treatment of commercial real
estate, Basel II contains an option that allows banks
to determine the riskiness of real estate projects (and
herewith capital requirements) by themselves. This
requires the bank to develop a so-called real estate
rating system that must be approved by the national
230
banking supervisory authorities. A real estate rating
system is based on a large data pool containing infor-
mation about the bank’s past real estate loans and on
a system of different rating criteria to classify property
features and characteristics as well as local externalities
and market conditions. The intention is to draw con-
clusions from the performance or default rates of past
real estate loans on the probability of default of
current and future loans. No robust property rating
system currently exists that produces valid and trace-
able results. The economic ‘property’ unit is incredibly
complex. In addition, research identifying the reasons
for default of loans secured by real estate is either
inadequate or unavailable. There is also a lack of suit-
able data and an absence of standardization concerning
the weighting and assortment of risk rating criteria.
Nonetheless, many major banks are currently trying
to develop their own rating systems. This offers the
opportunity to foster sustainable development among
real estate projects of every type and scale. As banks
become more aware of the risks (and opportunities)
associated with sustainability issues, it is likely they
will be willing to integrate corresponding performance
criteria within their real estate rating systems. Initial
evidence of this comes from The European Group of
Valuers Associations (TEGoVA), an organization
concerned with the development of property valuation
standards and education of valuation professionals
in association with the European mortgage industry.
TEGoVA proposed a property and market rating
system not only for capital requirement purposes, but
also because clear opportunity and risk profiles of
properties and markets are now regarded as a central
element of property valuations and economic feasi-
bility studies. TEGoVA’s rating system includes the
rating criterion ‘sustainability’ (TEGoVA, 2003).
Unfortunately, the TEGoVA approach fails to define
or explain sustainability. Other rating systems cur-
rently being developed by other organizations or
banks (e.g. rating systems are being developed by
FERI and TÜV Süddeutschland as well as by HVB
Expertise GmbH) also have similar problems with
rating criteria for building quality: there is a lack of
precise definitions, of common terminology and of
understanding what good environmental and social
building performance might be. A proactive involve-
ment in this process by the whole building related
research community could provide a sound basis for
agreeing on definitions and indicators for real estate
risk assessment. This is an urgent issue because Basel
II will be implemented into practice by the end of
2006 and therefore the opportunity now exists to inte-
grate the issue of sustainability into banking and
lending procedures.
Conclusion and outlook
The perception of property as a commodity is begin-
ning to change. It has been shown that market

participants are becoming more aware of the benefits
and risks associated with the ownership and occu-
pation of property. This affects the way property will
be treated for valuation, insurance, lending and other
decision-making purposes along the life cycle of build-
ings and it means a great challenge for the development
of appropriate methodological approaches and sup-
porting decision tools. The identification of and agree-
ment on sustainability KPIs and the development of
corresponding assessment schemes is not an academic
exercise. It has application for several uses including
engagement with the financial community to foster
the widespread implementation of principles of sus-
tainable development in property and construction.
The opportunities currently exist because major parts
of the banking and financial sector are motivated, but
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they need more appropriate guidance.
It has been argued that advanced property valuation
techniques such as hedonic pricing can align issues of
sustainable development with economic return.
However, before valid results can be produced and
before property investment and lending decisions can
be adequately based on sustainability considerations,
two issues need to be put on top of future research
agendas:
. The environmental and building research commu-
nity has a central role in determining a standardiz-
ation of terminology and improving the exchange
of ideas between financial and environmental
research disciplines. The simultaneous consider-
ation of economic, environmental and social
issues can provide a more profound knowledge
about property characteristics and associated
performance. This will lead to the creation of
more robust assessment approaches and greater
reliability of assessment results if the require-
ments of the financial and banking industry are to
be met.
. The creation of new property databases as well as
extending existing property databases/indices is
vital for providing more market evidence on the
financial performance of sustainable buildings.
Existing databases and empirical studies on the
performance of sustainable buildings focus either
on cost performance or on energy consumption.
However, what is required is information on the
overall building performance including rent levels
and transaction prices.
Knowledge about the effects of different design and
building solutions on various aspects of building per-
formance will provide property professionals and advi-
sors with a significant competitive advantage given that
they will be able to advise their clients on that basis.
Valuers need to be aware of the developments
described above. They need to be prepared to
Sustainable property investment
account for issues of sustainability within their valua-
tion reports. Addressing various aspects of building
performance within valuation reports would help to
make the valuer’s assumptions much more explicit
and would be of great value for clients who want to
act properly on the valuation. Currently, however, it
seems that valuers are not yet interested in issues of sus-
tainability because they traditionally tend to respond to
market need rather than drive it (St. Lawrence, 2004).
When John Edge, head of UK valuations business at
Knight Frank and Chairman of the International
Valuation Standards Committee, was asked if valuers
should use environmental performance measurement
tools, he commented as follows:
The problem with valuers and valuation pro-
fessionals is: do they lead or do they follow? If
the market who determines value uses these
tools and if these tools have relevance than
valuers must also use them. The question is,
should valuers use them and promote their use
to the market?
(Edge, 2002)
Today, it can be argued that there is evidence of market
demand that requires valuers to use those tools that
allow assessing building performance and that this
demand is likely to raise due to increasingly stringent
environmental regulations. Even the Royal Institution
of Chartered Surveyors, UK’s major valuation organiz-
ation, reported that the EU energy-efficiency directive
is likely to have influence on property values and
building design, renovation and investment decisions
(RICS, 2003). Furthermore, letting agents are chal-
lenged to provide clients with appropriate information
on different aspects of building performance. In doing
so, they would help overcome the communication
problem that obviously exists with regard to the
benefits of sustainable buildings. There is no better
marketing than satisfied clients.
These changes in the property and finance markets will
most definitely affect assignments and business activi-
ties of architects and engineers whose major duty at
the moment is to deliver design and planning solutions.
In the future, clients will ask about the effects of these
design and planning solutions on overall building per-
formance. This creates a new client need that the design
team can fulfil by providing building related infor-
mation relevant to valuation and rating purposes.
Property professionals will require a new combination
of knowledge and experience, i.e. property economics
combined with technical experience, and knowledge
about environmental and social interrelations. Univer-
sities and educational institutions face a challenge to
anticipate and incorporate these new needs into exist-
ing and new curricula.
231
 Lu«tzkendorf and Lorenz
Acknowledgement
The authors thank the Editor for support and four
anonymous referees for very constructive critique and
useful comments.
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