Sustainability and Obsolescence in the Property Market
Dr Georgia Warren-Myers (RMIT University)
Professor Richard Reed (Deakin University)
Summary
• Introduction
•What is obsolescence?
•Types of obsolescence
•Research approach
•Obsolescence and sustainability
•Concluding comments
RMIT University©2008 Information Technology Services 2
Definitions
• There are two core meanings:– “1 (a) no longer in use or no longer useful (b) of a kind or style no longer current;– 2 of a plant or animal part : indistinct or imperfect as compared with a
corresponding part in related organisms.”
• From a property perspective, ‘obsolescence’ can be defined as “a loss in value due to a decrease in the usefulness of property caused by decay,
changes in technology, people’s behavioural patterns and tastes, or environmental changes. Obsolescence is sometimes classified according to items of outmoded design and functionality, items with structural design unable to meet current code requirements, and factors arising outside the asset, such as changes user demand” (API Glossary 2008).
RMIT University©2008 Information Technology Services 3
What is obsolescence
•Economic
•Functional
•Physical
•Technological
•Social
•Market
RMIT University©2008 Information Technology Services 4
RMIT University©2008 Information Technology Services 5RMIT University©2008 Information Technology Services 5
RMIT University©2008 Information Technology Services 6
What is obsolescence
Total Depreciation Estimate from Market Extraction or Age-Life Method
Total Depreciation Estimate from Market Extraction or Age-Life Method
Functional ObsolescencePhysical Obsolescence External Obsolescence
Curable Incurable Curable Incurable
Deferred Maintenance
Long-lived items
Short-lived items
Caused by Over-
capitalisation
Caused by deficiency
Caused by Over-
capitalisation
Caused by deficiency
Requiring an addition
Requiring substitution
Total Depreciation Estimate from Market Extraction or Age-Life Method
Total Depreciation Estimate from Market Extraction or Age-Life Method
Functional ObsolescencePhysical Obsolescence External Obsolescence
Curable Incurable Curable Incurable
Deferred Maintenance
Long-lived items
Short-lived items
Caused by Over-
capitalisation
Caused by deficiency
Caused by Over-
capitalisation
Caused by deficiency
Requiring an addition
Requiring substitution
•Survey Instruments–Valuers
–Online Questionnaire – 3 themes–Structured and unstructured questions–Likert scales, ranking questions and free response–Distributed through PINZ, API and RICS to qualified valuers
–Investors–Unstructured Interview–9 questions – three themes–Interviews held with senior executives, general managers,
fund and portfolio managers of institutional investment vehicles like REITS, unlisted trusts, funds and companies
Findings from the research: Methods
• Valuer data collection – Conducted in Australia and New Zealand, – 244 responses – Analysis of data used a combination of qualitative and quantitative analysis
• Investor data collection– Conducted in Australia and New Zealand– 30 responses– Analysis of data collected from investors used primarily qualitative analysis and
some limited quantitative analysis
• Analysis Techniques– Content Analysis
– Qualitative and Quantitative Content analysis
– Statistical analysis– Hierarchical clustering analysis– Multidimensional analysis
Results and Analysis
Sustainability focus
Investors Response
43%
20%
13%
10%
7%
3% 3%
Energy OpexMarketabilitySustainable fea-turesIEQOffice qualityRating tool certi-fication
Rationale for Energy
• Cost benefits – a financial return easily identifiable
• Measureable!
• Mitigation against increasing resource costs and other legislative risks
– ETS
– Compulsory disclosure
• Analysis of portfolio on an energy basis
• Divestment of non-performing stock
• Anticipation of two tier market
RMIT University©2008 Information Technology Services 9
RMIT University©2008 Information Technology Services 10
Relationship between obsolescence and sustainability
Obsolescence Sustainability factors
Physical Energy and water usage considered too highTechnological aspects of building technology regarding sustainability management of propertyAdvances in current technologies for sustainability may quickly become outdated
Economic Energy and water costs (escalation)Reduced rentals and achievable sale price as a result of non-sustainabilityMarket changes, desire of tenants/owners changes as a result of increasing requirements for sustainability, consequently a form of market obsolescence
Social Tenant attraction & retention (reduced as a result of non-sustainability)- High operational costs- Reduced quality of indoor environment- Potential degradation of brand
Valuers Ranking of Obsolescence
General Valuation Context1. Yield
2. Rental growth
3. Vacancy
4. Discount rate
5. Level of outgoings
6. Letting up allowances
7. Risk premium
8. Terminal sale price
9. Capital expenditure
10. Obsolescence
Sustainability1. Yield
2. Rental growth
3. Vacancy
4. Level of Outgoings
5. Letting up allowances
6. Risk premium
7. Discount rate
8. Terminal sale price
9. Capital expenditure
10. Obsolescence
RMIT University©2008 Information Technology Services 11
RMIT University©2008 Information Technology Services 12
Consequences for the market
• Valuers lack of acknowledgement of obsolescence and sustainability having a relationship and being taken into account in practice
• Investors are anticipating a two tier market, evidence apparent through:
– Portfolio analysis regarding sustainability levels
– Anticipation of future requirements and risk mitigation
– Divestment of non-performing stock
• If valuer ignore this developing trend and market dynamic, there could be major ramifications for the market in the future.
• More research is required in addressing the issue of sustainability as a form of obsolescence, and
• Development of better mechanisms for valuers to incorporate obsolescence in property valuation
RMIT University©2008 Information Technology Services 13
Thank you
• Any questions
• Contact details:
– Dr Georgia Warren-Myers [email protected]
– Prof Richard Reed [email protected]