Sustainability and Obsolescence in the Property Market Dr Georgia Warren-Myers (RMIT University) Professor Richard Reed (Deakin University)

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

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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• There are two core meanings:– “1 (a) no longer in use or no longer useful (b) of a kind or style no longer current;– 2 of a plant or animal part : indistinct or imperfect as compared with a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).


What is obsolescence

•Economic

•Functional

•Physical

•Technological

•Social

•Market


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What is obsolescence

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


Requiring an addition

Requiring substitution



Functional ObsolescencePhysical Obsolescence External Obsolescence

Curable Incurable Curable Incurable

Deferred Maintenance

Long-lived items

Short-lived items

Caused by Over-

capitalisation


Caused by Over-

capitalisation


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



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



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


Thank you

• Any questions

• Contact details:

– Dr Georgia Warren-Myers [email protected]

– Prof Richard Reed [email protected]

mailto:[email protected]

mailto:[email protected]

Sustainability and Obsolescence in the Property Market Dr Georgia Warren-Myers (RMIT University) Professor Richard Reed (Deakin University)

Documents

relational analysis

unstructured comments

semantic analysis

relational content analysis

structured responses

series of structured

quantitative content

ranking questions