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The European Union (EU) shows great sensitivity towards the environmental impact of construction, as it considers it to be the sector that consumes the most energy and emits the most carbon into the atmosphere, around 40% and 36% respectively, of total productive activity; and furthermore, they estimate that three-quarters of the current housing stock is energy inefficient, with a renovation rate of only 1% of buildings per year. Recently, the EU group of experts on sustainable finance published a classification of activities with details of their probable impact (“Taxonomy, Technical Report, Financing a Sustainable European Economy”, June 2019), which includes construction.
From Euroval's perspective, as a valuation company, these issues have two areas of analysis; one, the evaluation of the efficiency of properties in terms of energy consumption, which in the work carried out is usually extended to other aspects of sustainability, such as emissions, water consumption, and even the quality of lighting and air inside buildings, access to public transport, or green spaces. And, on the other hand, it seeks to translate these heterogeneous aspects into a valuation that distinguishes, for comparable properties, those that may have more present and future value due to their environmental attributes.
"In this way, valuation companies can help financial institutions to set objective criteria in relation to financial products known as “green mortgages”, which can be extended to other financing related to the renovation or refurbishment of properties."
At least three key ideas emerge from the European Union's technical report. The first is that all types of property should be taken into account, not only residential, according to their uses and characteristics; for example, hotels would have a special consideration, together with properties intended for tourist accommodation. The activities considered are the construction of buildings, renovation and rehabilitation, individual measures for the installation of energy improvement equipment and other actions, and the purchase of properties themselves, from the perspective of acquiring an asset and generating income.
The second idea is the recognition that data is lacking to establish exactly what the best compliance with environmental quality standards is. For this reason, the valuation is being limited to what can be certified externally and independently, and with explicit and comparable methodologies, which is usually the quality of insulation of materials, and the efficiency in terms of building consumption. It must be taken into account that the qualification and certification process must maintain a balance between the cost involved and the quality of that certification.
CONSUMPTION METRICS
Thirdly, delving into the issue of the metrics to be used, the expert report establishes, in relation to the objective of “building with near-zero emissions”, the energy demand during the life of the building measured by KWH/m2 per year; and the annual ratio of equivalent carbon emission Kg CO2/m2. For places with water scarcity, the consumption of the property measured by m3/person/year can be added. A further issue is the exposure of the building to physical climatic risks, which requires working with scenarios and probabilities, and admits only a very simple metric, synthesized in, for example, “no risk”, “medium” or “with risk”. It must be taken into account that the use of consumption metrics depends not only on objective criteria, but also on the habits of users or inhabitants, always taking into account the climatic influence of the location; for this reason, it will be necessary to check the difference between the theoretical energy demand given by the models, and the real one, which depends on the management of the buildings and the behavior of the users.
The situation can be summarized by saying that the objective of classifying the environmental impact of construction is limited, for the moment, to the use of buildings, although it is intended to advance considering the construction and recycling phase of some elements of the same. Renovation and rehabilitation are of particular importance, and with it facilities of very diverse nature, ranging from modules, panels and solar collectors, to wind turbines and their equipment, or thermal storage units; the possibilities are very wide when incorporating insulation, protection of facades and roofs, including vegetation, water flow control, and all types of measurement, control and management facilities.
FINANCING
Regarding the necessary financing, perhaps the calculations made to comply with the EU objectives may seem somewhat exaggerated, as for different time horizons they range from 48,000 million euros in a relatively short period, to 562,000 million for an ideal scenario in which at least 80% of the buildings comply with the criterion of “near-zero emission”, but there is no doubt that there is a firm will on the part of the Parliament and the Commission to advance in this line.
"The fundamental issue is to work on information and data that are reliable and homogeneous, which in a first phase will be limited to what is defined as energy consumption in the use of the building, and gradually expand it as variables that meet that condition of being homogeneous become available."
This approach should allow building a database where, for comparable properties, a higher market value is appreciated for those that have environmental attributes, compared to those that do not.
Currently there is a working initiative in Europe called EeMAP (Energy efficient Mortgages Action Plan) that is oriented to the creation of a standard of energy efficient mortgages based on the idea that these mortgages would represent a lower risk in the balance sheets of financial institutions. Work is being done on a proposal for the qualification of properties, which would result in assessing whether the credit risk due to the decrease in value is aligned with the average or is higher or lower than this.
The road is long and to get to where you want to go you have to go through defining and standardizing how we are going to perform the energy rating to start collecting experience in the form of data on values and ratings; or whether or not policies are implemented that affect purchasing decisions and therefore values. What we have right now are the first steps.
It is one more challenge that valuation companies face, in this era of transformation of valuation techniques and processes, where sustainability goes from being a more or less ambiguous concept, to posing rigorous demands of knowledge of value.
