Report on Pilot-Project Valuations and Survey Results

Transcription

1 WORK PACKAGE 6 REPORT D6.1-D6.2 Report on Pilot-Project Valuations and Survey Results Authors: Bienert, Sven KPMG Austria Schützenhofer, Christian KPMG Austria Leopoldsberger, Gerrit Dr. Leopoldsberger + Partner Bobsin, Kerstin Dr. Leopoldsberger + Partner Popescu, Daniela TU Iasi Boazu Rodica TU Iasi Madritsch, Thomas Fachhochschule Kufstein (FHK) Koch, David Fachhochschule Kufstein (FHK) Klemens Leutgöb e7 Christoph Kuh e7 Work Package 6: Pilot Projects Practice testing of the newly developed methodology in property valuation Version of Report: 30 June 2010 Full title of the Project: Improving the market impact of energy certification by introducing energy efficiency and life-cycle cost into property valuation practice Acronym of the Project: IMMOVALUE Agreement N : Co-ordinator: Project website: IEE/07/553/SI KPMG Financial Advisory Services GmbH Dr. Sven Bienert sbienert@kpmg.at Supported by

2 I. Table of Content I. Table of Content... 2 II. Glossary... 7 III. Index of Figures and Tables Management Summary on Results Findings applying the Modified Income Approach Pilot Projects from the Austrian Market Pilot Project 1 Vienna Offices Building : Valuation based on energy cost differences Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Pilot Project 2 Vienna Offices Building : Valuation based on a full life-cycle cost assessment Results from ordinary valuation Results applying the modified methodology Pilot Project 3 Tenement (Multi-Storey Residential Property) in Graz Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Pilot Project 4 Condominium in Bad Häring/Kufstein Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Pilot Project 5 Condominium in Feldkirch Toster Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Pilot Project 6 Commercial Unit in Vienna Freehold Interest Key figures of the Property valuation... 79

3 Results from ordinary valuation Results applying the modified methodology Pilot Projects from Germany and Sweden Pilot Project 7 Community Center in the Ruhr Area Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Description of key findings Pilot Project 8 Multi-family Building in the Rhine-Main Area Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Description of key findings Pilot Project 9 Office Building in the Oresund-Region Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Description of key findings Pilot Project 10 Care Retirement Home in the Ruhr Area Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Findings applying Modified Sales Comparison Approach Pilot project from the Romanian Market Pilot Project 11 Residential property in Iasi Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology IMMOVALUE IEE/07/553/SI Page 3 of 221

4 4 Findings applying Modified Cost Approach Findings from Pilot Projects applying cost approach for the Austrian market Pilot Project 12 Single-family House in St. Christophen Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Pilot Project 13 Single-family House in Nußdorf am Attersee Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Pilot Project 14 Single-family House in St. Andrä i.l Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Pilot Project 15 Condominium in Braunau Key figures of the Property valuation Results from ordinary valuation Results applying the modified methodology Surveys on the application of EPC in valuation practice in Austria Survey on application of EPC in the Income Approach Survey on application of EPC in the Cost Approach Results of Web-based Survey on current valuation practice Approach of the Survey Purpose Dissemination Composition of the universe Results Question 1: Already quantitative differences mentioned? IMMOVALUE IEE/07/553/SI Page 4 of 221

5 6.2.2 Question 2: How could the difference be expressed? Question 3: In which markets and category of properties did the differences mentioned occur mostly? Question 4: Which parameter do you use to express the quantitative difference? Question 5: Energy-efficient buildings/sustainable buildings should generate a higher market value Question 6: Did you already consider the energy-efficiency/sustainability aspect due to your experience as a property valuer for example within the qualitative descriptive parts of your valuation reports? Question 7: Which sources of literature or information, do you recommend to verify the quantitative and/or qualitative impact at property valuation practise for energy-efficient/sustainable in comparison to non-energy-efficient/non-sustainable properties? Question 8: What do you think could be an important source for assessing the difference between energy-efficient/sustainable and non-energy-efficient/nonsustainable buildings? Question 9: Valuation frameworks like IVS, EVS, Red Book and the other national/legislative standards need to be revised to reflect/integrate the aspects of energy efficiency and sustainability in the valuation process Question 10: If changes are considered necessary for the legislative frameworks. Do you think there should be a country-specific practice varying across Europe or is there room for a pan-european framework? Question 11: Which of the well-known valuation approaches is the most appropriate for the integration and reflection of energy efficiency/sustainability characteristics in a property? Question 12: During the last few years you found an increasing need to incorporate energy-efficiency/sustainability into property valuations Question 13: There can be one common approach for the integration of energy efficiency/sustainability regardless of how transparent and developed the individual property market is IMMOVALUE IEE/07/553/SI Page 5 of 221

6 Question 14: The aspect of energy-efficiency and sustainability in general will matter in the future in the property valuation. The importance and relevance of these aspects will increase Further comments Conclusion IV. Bibliography IMMOVALUE IEE/07/553/SI Page 6 of 221

7 II. Glossary AAP... Average Adjustment Parameter AI... Appraisal Institute ANEVAR... Asociatia Nationala A Evaluatorilor Din Romania API... Australian Property Institute BREEAM... Building Research Establishment Environmental Assessment Method CBRE... CB Richard Ellis CCRS... Center for Corporate Responsibility and Sustainability CSR... Corporate Social Responsibility DGNB... Deutsche Gesellschaft für Nachhaltiges Bauen ECSD... Energy Cost Saving Potential EPBD... European Energy Performance of Building Directive EPC... Energy Performance Certificate ERV... Estimated Rental Value EVS... European Valuation Standards FEC... Final energy cost FED... Final energy demand GDV... Gross Development Value HWB... Heizwärmeenergiebedarf ImmoWertV... Immobilienwertermittlungsverordnung IVS... International Valuation Standards IVSC... International Valuation Standards Committee KVP... Key Valuation Parameter LBG... Liegenschaftsbewertungsgesetz IMMOVALUE IEE/07/553/SI Page 7 of 221

8 LCC... Life-Cycle Costing LCCA... Life-Cycle Cost Analysis LEED... Leadership in Energy and Environmental Design NIY... Net Initial Yield NOI... Net Operating Income MAR... Market Adjustment Rate OIB... Österreichisches Institut für Bautechnik RICS... Royal Institution of Chartered Surveyors ROI... Return on Investment RPI... Responsible Property Investment TEGoVA... The European Group of Valuers Associations TIAVSC... The International Assets Valuation Standards Committee UK... United Kingdom US/USA... United States of Amerika USP... Unique Selling Proposition VAT... Value Added Tax VEA... Valuation Estimation Adjusment VPA... Valuation Parameter Adjustment WAF... Weighted Adjustment Factor WAPEC... Weighted Adjustment for valuation Parameter Effecting Characteristics Y... Yield YP... Year s Purchase / Multiplier IMMOVALUE IEE/07/553/SI Page 8 of 221

9 III. Index of Figures and Tables Figure 1: WAPEC-Scoring: Example office rent Figure 2: WAPEC-Scoring Multi-Family Building Figure 3: WAPEC-Scoring Office Building Figure 4: WAPEC-Scoring Care Retirement Home Rhine-Ruhr area Figure 5: Romanian Energy Performance Certificate Figure 6: Geographical distribution of the valuation reports in Austria Figure 7: Geographical distribution of the valuation reports in Austria Figure 8: Distribution of the survey participants across Europe Figure 9: Profession of the respondents Figure 10: Working experience in years by different professions Figure 11: Type of properties and type of property markets respondents are dealing with Figure 12: Difference in market values in combination to profession of the respondent Figure 13: Kind of the expression of the mentioned difference in market values Figure 14: Magnitude of the difference in market values Figure 15: Property market and type of property in which difference in market values occurred Figure 16: Valuation parameter used for express the difference in market value Figure 17: Energy-efficient buildings/sustainable buildings should generate a higher market value Figure 18: Qualitative integration: if and how Figure 19: Sources for assessing the energy-efficiency/sustainability of a building Figure 20: Adaptation of the valuation frameworks required? Figure 21: International vs. Pan-European vs. National frameworks Figure 22: Most appropriate valuation approach for integration IMMOVALUE IEE/07/553/SI Page 9 of 221

10 Figure 23: Importance rose in the last few years? Figure 24: Importance will increase in the future? When? Figure 25: Knowledge will be adopted at? Figure 26: Common valuation approach for transparent and non-transparent markets Figure 27: Will the relevance will raise in the future? Table 1: Overview on Pilot Project Valuations Income Approach... 1 Table 2: Technical characteristics of subject property and comparables Table 3: Operational cost according to cost categories for subject property and comparables (based on a comprehensive LCCA) Table 4: Total recoverable and non-recoverable operational costs for subject property and comparables (in /m 2 a lettable are; based on a comprehensive LCCA) Table 5: Results of conventional valuation Table 6: Results of modified valuation Table 7: Results of the case study Table 8: Description of the analyzed the valuation reports Table 9: Results of the analysis Table 10: Summary of valuers comments on applied discounts Table 11: Results of the analysis IMMOVALUE IEE/07/553/SI Page 10 of 221

11 1 Management Summary on Results With the objective to foster the integration of energy efficiency, life-cycle cost assessment (LCCA) and other sustainability aspects into property valuation the IMMOVALUE project team developed modified valuation methodologies for the major approaches applied in valuation practice: the income approach, the sales comparison approach and cost approach. The modified methodologies are described in detail in the IMMOVALUE report 7.2. Methodologies for Integration of Energy performance and Life-Cycle Costing Indicators into Property Valuation Practice. This present report gathers all results of testing the proposed modified valuation approaches by calculating pilot projects and case studies from the real market. Altogether the following practice testing has been realized: Calculation of 10 pilot project valuations applying the income approach which can be seen as the standard approach prevailingly for markets with complex and heterogeneous properties (office, retail, bigger residential buildings etc.): 6 pilot projects related to the Austrian market, 3 pilot projects were calculated for the German market and 1 case study dealt with the Swedish market. For the given building segments these entire markets can interpreted as opaque markets with comparably little (reference) data available. Testing of the sales comparison approach for one pilot project on the Romanian market: The sales comparison approach suitable for homogenous property markets where a lot of data for similar comparables is available. It was therefore tested for multi-family residential buildings (panel buildings) on the real estate market of the city of Iasi. Finally the modified cost approach was tested for 4 pilot projects. The cost approach is only applied for simple properties; therefore it was tested with the pilot valuation of three single family houses and of one condominium. The main result of the practice testing is that all proposed modified valuation approaches work well and generate comprehensible results. There are, however, in practically all cases serious data problems relating to the lacking availability of EPC - and potentially further IMMOVALUE IEE/07/553/SI Page 11 of 221

12 sustainability data such as LCCA - not only with respect to the subject property but even more pressing with respect to reference properties ( comparables ). Although it was not the main purpose of practice testing to deliver a comprehensive analysis of the value impact of the modified approaches as compared to conventional valuation a few preliminary observations can be put on record: The value impact is for most cases very low. In practically all cases (except for two pilot project valuations) it is negligible (around resp. below 1 %). There are two reasons for the negligible value impact: Firstly the distance between the subject property and standard buildings on the market with regard to energy efficiency is too low. Secondly, the weak and incomplete data basis forces the valuers to take conservative assumption with respect to market sensitivity for energy efficiency and sustainability aspects, i.e. to which degree the market takes into account these issue. The (necessary) conservative assumptions on the willingness of the market to adjust to energy efficiency and sustainability aspects lead to a further reduction of value impacts. For one pilot project where the project team calculated a comprehensive LCCA for the subject property as well as for the comparables the value impact is around 5 % (taking into account only differences in operational costs, but without taking into account potential additional differences with regard to vacancy rates etc.). The reason for this remarkable value impact is the reliable data basis with respect to operational cost (differences) and the fact that the subject property is a very sustainable building with superior energy efficiency. In addition, the pilot project valuation applying the sales comparison approach (panel building in the city of Iasi) comes up with a value impact of around 5 % between a non-refurbished and a refurbished block of flats. In this specific case it is interesting, however, that the market value estimated by using thermal retrofitted comparables is higher than the value calculated by the proposed modified methodology, which means that - for the Romanian market (or at least for the specific market segment in Iasi) - the market adjustment rate (MAR) > 1. Buyers/sellers from the city of Iasi seem so sensitive to thermal retrofitting, that they had the willingness to pay more than the value of the achievable energy savings or the costs of IMMOVALUE IEE/07/553/SI Page 12 of 221

13 investments for thermal retrofitting. This may indicate that thermal refurbishment is assumed by the Romanian real-estate market, to be part of a package of qualities specific to modern, healthy, good looking properties. Altogether the pilot project valuations show that only for very energy efficient and sustainable properties with sufficient data basis on energy and/or operational cost differences the modified approaches would come up with a premium of 5-10 %. Only if the market sensitivity towards energy efficiency and sustainability grows beyond the pure cost advantages (i.e. if the market account also for better comfort levels, for better productivity etc. to be achieved in sustainable buildings) the premium can increase beyond 10 %. In addition, there might be reason for assuming lower vacancy rates or higher economic lifetimes in sustainable properties, which would have a positive influence on value impacts, too. The comprehensive practice testing as confirms the following recommendations for a broader application of the proposed modified approaches for an integration of energy efficiency, LCCA, and other sustainability aspects into valuation practice: Descriptive part of the valuation report: It is recommended to add a subchapter at the report structure especially for describing observable property market sensitivity and maturity for energy-efficient or sustainable properties and developments. In addition it is also necessary that valuers address and investigate more precisely the aspects which influence property s energy efficiency and sustainability. Some information can be noticed by the valuer during inspection of the property (source of energy, type of windows, thermal insulation if it exist, etc), others can be extracted from the EPC and from the energy audit (energy demand of the building, energy demand of the reference building, measures for better energy efficiency, rate of investments for thermal retrofitting, etc). The information can be given in the various already existing parts of a valuation report (e.g. description of building equipment and appliances, structural condition and repair, etc.). To adequately include EPC into property valuation practice valuers need to be trained to be able to derive operational cost data from technical building characteristics in general and to interpret EPC and results of LCCA in the right way in particular. To adequately include EPC, LCCA and other sustainability aspects into IMMOVALUE IEE/07/553/SI Page 13 of 221

14 property valuation practice it is important that valuers understand the basics these issues. In most cases data on energy efficiency, LCCA and other sustainability aspects is very vague. Although prescribed by law EPC are still missing for many valuation processes, LCCA is practically not available at all. Therefore valuers usually apply very simple benchmarks for cost categories such as operational cost (OPEX) which due not differentiate properly according to the specific building characteristics. Therefore valuers would need reliable data bases on reference buildings (comparables) including not only data on building site, rent level and building equipment but also on energy efficiency and different operational cost categories. IMMOVALUE IEE/07/553/SI Page 14 of 221

15 2 Findings applying the Modified Income Approach Key Facts and Findings Table 1 below summarises major results of most of the pilot project evaluations applying the income approach. The other pilot projects which are not included in the table show similar results. Project 1 Project 2 Project 4 Project 5 Project 6 Project 8 Project 9 EPC available yes yes no yes no no yes LCCA available no yes no no no no no type office office condomin. condomin. office / retail multifam. building office Lettable Area 21,421 m² 7,300 m² m² m² m² 4,095 m² 16,440 m² modification Premium Premium Premium Discount Premium - - Value impact (%) +0,39% +4,97% % 1.27 % % 0% 0% Table 1: Overview on Pilot Project Valuations Income Approach From the methodological point of view the modified income approaches which has been developed in IMMOVALUE for an integration of energy efficiency and other sustainability aspects work well because they represent just smaller interventions to the conventional approach. The value impact, however, is for most cases very low. In practically all cases (except one) it is negligible (around resp. below 1 %). There are two major reasons for the low impact of energy efficiency and other sustainability aspects on value in the pilot project valuations: Firstly, some of the subject properties have been quite similar to the market standard leading to (too) low energy resp. operational cost differences. It seems the modified impact approach proposed by IMMOVALUE produces value impacts can only for very energy efficient resp. sustainable subject properties (premiums) or on the contrary for very inefficient ones (discount). Secondly, the comprehensive integration of energy efficiency and other sustainability aspect suffers from a lack of reliable data which is available in valuation practice. The table above shows that some of the property subjects had available an EPC, more comprehensive operational cost data are not available at all. The situation with lacking data is even worse at second glance, because EPC and/or other operational cost data need to be available for the reference objects (comparables) which was not the case in any of the pilot projects. The incomplete data basis forces the valuers to take conservative assumption with respect to market sensitivity and maturity with respect to energy efficiency and sustainability aspects, i.e. the valuer will choose low values for Market Adjustment Rate (MAR) and the (very subjective) Valuation Estimate Adjustment (VEA). This leads to a further reduction of value impacts. IMMOVALUE IEE/07/553/SI Page 15 of 221

16 Key Facts and Findings Only in the pilot project where the project team calculated a comprehensive LCCA for the subject property as well as for the comparables the value impact is around 5 % (taking into account only differences in operational costs, but without taking into account potential additional differences with regard to vacancy rates etc.). The reason for this remarkable value impact is the reliable data basis with respect to operational cost (differences) and the fact that the subject property is a very sustainable building with superior energy efficiency. The qualitative description of energy efficiency and other sustainability aspects of the property as compared to reference buildings is indispensable. For valuations where only little quantitative data on the energy performance and/or of operational cost of the property is available the qualitative description of the status of the building and of requirements for (thermal-energetic) refurbishment is even more important. 2.1 Pilot Projects from the Austrian Market For the Austrian market altogether 6 pilot projects have been valuated with the modified income approach as developed by the IMMOVALUE project (see IMMOVALUE report 7.2) by KMPG (pilot project 1), FH Kufstein (pilot projects 3-6) and e7 (pilot project 2 with suppot of KPMG). Due to the general lack of market data for all pilot projects the approach for opaque markets has been applied. The pilot projects include different building types and are from different regions: 3 pilot projects are office and/or retail buildings from Vienna; 1 pilot project is a multifamily residential building in Graz 3 pilot projects refer to single condominiums in different regions of Austria. For all pilot projects the project partners had available a data set for a conventional valuation and they tried to use the same data set for the modified approach integrating energy efficiency and other sustainability aspects. As refers the technical characteristics of the buildings with respect to energy performance some of the pilot projects (but not all!) had available an EPC. For one pilot project the project team conducted a full LCCA in order to get reliable data on operational cost. IMMOVALUE IEE/07/553/SI Page 16 of 221

17 2.1.1 Pilot Project 1 Vienna Offices Building : Valuation based on energy cost differences Key figures of the Property valuation Key figures Starting point Figures Region/Tow n Vienna, 20th district Year of construction 1999 Year of last (intensive) renovation 1999 Main use office Location quality (A to D) A/B Construction quality (A to D) B Maintanance quality (A to D) B Market data transparency (A to D) B Property data transparency (A to D) A/ B Lettable area 21,421 Vacancy in % 15% Gross external area 30,000 Gross internal area 23,500 Valuation methodology applied Term and Reversion Valuation Company KPMG Current rent 13.3 /m² p.m. Date of valuation 1st of October 2009 Measured energy use n.a. Calualated final energy demand 118,6 kwh/ m².a EPC existing (Y/ N) Y LCC calculation existing (Y/ N) N Market value 52,320,000 Applying the modified approach Figures Methodology for developed market (Y/ N Y LCC carried out (Y/ N) N Revised Value 52,530, Results from ordinary valuation The following chapter expresses the main important parts and issues which have to be address within an ordinary property valuation report and calculation. Basis therefore formed a current IMMOVALUE IEE/07/553/SI Page 17 of 221

18 property valuation carried out by KPMG. In this exemplary case energy efficiency has not been taking into account because no correlation and evidence between energy efficiency and property values, etc. where observable and consequently did not affect the property valuation General description and explanation Background/Initial Situation Valuation of property for the owner due to the purpose of financing aspects. Scope of Work The property has been inspected on 1 st of October 2009 (which represents as well the date of valuation). The structural condition has been evaluated in the course of the visual inspection. Detailed analyses of property condition, used construction material and installation, as well as technical equipment have not been carried out in accordance with the valuation agreement. A survey and analysis on location and market situation has been carried out by the valuer. The property has been evaluated by applying the term and reversion methodology. Basis of Valuations Valuation was carried out in accordance with RICS valuation guidance (Red Book). Main basis for the valuation has been the documents supported as follows: - land register abstract of title - cadastral map excerpt - designation of area and zoning map - former valuation report (June 2003) - information on maintenance costs (incl. Fit-outs) - current rent role - energy performance certificate (in line with the EU Directive 2002/91/EG) - example of tenancy agreement (contract) - digital blueprint of property In addition to the mentioned documents the valuer as well take following considerations into account: - results of site inspection - observable property condition - current and expected rental income - current observable market condition and situation of the local real estate market. IMMOVALUE IEE/07/553/SI Page 18 of 221

19 Legal Status/ Statutory Considerations/ Town Planning Location Site description Property description (construction) Structural condition and repair No further potential for constructive extension. Audit of existence of planning and building permission and other official permission required for the usage of the property hasn t been carried out in accordance with the valuation agreement. It is assumed that the property has been constructed due to building codes and standards for construction valid at the time of construction. Due to fiscal considerations rights of usufruct have been assigned between the owner and the beneficiary, which are not relevant for the property valuation and therefore have not taken into considerations. The site is designated as a mixed specific land-use area. Property is situated in the 20 th district of Vienna, and has very good and close link to regional and national public transport (e.g. metro, bus, and highway). The surrounding area is mainly characterised by residential properties and retail infrastructure is rare Representative site in good location with access to necessary public utilities (e.g. electricity, district heating, water, sewerage system, etc.). The plot is defined by a rectangular layout. Due to official statement by the federal environmental agency the site is free of brownfields and other contaminations. The site is not located in endangered areas which might be affected by natural disasters (e.g. avalanches, earthquakes, soil erosion, etc.). The construction of the property was finished in 1999 and encompasses a gross floor area (GFA) of approx. 30,000 m² with a gross lettable area (GLA) of 21,421 m². The property represents a frame construction made out of reinforced concrete and with a curtain-wall facade mostly out of class (rd. 70 %). The property and its various floor levels are accessed via a foyer in the ground floor and the upper levels can be reached in beside the staircase as well with four existing elevators. The offices consist of a flexible partition, suspended ceiling and a false floor. The property is equipped with a district heating and ventilation and air conditioning system, sprinkler system and emergency-power supply. The property is with respect to its age in a very good condition. Further no backlogs of maintenance and repair, as well as structural damages have been observed and therefore no major repairs, improvements or renovations are IMMOVALUE IEE/07/553/SI Page 19 of 221

20 Market condition (rental, investment) Valuation methodology and commentary required. Adequate function of electric, sanitary and other equipment and appliances, as well as the supply and disposal utilities are assumed. The general investment market in Austria has slowed down in 2008 due to arising effects of the global financial crisis. Due to decreasing demand rapid decompression of yields of about 20 to 50 basis points could be observed. In 2009 property transaction activities have gained momentum and lead to positive market perspective. The current net initial yields for offices are on average in the range of 6.0 %. Currently office rents on average ranges between 13.0 and 15.0 /m² p.m. in the area near by the subject property. In the short-run maybe higher risk for letting high standard offices due to current difficult market conditions (financial crisis, decreasing demand, etc.) leads to higher risk for vacancy. As usual for commercial properties an income related approach has been chosen to quantify the market value of the subject property. More precisely the so called Term and Reversion method, which represents a special type of the traditional income approach, has been applied. This approach differentiates between (1) a term (residual term of tenancy agreements) where current rents are applied and (2) a period after the expiration of the contract duration where the estimated rental value derived by market rental levels sets the rental basis Key Valuation parameter Current gross rental income Non-recoverable Operating expenses The rental income of the subject property due to current tenancy agreements exceed an annual amount of EUR 3,418,791.6, which on average equals a monthly rental income of approx /m² p.m. The current annual non-recoverable operating expenses (OPEX) have be derived by recent information of the property owner on maintenance costs (222,116 p.a.) and other non-recoverable operating cost (7,622 p.a.). For the reversion the non-recoverable OPEX have been assumed on an imputed basis with an amount of 10.0 /m² p.a., which represents an adequate benchmark for similar office properties. Applied yield (term) The applied yield for the term was estimated with 6.6 % IMMOVALUE IEE/07/553/SI Page 20 of 221

21 Applied revisionary yield and encompasses adjustments for location, property configurations, and risks adjustments for expected shortterm difficulties in letting high standard offices (vacancy and collection loss). For the period after the expiration of the contract duration a revisionary yield of 6.5 % was applied to addresses the positive market expectations due to recovery of the market conditions Derivation of other key valuation figures Average residual term of contract Estimated rental value (ERV) On the basis of the current tenancy agreements an average residual term of approx years was determined. The estimated rental value was derived by observable market rental levels of comparable properties which are located near by the subject properties (see illustrated table below). The average market rent was determined by the sum of the weighted rents. Comps GFA [m²] Weighting for average rent (basis GFA) Comp 1 20, Comp 2 50, Comp 3 30, Comp 4 10, Average 14.2 Rent [ /m² p.m.] Vacancy rate On the basis of the market observation the market rent for comparable properties ranges between 14.0 and 14.5 /m² p.m. The current observable vacancy rate of 15 % has been addressed within the applied yield Ordinary Valuation calculations and results Market Value (MV) 52,320,000 Gross lettable Area (GLA) 21,421 m² Net Initial Yield (MV as basis) 6.53 % Date of valuation 1 st of October 2009 IMMOVALUE IEE/07/553/SI Page 21 of 221

22 Input Parameter Term Reversion Lettable Area 21,421 m² 21,421 m² Current Rent 13.3 /m² p.m. - Estimated Rental Value /m² p.m. Annual Gross Rental Income 3,418,792 3,650,138 Total non-recoverable OPEX 229, ,210 Annual Net Rental Income 3,189,054 3,435,928 Applied yield 6.60 % 6.50 % Average residual term of contract Annuity factor (Term) ( %) ( %) % 2.43 years Investments - - Net Present Value (Term) Net Rental Income x Annuity factor 6,952,138-7,490,323 Net Present Value (Reversion) - 52,860,437 Total Net Present Value (Term + Reversion) 6,952,138 + (52,860,437 7,490,323) = 52,322,252 Market Value 52,320, Results applying the modified methodology The following chapter illustrates how valuers could address energy efficiency aspects or further sustainability issues in an appropriate manner within the already existing qualitative/descriptive part of a property valuation report. It further illustrates in a comprehensible way how to derive reliable measure in general for quantitative integration of energy efficiency into property valuation calculations if property markets willingness to pay is observable but no reliable numerical evidence is available. IMMOVALUE IEE/07/553/SI Page 22 of 221

23 Description of key findings Result of ordinary (conventional) valuation 52,320,000 Result of modified valuation approach 52,530,000 Rental impact (nominal) Premium of 0.06 /m² p.m. Rental impact (percentaged) Premium of 0.44 % Value impact (nominal) +210,000 Value impact (percentaged) Premium of 0.39 % Explanatory notes The results of the applied modified methodology in comparison to conventional valuation show that the impact of energy efficiency on property rents and values is still at a negligible insignificant scale. In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate way and leads to reliable and plausible results Descriptive integration of aspects affecting buildings energy efficiency Building Equipment and Appliances Heating and cooling Ventilation, air conditioning and indoor air quality Lighting and day lighting The heating is provided by the local district heating system and installed fan-coil units and usual radiators. The property is equipped with a controlled ventilation and air conditioning system and provides optimum indoor air quality for its occupiers. The heating, ventilation and air conditioning (HVAC) system is in accordance to fulfil current standards and energy efficiency requirements. Due to the buildings structure and the dominant use of glas facades the majority of lettable areas have access to natural lights. Artificial lighting is mostly just required in functional areas (e.g. restrooms, stairways, etc.) which are located in the inner part of the building. The high availability of natural daylight supports efficient use of energy source (electricity). IMMOVALUE IEE/07/553/SI Page 23 of 221

24 Use of renewable energy resources Plumbing and hot-water heating Other equipment: The subject property is not equipped with a solar heating system nor a photovoltaic (PV) or other alternative energy supply system, and consequently do not directly use renewable energy resources. But anyways the property benefits from solar thermal energy gains due to dual-pane glass facade. The subject property is equipped with up-to-date plumbing due to current building standards and therefore supports efficient use of water resources. The subject property is further equipped with fire protection appliances (automatic fire detection system, a sprinkler system) and emergency-power supply Energy efficiency and other sustainable features of the property Energy efficiency Energy source Green lease agreements LCC Property configuration According to the available EPC the subject property achieves an overall annual final energy demand of approx kwh/m².a and ranges in-between current energy efficiency requirements for non-residential properties of (according to the guidance 6 of the ÖIB Österreichisches Institut für Bautechnik ). The overall energy efficiency of the subject property therefore can be evaluated as good, and ranges in comparison to the comparable building stock a bit below the observable energy efficiency in the market (see chapter ). The use of local district heating system for energy supply ensures long-term security of energy supplies. Further this energy source supports low CO2 emission of the subject property itself. There are no green lease agreements with tenants/occupiers in force. The property as well does not have a green building certifications (LEED, BREEAM, DGNB, CEN, etc.). Further no environmental management systems such as EMAS or ISO or carbon reduction commitment (CRC) are in place and addressed by the owners management. No Life-Cycle-Costing analysis or investigations are available or have been carried out. The property s configuration supports and sets the basis for the possibility of efficient and flexible use of space (good A/V ratio of 0.13 according to the EPC) which as well IMMOVALUE IEE/07/553/SI Page 24 of 221

25 positively influence the buildings energy efficiency. The thermal insulation of the building envelope can be evaluated as good even though the majority of buildings facade is out of glass (due to use of dual-pane windows) Observable property market sensitivity and maturity for energy-efficient or sustainable properties Real estate market sensitivity Market information available Beside the already given information about the current property market situation and condition (see chapter ) following additional observations concerning the real estate markets awareness, sensitivity and maturity regarding energy efficiency and sustainability are necessary. In general the Austrian property market so far start to recognise the importance of property s energy efficiency and sustainability. This was as well supported by the suffering economic situation and property market condition throughout the last year, which had lead the Austrian real estate market to pay more attention on efficiency in general and need for energy-efficient and sustainable developments. Although the awareness of property owners, tenants, occupiers, etc. for energy efficiency and sustainability is rising, such aspects are in most cases still not recognised within decision making process so far (e.g. in the course of leasing a property or part of it, etc.). This seems to be one of the main reasons why the market currently does not show price elasticity for energy-efficient buildings in comparison to non-energy-efficient ones. In addition as well no proven evidence for higher willingness to pay for energy-efficient properties can be observed in the market so far. But due to the fact that investigations on international level already show some examples, in which global acting, international companies already started to just focus and rent energy-efficient or sustainable properties, proven evidence just seems to be a matter of time and is expected in the short run. Even thought there exists a mandatory disclosure of property owners for EPC potential tenants just get informed about the energy efficiency if they explicitly ask for it. In most cases where lettings are offered no EPC or other information about buildings energy efficiency are available or even exist. In this valuation case EPC for the comparable properties (see chapter ) being used have been available and IMMOVALUE IEE/07/553/SI Page 25 of 221

26 can be summarised as follow: Comps GFA [m²] Final Energy Demand (accord. to EPC) Comp 1 20, kwh/m².a 12.5 Comp 2 50, kwh/m².a 15.3 Comp 3 30, kwh/m².a 13.8 Comp 4 10, kwh/m².a 13.0 Average 14.2 Rent [ /m² p.m.] Public awareness General circumstances and mandatory regulations The public media in general already start to recognise the importance of sustainability and energy efficiency and start to inform on a broader scale about activities, etc. in the field of sustainability. This already had lead to increase of sensitivity and awareness for sustainability and energy efficiency of the society. Governmental institutions and policy makers already realised the importance of and promote energy-efficient and sustainable developments. Therefore mandatory regulations and directives on national as well European level have been established e.g. EPBD (2002/91/EG), EN (sustainability assessment of buildings), etc. to measure and strengthen the transparency of data and information about buildings energy efficiency. On national level building standards and guidance (e.g. ÖIB-Guidance 6) already encompass energy efficiency requirements for new developments. Further it is observable that low-energy building (LEH) requirements (final energy demand below 100 kwh/m².a) are on the way to become the general building standard Valuation calculation results of modified method Revised Value 52,530,000 Gross Lettable Area (GLA) 21,421 m² Net Initial Yield (MV as basis) 6.51 % Date of valuation 1 st of October 2009 IMMOVALUE IEE/07/553/SI Page 26 of 221

27 Input Parameter Term Reversion Lettable Area 21,421 m² 21,421 m² Current Rent 13.3 /m² p.m. - Market Rent /m² p.m. VPA rent /m² p.m. Estimated Rental Value /m² p.m. Annual Gross Rental Income 3,418,792 3,665,562 Total non-recoverable OPEX 229, ,210 Annual Net Rental Income 3,189,054 3,451,352 Applied yield 6.60 % 6.50 % Average residual term of contract Annuity factor ( %) ( %) % 2.43 years Investments - - Net Present Value (Term) Net Rental Income x Annuity factor 6,952,138-7,523,946 Net Present Value (Reversion) - 53,097,716 Total Net Present Value 6,952,138 + (52,860,437 7,490,323) = 53,525,907 Revised Value 52,530,000 To derive the above mentioned valuation parameter adjustment (VPA) the developed methodology for quantifying the rental impact of energy efficiency determined by the EPC (as expressed in the working paper D5.1-D5.3, chapter ) has been applied. One of the first steps therefore requires to collect information of comparable properties, which are necessary to verify a market rent, average energy demand, etc. (see following table) of a peer group (defined as a peer of comparable properties). Parameters Subject Property Peer Group Comp 1 Comp 2 Comp 3 Comp 4 (1) Observable rent [ /m² p.m.] IMMOVALUE IEE/07/553/SI Page 27 of 221

28 (2) Final Energy demand - EPC [kwh/m².a] (3) Weighting (4) Market rent (1) (3) [ /m² p.m.] (5) Final Energy demand (2) (3) [kwh/m².a] (6) Overall energy cost (FEC) [ p.a.] (7) Final Energy demand (FED) [kwh] (8) Average overall energy price per kwh (6) (7) (3) [ /kwh] 372, , , ,992 74,127-2,781,053-2,294,821 6,059,408 4,191, , On the basis of the estimated key figures, required for quantifying the energy cost saving potential (ECSP), the average adjustment parameter to derive the rental impact of energy efficiency (AAP rent ) can be calculated as follows: ( E p ) ( E p ) ( ) ( ) ref e, ref subj e, subj AAP rent = ECSP = = = +0.9 % r M To verify and estimate the current market sensitivity for energy efficiency, which determines the markets degree of willingness to pay for energy efficiency, the market adjustment rate (MAR) has to be estimated. Therefore following illustrated scoring model has been applied. The results of the WAPEC-Scoring shows, that the market already shows low to medium sensitivity for energy efficiency on the and achieves a MAR of around 50 % due to valuers expectation based on observable market conditions and circumstances (see chapter ) IMMOVALUE IEE/07/553/SI Page 28 of 221

29 Weighted Adjustment for valuation Parameter Effecting Characteristics (WAPEC) Market maturity Opaque (Emerging) Market --> Premium for energyefficient building (primarilly in emerging market) Significant adjustment Medium adjustment Low adjustment neutral - high price elasticity - low price elasticity observable - high awareness of tenants for sustainability and energy efficiency - omnipresence of green building issues in the broad media - tenants partly start to focus on energy efficiency and sustainability aspects in their decision making process - sustainability and energy efficiency aspects are recognised by a broad media - market start to note price elasticity - tenants get informed about energy efficiency but it does not play a main role to the tenant yet - just specific media start to address green building and energy efficiency aspects. - market does not reflect price differences due to energy efficiency or sustainability at all - tenants do not pay attention on sustainability and energy efficiency at all - media does not recognise green buildings benefits at all - property market is willing to pay rental premiums for green or energy-efficient buildings - high market sensitivity for operating expenses and energy costs (especially in gross rent-orientated property markets) - It is observable that few tenants start to just rent energy-efficiency or sustainable properties - majority of property market is not willing to pay rent premium for green buildings - market pays attention to energy efficiency and sustainability independent of market condition. - suffering economic situation - lead market to pay attention on efficiency and need for energy-efficient or green buildings becomes a topic - just low attention on energy efficiency even though market situation lead to focus on efficiency in general - good general economic situation - low-energy houses are quite rare and represents unique selling proposition - low-energy standards are on the way to become building standard - majority of building stock receive low-energy or passive house standard - zero-carbon house are required building standards - monetary penalties/restrictions for nonenergy-efficient properties - subject property achieves low-energy (LEH) or passiv house (PH) standards - monetary restrictions for non-energy-efficient building are discussed by government and policy makers - subject property achieves better energy-efficiency than current standards - government and policy makers realise importance and promote energy efficiency and sustainable developments - subject property achieves current energyefficiency or sustainable standards and requirements - government and policy makers do not push market to focus on energy efficiency and sustainabiltiy - subject property does not achieve energy efficiency requirements and performance standards Market adjustment rate +/ % +/ % +/ % +/ % Estimated MAR +50 % x AAP +/- 1.3 % [%] --> Average Adjustment Parameter derived from market evidence/valuers expectations due to replicable argumentation x or estimation VEA +/- 100% [%] --> Valuers estimation adjustment (VEA) due to probability of occurrence, uncertainty, etc. regarding the AAP = WAF +/ % [%] --> Weighted Adjustment Factor (WAF) = MAR x AAP x VEA After applying the WAPEC-Scoring the valuer can calculate the weighted adjustment factor (WAF rent ), which determines the specific valuation parameter adjustment (VPA rent ) as input variable for the estimated rental value (ERV) of the subject property. Due to the verification of the the WAF can be calculated as follows: WAFrent = MARrent AAPrent VEA = 50% 0.9% 100% +0.43% The current rental impact of energy efficiency, defined as VPA rent achieves VPA rent = WAF r = 0.43% 14.2 /m² p.m /m² p.m. rent market IMMOVALUE IEE/07/553/SI Page 29 of 221

30 Pitfalls within the process Market transparency Market transparency Information quality concerning energy-efficiency Information quality concerning LCC Market data has been collected from various sources such as real estate agencies, direct contact with owners, etc. It has to be mentioned that finding reliable and adequate market information regarding buildings energy efficiency or life-cycle-costs is still quite difficult, because the market is not transparent enough at the moment. The EPC includes a lot of detailed information especially concerning various stated energy-efficiency figures within the EPC Valuers need to be able to understand and use the right figures and do not compare different figures when undertaking comparison of peer group (comparable properties). Finding and collecting information on LCC analysis, etc. is an even more impossible task. Because LCCA are just applied in specific cases in scientific researches and mostly not undertaking in real estate practice. It can be mentioned that such analysis tools are too sophisticated and extensive that their application in property valuation practice cannot be claimed. IMMOVALUE IEE/07/553/SI Page 30 of 221

31 2.1.2 Pilot Project 2 Vienna Offices Building : Valuation based on a full life-cycle cost assessment In addition to the results derived from pilot project 1, where only energy cost differences have been integrated into the valuation, in pilot project 2 it has been tried to enlarge the approach towards an overall LCCA thus introducing the operational cost differences as main driving factor behind different values. Due to a lack of data on technical characteristics of the valued object as well as of the reference objects it has been decided to estimates of realistic buildings - i.e. the office buildings used in pilot project 2 are virtual ones although they are rather similar to office building really existing on the Viennese market. Furthermore the valued building is not a standard building but similar to one of the highly sustainable office building of Vienna. This fact ends up with remarkable differences in operational cost between the valued building and the reference group building Results from ordinary valuation Due to the fact that only estimates of realistic buildings have been used no ordinary valuation has been made before the modified methodology has been applied. Therefore a direct assessment of the impact of the modified methodology compared to the ordinary one is not possible for this pilot project Results applying the modified methodology In the following it is described how the results of a full Life Cycle Cost Assessment (LCCA) can be used in the income approach for property valuation. In general, this is done by It further illustrates in a comprehensible way how to derive a reliable and generally applicable approach for quantitative integration of sustainability aspects (captured through cost differences in the LCCA) into property valuation calculations even for opaque property markets where willingness to pay is observable but no reliable statistical evidence is available Description of key findings Result of modified valuation approach 17,150,000 IMMOVALUE IEE/07/553/SI Page 31 of 221

32 Rental impact (nominal) Premium of 0,53 /m² p.m. Rental impact (percentaged) Premium of 3,74 % Value impact (nominal) +810,000 Value impact (percentaged) Premium of around 5 % (of which around 1,4 % is direct impact due to difference in non-recoverable OPEX) Explanatory notes The results of the applied modified methodology in comparison to conventional valuation show that a building of high energy and sustainability performance (as this is the case for the valued property) a considerably higher value as compared to comparable buildings with standard performance. The higher value comes prevailingly from achievable rental premiums and partly also from lower non-recoverable OPEX. Depending on the observable sensitivity on market (MAR) the calculated value impact is between 5 and 10 % not taking into account the potential additional impact of lower vacancy rates in higher quality buildings. The application of LCCA in the income approach of property valuation is feasible and leads to reliable and plausible results when integrating sustainability aspects into property valuation Key Valuation parameters Current gross rental income Non-recoverable Operating expenses The rental income of the subject property due to current tenancy agreements is calculated on the basis of 13.0 /m² p.m. amounting at a current gross rental income of 1,138,800 /a The current annual non-recoverable operating expenses (OPEX) have been calculated by the LCCA based on the technical characteristics of the building and amount at 20.5 /m² p.a. This is considerably higher than OPEX benchmarks which are typically used in property valuations (around 10 /m² p.a.). The difference can be explained by the fact that LCCA includes also yearly average cost for capital repair. At the same time the LCCA shows that the IMMOVALUE IEE/07/553/SI Page 32 of 221

33 non-recoverable operating expenses of the highly sustainable and energy efficient subject property is a little bit lower than the OPEX from the comparables (-2.0 /m 2 p.a.) Applied yield (term) The applied yield for the term was estimated with 6.6 % and encompasses adjustments for location, property configurations, and risks adjustments for expected shortterm difficulties in letting high standard offices (vacancy and collection loss). Applied revisionary yield Average residual term of contract Estimated rental value (ERV) Vacancy rate For the period after the expiration of the contract duration a revisionary yield of 6.5 % was applied to addresses the positive market expectations due to recovery of the market conditions. assumption: 3 years For the calculation of the estimated rental value the approach used for pilot project 1 was used as the subject property is part of the same market (office buildings in Vienna). On the basis of the market observation the market rent for comparable properties ranges between 14.0 and 14.5 /m² p.m. Therefore a value of 14.2 /m² p.m. was applied. The current observable vacancy rate of 15 % has been addressed within the applied yield Technical characteristics of the valued property and of comparables Life cycle cost is calculated based on the technical characteristics of the building. The following Table 2 gives an overview of the technical characteristics of the property building and of the comparables as they were assumed for this pilot project calculation. As already mentioned in the introduction the office buildings used in pilot project 2 are virtual ones but their technical characteristics are very similar to office buildings really existing on the Viennese market. Furthermore the valued building is not a standard building but similar to one of the highly sustainable office buildings of Vienna. IMMOVALUE IEE/07/553/SI Page 33 of 221

34 comp 1 comp 2 comp 3 com 4 subject roperty lettable area, m² heating, cooling, ventilation heat production district heating district heating district heating district heating heat pump refrigeration vapor-compression refrigerat ion vapor-compression refrigeration vapor-compression refrigeration vapor-compression refrigeration vapor-compression refrigeration ventilation ventilation with preconditioning and air de-/ humidification ventilation with preconditioning and air de-/humidification ventilation with preconditioning and air de-/humidification ventilation with preconditioning and air de-/humidification vent ilat ion wit h preconditioning and air de-/humidification heat dissipation radiation fan coils radiation heating fan coils building component act ivation cold dissipation fan coils fan coils building component activation fan coils building component act ivation indoor ventilation ventilation ventilation ventilation ventilation ventilation renewables solar thermal system m² use of solar thermal system hot water and heating support PV m², integrated facade facade / design type of facade glass and panel facade perforated facade glass and panel facade glass and panel facade perforated facade (80%), perforated facade (20%) window area share 70% 100% 70% 70% 31% sun protection none none lamellae horizontal none special constructive overhanging facade (tilted forward) dazzle protection sun-blind sun-blind sun-blind sun-blind sun-blind daylight control none none none none none purifier cat burglar cat burglar cherry picker cat burglar cherry picker windows glass and panel facade aluminum window aluminum window (at glass and panel facade aluminum window the perforated facade (20%)) glazing thermal insulation thermal insulation thermal insulation thermal insulation sun protective glass glass glass glass glass g-value window 0,65 0,65 0,65 0,65 0,45 u-values [W/ m²k] exterior wall 0,35 0,37 0,31 0,35 0,11 window 1,7 1,3 1,15 1,7 0,6 ceiling against exterior wall 0,2 0,24 0,21 0,2 0,09 ceiling against unheated 0,4 0,38 0,41 0,4 0,13 building floor over ambient air - 0,24 0,2 - - Table 2: Technical characteristics of subject property and comparables Results of LCCA Based on the data resp. assumption of technical characteristics a comprehensive LCCA has been conducted with an integrated LCCA tool which has been developed by e7 together with the Austrian real estate consultant M.O.O.CON (see WP 5 report, Annex 2). Since the LCCA serves only for the calculation of operational cost differences, LCCA was limited to operational cost (including capital repair cost) but did not include the primary construction cost. IMMOVALUE IEE/07/553/SI Page 34 of 221

35 The following Table 3 summarises the results structured according to different cost categories. Since LCCA usually works on the basis of sqm gross floor area, all results are given for this unit. Table 3: Operational cost according to cost categories for subject property and comparables (based on a comprehensive LCCA) The following Table 4 gives the results for the differences in operational cost between the comparables and the subject property after recalculating the figures of Table 3 to the unit of sqm lettable area which is the usual area unit for property valuation and after taking into account the differentiation between recoverable and non-recoverable operational costs. For this purpose it was assumed that non-recoverable costs consist of 70 % of costs for conversion and backfitting and of 100 % of capital repair costs. For all other costs it was assumed they can be recovered from the tenant. Table 4: Total recoverable and non-recoverable operational costs for subject property and comparables (in /m 2 a lettable are; based on a comprehensive LCCA) Valuation calculation results of modified method Revised Value 17,150,000 Gross Lettable Area (GLA) 7300 m² Net Initial Yield (MV as basis) 6.50 % IMMOVALUE IEE/07/553/SI Page 35 of 221

36 Input Parameter Term Reversion Lettable Area 7300 m² 7300 m² Current Rent 13.0 /m² p.m. - Market Rent /m² p.m. VPA rent /m² p.m. Estimated Rental Value /m² p.m. Annual Gross Rental Income 1,138,800 1,290,348 Total non-recoverable OPEX per a. (difference to average nonrecov. OPEX of comparables) 149, ,122 (-14,336 ) Annual Net Rental Income 989,768 1,141,226 Applied yield 6.60 % 6.50 % Average residual term of contract Annuity factor ( %) ( %) % 3 years Investments - - Net Present Value (Term) Net Rental Income x Annuity factor 2,616,325-3,022,508 Net Present Value (Reversion) - 17,557,316 Total Net Present Value 2,616,325 + (17,557,316-3,022,508) = 17,151,133 Revised Market Value 17,150,000 To derive the above mentioned valuation parameter adjustment (VPA) the developed methodology for quantifying the rental impact of operational cost differences (as expressed in the report 7.2, chapter ) has been applied. One of the first steps therefore requires to collect information of comparable properties, which are necessary to verify a market rent and average operational costs of a peer group (defined as a peer of comparable properties). IMMOVALUE IEE/07/553/SI Page 36 of 221

37 On the basis of the estimated key figures, required for quantifying the operational cost saving potential (OCSP), the average adjustment parameter to derive the rental impact of energy efficiency (AAP rent ) can be calculated as follows: ( OC ) ( OC ) ref, i subj 61,0 48,2 AAP rent = OCSP = = = +7,48 % r M To verify and estimate the current market sensitivity for energy efficiency, which determines the markets degree of willingness to pay for energy efficiency, the market adjustment rate (MAR) has to be estimated. Therefore - as for pilot project 1 - the following illustrated scoring model has been applied. The results of the WAPEC-Scoring indicates, that the market is assumed to have low to medium sensitivity for operational cost differences and achieves a MAR of around 50 % due to valuers expectation based on observable market conditions and circumstances (see report 7.2 chapter ) After applying the WAPEC-Scoring the valuer can calculate the weighted adjustment factor (WAF rent ), which determines the specific valuation parameter adjustment (VPA rent ) as input variable for the estimated rental value (ERV) of the subject property. Due to the verification of the the WAF can be calculated as follows: WAFrent = MARrent AAPrent VEA = 50% 7,48% 100% +3,74% The current rental impact of energy efficiency, defined as VPA rent achieves VPA rent = WAF r = 0.43% 14.2 /m² p.m /m² p.m. rent market Pitfalls within the process Information quality concerning LCC Information quality concerning energy-efficiency Use of LCCA by valuers It has not been possible to gather real market data necessary for a comprehensive LCCA. Therefore several assumptions on the technical characteristics of the property building as well as of the comparable buildings had to be made. Nevertheless the data which has been finally used in the pilot projects is realistic and reflects existing differences between conventional and energy efficient buildings on the market. The information given EPC includes a lot of detailed information on the technical characteristics of the building and is thus also an important starting point for LCCA. The calculation of LCCA is a specialised task which usually cannot be done in the valuation process. It is to be seen as a IMMOVALUE IEE/07/553/SI Page 37 of 221

38 kind of preparatory works - comparable to a technical du diligence assessment. For the moment property valuations are not based on information which is given by LCCA. IMMOVALUE IEE/07/553/SI Page 38 of 221

39 2.1.3 Pilot Project 3 Tenement (Multi-Storey Residential Property) in Graz Key figures of the Property valuation Key figures Starting point Figures Region/Town Graz, 12th district (Andritz) Year of construction 2006 Year of last (intensive) renovation 2006 Main use residential Location quality (A to D) A/B Construction quality (A to D) B+ Maintanance quality (A to D) B Market data transparency (A to D) C Property data transparency (A to D) B Lettable area 2,000 Vacancy in % 0% Gross external area 3,000 Gross internal area 2,700 Valuation methodology applied Austrian income capitalisation method Valuation Company KPM G Current rent 7.8 /m² p.m. Date of valuation 30 th of September 2009 Measured energy use n.a. Calualated energy use 27 kwh/ m².a EPC existing (Y/ N) Y LCC calculation existing (Y/ N) N M arket value 3,314,000 Applying the modified approach Figures Methodology for developed market (Y/ N) Y LCC carried out (Y/ N) N Revised Value 3,349, Results from ordinary valuation The following chapter expresses the main important parts and issues which have to be address within an ordinary property valuation report and calculation. Basis therefore formed a current property valuation carried out by KPMG. In this exemplary case energy efficiency has not IMMOVALUE IEE/07/553/SI Page 39 of 221

40 been taking into account because no correlation between energy efficiency and property values, etc. where observable and consequently did not affect the property valuation General description and explanation Background/Initial Situation Valuation of property for the owner due to portfolio management purposes. Scope of Work The property has been inspected on 11 th of August The structural condition has been evaluated in the course of the visual inspection. Detailed analyses of property condition, used construction material and installation, as well as technical equipment have not been carried out in accordance with the valuation agreement. Investigations and analysis on location and local property market situation and condition has been carried out by the valuer. The property has been evaluated by applying the Austrian income capitalisation approach. Basis of valuations Legal Status/ Statutory Considerations/ Town Planning Valuation was carried out in accordance with national property valuation law ( Liegenschaftsbewertungsgesetz (LBG) BGBl. Nr. 150/1992) and standards (ÖNORM B1802-1) Main basis for the valuation has been the documents supported as follows: - land register abstract of title - cadastral map excerpt - designation of area and zoning map - information on maintenance costs (incl. fit-outs) - current rent role - energy performance certificate (in line with the EU Directive 2002/91/EG) - example of tenancy agreement (contract) In addition to the mentioned documents the valuer as well take following considerations into account: - results of site inspection - observable property condition - current and expected rental income - current observable market condition and situation of the local real estate market. No further potential for constructive extension due to designation of area and zoning map. Audit of existence of planning and building permission and other official permission required for the usage of the property hasn t been IMMOVALUE IEE/07/553/SI Page 40 of 221

41 carried out in accordance with the valuation agreement. It is assumed that the property has been constructed due to building codes and standards for construction valid at the time of construction The site is designated as a centre/core specific land-use area. Location Property is situated in the 12 th district of Graz called Andritz, and has a close link to regional public transport (e.g. bus,). The adjacent plots are mainly characterised by residential properties. Site description Property description (construction) Structural condition and repair The subject property is located in one of the most preferred residential areas of Graz - 11 th and 12 th district of Graz represents very good residential location with access to necessary public utilities (e.g. electricity, district heating, water, sewerage system, etc.). The site represents an irregular plot which comprises an plot size of 2,400 m² and is only accessible from the western plot boundary. The plot is marginally influenced by noise pollution due to the nearly located railroad network, which is not value relevant due to insignificance. Due to official statement by the federal environmental agency the site is free of brownfields and other contaminations. Furthermore the site is not located in endangered areas which might be affected by natural disasters (e.g. avalanches, earthquakes, soil erosion, etc.). The construction of the property was finished in 2006 and encompasses a gross floor area (GFA) of approx. 3,000 m² with a gross lettable area (GLA) of 2,000 m². The properties facade/shell is constructed out of a prefabricated thermal insulation composite system (with brick walls). The cellar is constructed as usual out of prefabricated reinforced concrete walls. The partition walls are as well constructed out of bricks. In general the property offers flats with high quality of configuration and fit-out and a size between 80 to 100 m². Most of the flats as well include a balcony or terrace. The property and its various floor levels are accessed via various stairways and two elevators. The thermal energy demand of the subject property is supported by the regional district heating and distributed to the conditioned space via a floor heating system. The property is further equipped with a solar heating system for hot-water supply. The property is with respect to its age in a very good condition. Further no backlogs of maintenance and repair, IMMOVALUE IEE/07/553/SI Page 41 of 221

42 Market condition (rental, investment) Valuation methodology and commentary as well as structural damages have been observed and therefore no major repairs, improvements or renovations are required. Adequate function of electric, sanitary and other equipment and appliances, as well as the supply and disposal utilities are assumed. The general investment market in Austria has slowed down in 2008 due to arising effects of the global financial crisis. Due to decreasing demand rapid decompression of yields for residential properties of about 25 to 50 basis points could be observed in the property market of Graz. In 2009 property transaction activities have gained momentum and lead to positive market perspective. The current net initial yields for residential properties are on average in the range of 4.0 to 4.5 %. Currently residential rents on average ranges between 7.0 and 8.0 /m² p.m. for comparable flats/properties (due to market research) in the area near by the subject property depending on quality of flat. As usual for commercial properties an income related approach has been chosen to quantify the market value of the subject property. More precisely the Austrian Income Capitalisation Approach, which represents the traditional income related approach, has been applied. This approach evaluates the subject property by separate valuation of (1) the income value of the construction (building only) by using the annual potential income, and (2) the land value Key Valuation parameter Current gross rental income Non-recoverable Operating expenses The rental income of the subject property due to current tenancy agreements exceed an annual amount of 186,000 EUR, which on average equals a monthly rental income of approx. 7.8 /m² p.m. The estimated rental value applied for valuation has been chosen in accordance to the observable market rent The current annual non-recoverable operating expenses (OPEX) have be derived by recent information of the property owner and ranges at a level of 19,920 p.a. For the property valuation the non-recoverable OPEX have been assumed with an amount of 10.0 /m² p.a., which represents an adequate benchmark for similar residential properties. IMMOVALUE IEE/07/553/SI Page 42 of 221

43 Applied yield (Austrian capitalisation rate) The applied yield for was estimated with 4.85 % and encompasses adjustments for location, property configurations, and risks of vacancy and collection loss Derivation of other key valuation figures Average residual term of contract Estimated rental value (ERV) On the basis of the current tenancy agreements an average residual term of approx. 5 years was determined. The estimated rental value was derived by observable rental levels of comparable properties in the market which are located near by the subject properties (see illustrated table below). The average market rent was determined by the sum of the weighted rents. Comps Lettable area [m²] Weighting for average rent (due to size of flat) Comp Comp Comp Comp Average 8.0 Rent [ /m² p.m.] Land value Economic lifetime Vacancy rate On the basis of the market observation the ERV has been chosen for the valuation with an amount of 8.0 /m² p.m. Due to investigation on observable land values for similar developable plots nearby the subject property where derived by information of local experts, market reports and own investigations on achievable land values (on basis of current transactions). The achievable land value in the market for similar plots have been ascertained with an amount of 200 to 250 /m². The average economic lifetime for multi-tenant residential properties has been estimated with 60 years and equals various wide-spread and accepted literature (such as Kleiber, et al.), which refer to an adequate economic lifetime between 60 to 80 years for such properties. The current observable vacancy rate of 0 % has been taken into account within valuation. IMMOVALUE IEE/07/553/SI Page 43 of 221

44 Ordinary Valuation calculations and results Market Value (MV) 3,314,000 Gross lettable Area (GLA) 2,000 m² Net Initial Yield (MV as basis) 5.19 % Date of valuation: 30 th of September 2009 Input Parameter Austrian Income Capitalisation Approach Lettable Area 2,000 m² Current Rent Estimated Rental Value (ERV) 7.8 /m² p.m. 8.0 /m² p.m. Annual Gross Rental Income 192,000 Total non-recoverable OPEX -20,000 Annual Net Rental Income 172,000 Plot size 2,400 m² Land value 200 /m² Land value 480,000 Capitalisation rate (applied yield Austria) 4.85 % Annual return on land value 480,000 x 0, ,280 Annual Net Income 148,720 Capitalisation rate (applied yield Austria) Economic lifetime of property 4.85 % 60 years Year of construction 2006 Remaining economic lifetime Annuity factor 57 years ( %) ( %) % Preliminary Income Value (building only) 2,859,886 Depreciation (damage in construction, etc.) - Land Value 480,000 Income Value 3,339,886 IMMOVALUE IEE/07/553/SI Page 44 of 221

45 Average residual term of contract Market adjustment (capitalized over-/underrented) ( ) 5 ( %) ,000 5 ( %) 4.85% 5 years -26,100 Market Value 3,314, Results applying the modified methodology As already mentioned within pilot project 1 (chapter 3.1.1) following chapter illustrate how valuers could address energy efficiency aspects or further sustainability issues in an appropriate manner, within the already existing qualitative and quantitative part of property valuation report, if property markets willingness to pay is observable but no reliable numerical evidence is available. In contrast to pilot project 1 reliable measure for quantitative integration of energy efficiency has been estimated by the valuer and weighted with the WAPEC-approach to quantify the impact on key valuation parameter. The reason therefore was the lack of information and limit availability regarding EPC and energy efficiency of comparable properties Description of key findings Result of ordinary (conventional) valuation 3,314,000 Result of modified valuation approach 3,349,000 Rental impact (nominal) Premium of 0.12 /m² p.m. Rental impact (percentaged) Premium of 1.50 % Value impact (nominal) +35,000 Value impact (percentaged) Premium of 1.08 % Explanatory notes The results of the applied modified methodology in comparison to conventional valuation show that the impact of energy efficiency on property rents and values is still at a negligible insignificant scale. The results of pilot project 2 strengthen the validity of results of pilot project 1 and fortify the applicability and reliability of the WAPEC-methodology. IMMOVALUE IEE/07/553/SI Page 45 of 221

46 In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate way and leads to reliable and plausible results Descriptive integration of aspects affecting buildings energy efficiency Building Equipment and Appliances Heating and cooling Ventilation, air conditioning and indoor air quality Lighting and day lighting Use of renewable energy resources Plumbing and hot-water heating Other equipment The heating is provided by the local district heating supply and installed floor heating system. The property is not equipped with a controlled ventilation and air conditioning system. The indoor air quality is regulated manually change of air via opening the windows. The heating system is in accordance to fulfil current standards and energy efficiency requirements. Due to the buildings structure, configuration and orientation the majority of lettable areas have access to natural lights. Artificial lighting is mostly just required in functional areas (e.g. restrooms, cellar, etc.). The high availability of natural daylight supports efficient use of energy source (electricity). The subject property is equipped with a solar heating system and consequently directly uses renewable solar energy resources. The property benefits from solar energy, which reduces the demand for non-renewable energy supply. The subject property is equipped with up-to-date plumbing due to current building standards and therefore supports efficient use of water resources. No further equipment and appliances are installed, which would be necessary for estimation of buildings energy efficiency Energy efficiency and other sustainable features of the property Energy efficiency According to the available EPC the subject property achieves an overall annual thermal energy demand of approx kwh/m².a (energy efficiency class B ) and IMMOVALUE IEE/07/553/SI Page 46 of 221

47 Energy source Green lease agreements LCC Property configuration ranges a bit below current energy efficiency requirements for residential properties of < 53.1 kwh/m².a (according to the Guidance 6 of the ÖIB Österreichisches Institut für Bautechnik ). The overall energy efficiency of the subject property therefore can be evaluated as very good in comparison to the comparable building stock which mostly achieves energy efficiency values between 35 and 45 kwh/m².a. The use of local district heating system for energy supply ensures long-term security of energy supplies. Further this energy source supports low CO 2 emission of the subject property itself. There are no green lease agreements with tenants/occupiers in force. No Life-Cycle-Costing analysis or investigations are available or have been carried out. The property s configuration supports and sets the basis for the possibility of efficient and flexible use of space (good A/V ratio of 0.45 according to the EPC in comparison to similar residential properties) which as well positively influence the buildings energy efficiency. The thermal insulation of the building envelope can be evaluated as very good in comparison to similar residential properties due to the special prefabricated thermal insulation composite system of the external walls and the use of dual-pane windows Observable property market sensitivity and maturity for energy-efficient or sustainable properties Real estate market sensitivity Beside the already given information about the current property market situation and condition following observations concerning the real estate markets awareness, sensitivity and maturity regarding energy efficiency and sustainability are necessary. In general the Austrian property market so far start to recognise the importance of property s energy efficiency and sustainability. This was as well supported by the suffering economic situation and property market condition throughout the last year, which had lead the Austrian real estate market to pay more attention on efficiency in general and need for energy-efficient and sustainable developments. Although the awareness of property owners, tenants, IMMOVALUE IEE/07/553/SI Page 47 of 221

48 Market information available Public awareness General circumstances and mandatory regulations occupiers, etc. for energy efficiency and sustainability is rising, such aspects are in most cases still not recognised within decision making process so far (e.g. in the course of leasing a property or part of it, etc.). This seems to be one of the main reasons why the market currently does not show price elasticity for energy-efficient buildings in comparison to non-energy-efficient ones. In addition as well no proven evidence for higher willingness to pay for energy-efficient properties can be observed in the market so far. But due to the fact that investigations on international level already show some examples, in which global acting, international companies already started to just focus and rent energy-efficient or sustainable properties, proven evidence just seems to be a matter of time and is expected in the short run. Even thought there exists a mandatory disclosure for EPC potential tenants just get informed about the energy efficiency if they explicitly ask for it. In most cases where lettings are offered no EPC or other information about buildings energy efficiency are available or even exist. In this valuation case EPC for the comparable properties being used have not been available and therefore the AAP has to be estimated by the valuer on the basis of descriptive investigations regarding energy efficiency on the subject property The public media in general already start to recognise the importance of sustainability and energy efficiency and start to inform on a broader scale about activities, etc. in the field of sustainability. This already had lead to increase of sensitivity and awareness for sustainability and energy efficiency of the society. Governmental institutions and policy makers already realised the importance of and promote energy-efficient and sustainable developments. Therefore mandatory regulations and directives on national as well European level have been established e.g. EPBD (2002/91/EG), EN (sustainability assessment of buildings), etc. to measure and strengthen the transparency of data and information about buildings energy efficiency. On national level building standards and guidance (e.g. ÖIB-Guidance 6) already encompass energy efficiency requirements for new developments. Further it is observable that low-energy building (LEH) requirements (energy demand below 25 kwh/m².a) are on the way to become the general building standard. IMMOVALUE IEE/07/553/SI Page 48 of 221

49 Valuation calculation results of modified method Revised Value 3,349,000 Gross Lettable Area (GLA) 2,000 m² Net Initial Yield (MV as basis) 5.21 % Date of valuation 30 th of September 2009 Input Parameter Austrian Income Capitalisation Approach Lettable Area 2,000 m² Current Rent Market rent VPA rent Estimated Rental Value (ERV) 7.8 /m² p.m. 8.0 /m² p.m /m² p.m. 8.1 /m² p.m. Annual Gross Rental Income 194,400 Total non-recoverable OPEX -20,000 Annual Net Rental Income 174,400 Plot size 2,400 m² Land value 200 /m² Land value 480,000 Capitalisation rate (applied yield Austria) 4.85 % Annual return on land value 480,000 x 0, ,280 Annual Net Income 151,120 Capitalisation rate (applied yield Austria) Economic lifetime of property 4.85 % 60 years Year of construction 2006 Remaining economic lifetime Annuity factor 57 years ( %) ( %) % Preliminary Income Value (building only) 2,906,038 Depreciation (damage in construction, etc.) - IMMOVALUE IEE/07/553/SI Page 49 of 221

50 Land Value 480,000 Income Value 3,386,038 Average remaining contract duration Market adjustment (capitalized over-/underrented) ( ) 5 ( %) ,000 5 ( %) 4.85% 5 years -36,540 Revised Value 3,349,000 To derive the above mentioned valuation parameter adjustment (VPA) the developed methodology for quantifying the rental impact of energy efficiency determined by the EPC (as described in detail in IMMOVALUE report 7.2) has been applied. One of the first steps therefore requires to collect information of comparable properties, which are necessary to verify a market rent (see following table) of a reference building (defined as a peer of comparable properties). Parameters Observable rent [ /m² p.m.] Lettable area of units[m²] Subject Property Reference building Comp 1 Comp 2 Comp 3 Comp 4 (info of experts) Weighting Market rent [ /m² p.m.] Due to the fact that the key figures regarding energy efficiency of comparable properties are not available and therefore cannot be applied to quantifying the average adjustment parameter (AAP) as shown in pilot project 1 (see chapter ), the the AAP is estimated with 5.0 % on the basis of results of buildings energy efficiency in relation to current energy efficiency requirements. To verify the current market sensitivity for energy efficiency, which determines the markets degree of willingness to pay for energy efficiency, the market adjustment rate (MAR) has to be estimated. Therefore following illustrated scoring model has been applied. The results of the WAPEC-scoring shows, that the market already shows low to medium sensitivity for IMMOVALUE IEE/07/553/SI Page 50 of 221

51 energy efficiency and achieves a MAR of around 50 % due to valuers expectation based on observable market conditions and circumstances. Furthermore the Valuers estimation adjustment (VEA) has been chosen with a size of 60 % due to uncertainty and probability of occurrence regarding the estimated AAP of 5.0 %. The VEA is above 50 % because various experts and limited scientific research or empirical surveys expect an impact on rents for energy efficient properties of about 5.0 % to 10 %. Weighted Adjustment for valuation Parameter Effecting Characteristics (WAPEC) Market maturity Opaque (Emerging) Market --> Premium for energyefficient building (primarilly in emerging market) Significant adjustment Medium adjustment Low adjustment neutral - high price elasticity - low price elasticity observable - high awareness of tenants for sustainability and energy efficiency - omnipresence of green building issues in the broad media - tenants partly start to focus on energy efficiency and sustainability aspects in their decision making process - sustainability and energy efficiency aspects are recognised by a broad media - market start to note price elasticity - tenants get informed about energy efficiency but it does not play a main role to the tenant yet - just specific media start to address green building and energy efficiency aspects. - market does not reflect price differences due to energy efficiency or sustainability at all - tenants do not pay attention on sustainability and energy efficiency at all - media does not recognise green buildings benefits at all - property market is willing to pay rental premiums for green or energy-efficient buildings - high market sensitivity for operating expenses and energy costs (especially in gross rent-orientated property markets) - It is observable that few tenants start to just rent energy-efficiency or sustainable properties - majority of property market is not willing to pay rent premium for green buildings - market pays attention to energy efficiency and sustainability independent of market condition. - suffering economic situation - lead market to pay attention on efficiency and need for energy-efficient or green buildings becomes a topic - just low attention on energy efficiency even though market situation lead to focus on efficiency in general - good general economic situation - low-energy houses are quite rare and represents unique selling proposition - low-energy standards are on the way to become building standard - zero-carbon house are required building standards - monetary penalties/restrictions for nonenergy-efficient properties - subject property achieves low-energy (LEH) or passiv house (PH) standards - monetary restrictions for non-energy-efficient building are discussed by government and policy makers - subject property achieves better energy-efficiency than current standards - majority of building stock receive low-energy or passive house standard - government and policy makers realise importance and promote energy efficiency and sustainable developments - subject property achieves current energyefficiency or sustainable standards and requirements - government and policy makers do not push market to focus on energy efficiency and sustainabiltiy - subject property does not achieve energy efficiency requirements and performance standards Market adjustment rate +/ % +/ % +/ % +/ % Estimated MAR +50 % x AAP +/- 5% [%] --> Average Adjustment Parameter derived from market evidence/valuers expectations due to replicable argumentation x or estimation VEA +/- 60% [%] --> Valuers estimation adjustment (VEA) due to probability of occurrence, uncertainty, etc. regarding the AAP = WAF +/ [%] --> Weighted Adjustment Factor (WAF) = MAR x AAP x VEA After applying the WAPEC-Scoring the valuer can calculate the weighted adjustment factor (WAF rent ), which determines the specific valuation parameter adjustment (VPA rent ) as input IMMOVALUE IEE/07/553/SI Page 51 of 221

52 variable for the estimated rental value (ERV) of the subject property. Due to the verification of the the WAF can be calculated as follows: WAFrent = MARrent AAPrent VEA = 50% 5.0% 60% +1.5% The current rental impact of energy efficiency, defined as VPA rent achieves VPA rent = WAFrent rmarket =1.5% 8.0 /m² p.m /m² p.m Pitfalls within the process Market transparency Market transparency Information quality concerning energy-efficiency Information quality concerning LCC Market data has been collected from various sources such as real estate agencies, direct contact with owners, etc. It has to be mentioned that finding reliable and adequate market information regarding buildings energy efficiency or life-cycle-costs is still difficult and almost an unsuccessful tasks, because information and data (EPC, etc.) are mostly not available in the property market so far. The EPC of the subject property includes a lot of detailed information especially various energy-efficiency figures within the EPC. Therefore it is important that valuers are able to understand and use the right figures. On the other hand the lack of EPCs from comparable properties requires that the valuers have to estimate the average adjustment parameter (AAP) due to his professional judgement skills and cannot apply the energy cost saving potential (ECSP), as illustrated in pilot project 1, to derive adequate numerical impact figures. Finding and collecting information on LCC analysis, etc. is an even more impossible task as described in pilot project 1. It can be mentioned that such analysis tools are too sophisticated and extensive that their application in property valuation practice cannot be claimed. IMMOVALUE IEE/07/553/SI Page 52 of 221

53 2.1.4 Pilot Project 4 Condominium in Bad Häring/Kufstein Key figures of the Property valuation Key figures Starting point Figures Region/Town 6323 Bad Häring Year of construction 1970 (fictitious) Year of last (intensive) renovation 2008 Main use flat Location quality (A to D) C Construction quality (A to D) C Maintanance quality (A to D) C Market data transparency (A to D) D Property data transparency (A to D) D Lettable area Vacancy in % 100% Gross external area ~158.6 Gross internal area n.a. Valuation methodology applied income approach Valuation Company court-approved appraiser Current rent n.a. (market rent: 5,75 /m²) Date of valuation 2nd of April 2009 Measured energy use n.a. Calculated final energy demand n.a. EPC existing (Y/N) N LCC calculation existing (Y/N) N Market value 83,185 Applying the modified approach Figures Methodology for developed market (Y/N) N LCC carried out (Y/N) N Revised Value 83, Results from ordinary valuation The following chapter expresses the main parts and issues, which have to be addressed within an ordinary property valuation report and calculation. This is based on an actual property valuation carried out by a court-approved appraiser. The valuation report appraises a condominium. In this case the EPC is not available and the appraiser points out that EPC is not available in the valuation report. In this case, however, it is additionally pointed out that IMMOVALUE IEE/07/553/SI Page 53 of 221

54 the object has inferior energy efficiency and cannot be used furthermore without refurbishment General description and explanation Background/Initial Situation Scope of Work Valuation of the property was made for a bankruptcy proceeding. The valuation is needed as an initial position for a public sale and the appraiser ascertains the market value of the property. The property has been inspected on 2 nd of April 2009, which also represents the date of valuation. The structural condition has been evaluated in course of the visual inspection. Detailed analyses of property condition, used construction material and installation, as well as technical equipment have not been carried out in accordance with the valuation agreement. The property has been valuated by applying the cost approach and the income approach. While the cost approach has been applied for the valuation itself the income approach was needed for a check of results Basis of valuations - Valuation was carried out in accordance with LBG (Liegenschaftsbewertungsgesetz the Austrian code on building appraisal) - Main basis for the valuation has been the documents supported as follows: - land register abstract of title - cadastral map excerpt - designation of area and zoning map - information on maintenance costs (incl. Fit-outs) - current rent rol - literature on valuation practise - blueprint of property In addition to the mentioned documents the valuer considers the following facts: - results of site inspection - observable property condition - current and expected rental income - current observable market condition and situation of the local real estate market. Legal Status/ Statutory Considerations/ Town Planning Austrian law Tyrol regional planning It is assumed that the property has been constructed due to building codes and standards for construction valid at the IMMOVALUE IEE/07/553/SI Page 54 of 221

55 Location Site description Property description (construction) Structural condition and repair time of construction. Since the appraised object is a resident owned flat which is not sold to companies regularly all figures are calculated including VAT. Property is situated in Bad Häring, close to the city of Kufstein. This is mainly important for the economic growth of the region. Considering purchasing power, employment and economic conditions in general a positive development may be expected. The building is situated next to the main street of Bad Häring. Therefore it is appropriate for commercial use. However this spot is not ideal for living due to the traffic on this road. Due to official statement by the federal environmental agency the site is free of brownfields and other contaminations. The site is not located in endangered areas which might be affected by natural disasters (e.g. avalanches, earthquakes, soil erosion, etc.). Initial year of construction according to building authority 1964/1979. The year 1970 is used as a fictive year of construction here forth. Type of construction: massive Floor: wood External wall: massive wall Facade: construction easy Windows: wooden windows with single glazing Doors (inside): wood Door (outside):wood with glass Roof: couple roof Roof covering: brick clay Heating system: oil heating The flat has a very functional layout. However the corridor outside the flat is dark and long. In addition the property does not provide an elevator. The visual inspection did not show any major structural issues being capable of influencing the object s value. Since the whole construction is rather old the object does not comply with modern standards. Damages are only due to the age of the building. In order to maintain these damages concerning floors, skylights, and paint works, EUR 3,500 have been calculated. The property does not comply with modern standards IMMOVALUE IEE/07/553/SI Page 55 of 221

56 Market condition (rental, investment) Valuation methodology and commentary concerning its thermal insulation. An EPC is not available. According to the property manager a refurbishment of the façade is planned in the near future. This includes thermal insulation. Costs for this measure may be calculated from past projects at 100,000 (incl. VAT) This is not covered by laybacks. Costs for this measure need to be apportioned on the owners. The flat s fraction would account for EUR 8,395. The general investment market in Austria has slowed down in 2008 due to arising effects of the global financial crisis. Due to decreasing demand rapid decompression of yields of about 20 to 50 basis points have been observed. In 2009 property transaction activities have gained momentum and lead to positive market perspective. The whole object is vacant at the time of valuation. In order to estimate obtainable rent actual comparable rents are used. This yields a span from /m² p.m. In addition a parking lot may be rented at 20 p.m. Starting from a base lending rate of 4.00 % regarding risk of location, vacation, rent development risk and market risk the used discount rate is fixed at 5.25 %. In order to obtain object s value the cost approach is applied. This is due to the fact that the usage by the owner is in focus. The income approach is used only for validation Key Valuation parameter Gross rental income Non-recoverable Operating expenses Applied yield (Austrian capitalisation rate) The rental income of the subject property due to the observable market rent exceeds an annual amount of 6,625 EUR, which on average, equals a monthly rental income of approx /m² p.m. The current annual non-recoverable operating expenses (OPEX) are assumed at 16.0 % of the gross rental income. This range is common for mixed used commercial properties. The OPEX is therefore at 1,060 p.a. The applied yield was estimated with 5.25 % and encompasses adjustments for location, risks of vacancy and collection loss. IMMOVALUE IEE/07/553/SI Page 56 of 221

57 Derivation of other key valuation figures Average residual term of contract Land value Economic lifetime Vacancy rate The object is vacant. Therefore this fact is not accounted for. This fact, however, is included in the capitalisation rate. The achievable land value has been estimated by various sources. Nearby developable plots, local experts, market reports and own investigations have been used for calculation. The achievable land value in the market for similar plots has been ascertained with 240 /m². The average economic lifetime for residential/office properties has been estimated with 80 years and equals various widespread and accepted literature (such as Kleiber, et al.), which refers to an adequate economic lifetime between 60 to 80 years for such properties. The current observable vacancy rate of 100 % has been taken into account for valuation Ordinary Valuation calculations and results Market Value (MV) 83,185 Lettable Area (GLA) m² Net Initial Yield (MV as basis) 6.69 % Date of valuation 11 th of April 2009 Input Parameter Austrian Income Capitalisation Approach Lettable Area m² Current Rent 0 /m² p.m. Storing position 240 /p.a. Estimated Rental Value (ERV) 5.75 /m² p.m. Annual Gross Rental Income 6,625 Total non-recoverable OPEX -1,061 Annual Net Rental Income 5,564 Plot size Land value 903 m² x (162 / 1,930) 75,7959m² 225 /m² IMMOVALUE IEE/07/553/SI Page 57 of 221

58 Land value 17,054 Capitalisation rate (applied yield Austria) 5.25 % Annual return on land value 17,054 x 0, Annual Net Income 4,669 Capitalisation rate (applied yield Austria) Economic lifetime of property 5.25 % 80 years Year of construction 1970 Remaining economic lifetime Annuity factor 41 years 41 ( %) 1 41 ( %) 5.25% Preliminary Income Value (building only) 78,025 Depreciation (damage in construction, etc.) -11,894 Land Value 17,054 Income Value 83,185 Market Value 83, Results applying the modified methodology The following chapter features the application of the modified methodology. In this case the expected refurbishment has been regarded in the original report. With the aid of this modified methodology the influence of an energy efficient construction type on rents and costs is expressed. In this case costs of refurbishment are offset by gains in rent from this measure. It is assumed implicitly that the object is refurbished and this indicates higher rents. However the influence on rents may not be significant but the application of the modified method may be shown in this case. In addition this method yields in plausible results Description of key findings Result of ordinary (conventional) valuation 83,185 Result of modified valuation approach 83,809 IMMOVALUE IEE/07/553/SI Page 58 of 221

59 Rental impact (nominal) Premium of 0.04 /m² p.m. Rental impact (percentaged) Premium of 0.70 % Value impact (nominal) 624 Value impact (percentaged) Premium of 0.74 % Explanatory notes The results of the applied modified methodology in comparison to the conventional valuation show that the impact of energy efficiency on property rents and values is still at a negligible insignificant scale. In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate way and leads to reliable and plausible results Descriptive integration of aspects affecting buildings energy efficiency Building Equipment and Appliances Heating and cooling Ventilation, air conditioning and indoor air quality Lighting and day lighting Use of renewable energy resources Plumbing and hot-water heating Other equipment The installed heating system is oil based and was installed in Within the building heat distribution is accomplished via white radiators dating back to the same year. none Since the flat is situated in the loft natural skylights emit light. The subject property is neither equipped with a solar heating system nor a photovoltaic (PV) or other alternative energy supply system, and consequently does not directly use renewable energy resources. No special system installed none IMMOVALUE IEE/07/553/SI Page 59 of 221

60 Energy efficiency and other sustainable features of the property Energy efficiency Energy source Green lease agreements LCC Since no EPC is available the HWB (net heat demand) is not known. According to the property manager a refurbishment of the façade is planned in the near future. This includes thermal insulation. From past projects costs for this measure may be calculated at EUR 100,000 (incl. VAT) This is not covered by general reserves. Costs for this need to be allocated to the apartments owners. The condominiums amount would account EUR 8,395. (100,000 x (162/1930)). Heating is oil based and was installed in No further details are known. There are no green lease agreements with tenants/occupiers in force. The property does not have any green building certification (LEED, BREEAM, DGNB, CEN, etc.). Further no environmental management systems such as EMAS or ISO or carbon reduction commitment (CRC) are in place and addressed by the owners management. No Life-Cycle-Costing analysis or investigations are available or have been carried out Observable property market sensitivity and maturity for energy-efficient or sustainable properties Real estate market sensitivity Beside the already given information about the current property market situation and condition following additional observations concerning the real estate markets awareness, sensitivity and maturity regarding energy efficiency and sustainability are necessary. In general the Austrian property market so far started to recognise the importance of property s energy efficiency and sustainability. This was as well supported by the suffering economic situation and property market condition throughout the last year, which had lead the Austrian real estate market to pay more attention on efficiency in general and need for energy-efficient and sustainable developments. Although the awareness of property owners, tenants, occupiers, etc. for energy efficiency and sustainability is rising, so far such aspects are still not recognised in most cases within decision making process (e.g. in the course of IMMOVALUE IEE/07/553/SI Page 60 of 221

61 Market information available Public awareness General circumstances and mandatory regulations leasing a property or part of it, etc.). This seems to be one of the main reasons why the market currently does not show price elasticity for energy-efficient buildings in comparison to non-energy-efficient ones. In addition as well no proven evidence for higher willingness to pay for energy-efficient properties can be observed in the market so far. But due to the fact that investigations on international level already show some examples, in which global acting, international companies already started to focus and rent just energy-efficient or sustainable properties, proven evidence just seems to be a matter of time and is expected in the short run. Even though a mandatory disclosure of property owners for EPC is existing potential tenants just get informed about the energy efficiency if they explicitly ask for it. In most cases lettings are offered with no EPC or other information about buildings energy efficiency. The public media in general already start to recognise the importance of sustainability and energy efficiency and start to inform about activities on a broader scale, etc. in the field of sustainability. This already has lead to increase of sensitivity and awareness for sustainability and energy efficiency of the society. Governmental institutions and policy makers already realised the importance of and promote energy-efficient and sustainable developments. Therefore mandatory regulations and directives on national as well European level have been established e.g. EPBD (2002/91/EG), EN (sustainability assessment of buildings), etc. to measure and strengthen the transparency of data and information about buildings energy efficiency Valuation calculation results of modified method On national level building standards and guidance (e.g. ÖIB-Guidance 6) already encompass energy efficiency requirements for new developments. Furthermore it is observable that low-energy building (LEH) requirements (energy demand below 25 kwh/m².a) are on the way to become the general building standard. Revised Value 83,809 Gross Lettable Area (GLA) m² Net Initial Yield (MV as basis) 6.68 % Date of valuation 11 th of April 2009 IMMOVALUE IEE/07/553/SI Page 61 of 221

62 Input Parameter Austrian Income Capitalisation Approach Lettable Area m² Storing position Current Rent Market rent VPA rent Estimated Rental Value (ERV) 240 /p.a. 0 /m² p.m /m² p.m /m² p.m /m² p.m. Annual Gross Rental Income 6,669 Total non-recoverable OPEX 16 % gross rental income -1,067 Annual Net Rental Income 5,602 Plot size 162 / 1,930 Land value 225 /m² Land value 17,054 Capitalisation rate (applied yield Austria) 5.25 % Annual return on land value 17,054 x 0, Annual Net Income 4,707 Capitalisation rate (applied yield Austria) Economic lifetime of property 5.25 % 80 years Year of construction 1970 Remaining economic lifetime Annuity factor 41 years 41 ( %) 1 41 ( %) 5.25% Preliminary Income Value (building only) 78,648 Depreciation (damage in construction, etc.) -11,894 Land Value 17,054 Income Value 83,809 Market Value 83,809 IMMOVALUE IEE/07/553/SI Page 62 of 221

63 To derive the above mentioned valuation parameter adjustment (VPA) the developed methodology for quantifying the rental impact of energy efficiency determined by the EPC (see IMMOVALUE report 7.2) has been applied. One of the first steps therefore requires collecting information from comparable properties, which are necessary to verify a market rent, average energy demand, etc. of a reference building (defined as a peer of comparable properties). Due to the fact that the key figures regarding energy efficiency of comparable properties are not available and therefore cannot be applied to quantify the average adjustment parameter (AAP), the AAP is estimated with 5.0 % on the basis of results of buildings energy efficiency in relation to current energy efficiency requirements. To verify the current market sensitivity for energy efficiency, which determines the markets degree of willingness to pay for it, the market adjustment rate (MAR) has to be estimated. Therefore the illustrated scoring model has been applied. The results of the WAPEC-scoring shows, that the market already shows low to medium sensitivity for energy efficiency and achieves a MAR of around 25 % due to valuers expectation based on observable market conditions and circumstances. Furthermore the valuers estimation adjustment (VEA) has been estimated at 75 % due to uncertainty and probability of occurrence regarding the estimated AAP of 5.0 %. The VEA is above 75 % because various experts and limited scientific research or empirical surveys expect an impact on rents for energy efficient properties of about 5.0 % to 10 %. Furthermore a survey with local real estate agents showed that consumers are willing to pay 5 % higher rents if it is possible to cut energy costs. IMMOVALUE IEE/07/553/SI Page 63 of 221

64 Weighted Adjustment for valuation Parameter Effecting Characteristics (WAPEC) Market maturity Opaque (Emerging) Market --> Premium for energyefficient building (primarilly in emerging market) Significant adjustment Medium adjustment Low adjustment neutral - high price elasticity - low price elasticity observable - high awareness of tenants for sustainability and energy efficiency - om nipresence of green building issues in the broad m edia - tenants partly start to focus on energy efficiency and sustainability aspects in their decision m aking process - sustainability and energy efficiency aspects are recognised by a broad m edia - m arket start to note price elasticity - tenants get inform ed about energy efficiency but it does not play a m ain role to the tenant yet - just specific m edia start to address green building and energy efficiency aspects. - m arket does not reflect price differences due to energy efficiency or sustainability at all - tenants do not pay attention on sustainability and energy efficiency at all - m edia does not recognise green buildings benefits at all - property m arket is willing to pay rental prem ium s for green or energy-efficient buildings - high m arket sensitivity for operating expenses and energy costs (especially in gross rent-orientated property markets) - It is observable that few tenants start to just rent energy-efficiency or sustainable properties - m ajority of property m arket is not willing to pay rent prem ium for green buildings - m arket pays attention to energy efficiency and sustainability independent of market condition. - suffering econom ic situation - lead m arket to pay attention on efficiency and need for energy-efficient or green buildings becom es a topic - just low attention on energy efficiency even though m arket situation lead to focus on efficiency in general - good general econom ic situation - low-energy houses are quite rare and represents unique selling proposition - low-energy standards are on the way to becom e building standard - m ajority of building stock receive low-energy or passive house standard - zero-carbon house are required building standards - m onetary penalties/restrictions for nonenergy-efficient properties - subject property achieves low-energy (LEH) or passiv house (PH) standards - m onetary restrictions for non-energy-efficient building are discussed by governm ent and policy m akers - subject property achieves better energy-efficiency than current standards - governm ent and policy m akers realise im portance and prom ote energy efficiency and sustainable developm ents - subject property achieves current energyefficiency or sustainable standards and requirem ents - governm ent and policy m akers do not push m arket to focus on energy efficiency and sustainabiltiy - subject property does not achieve energy efficiency requirem ents and perform ance standards Market adjustment rate +/ % +/ % +/ % +/ % Estimated MAR +25 % x AAP +/- 5% [%] --> Average Adjustm ent Param eter derived from m arket evidence/valuers expectations due to replicable argum entation or x estim ation VEA +/- 50% [%] --> Valuers estim ation adjustm ent (VEA) due to probability of occurrence, uncertainty, etc. regarding the AAP = WAF +/ [% ] --> Weighted Adjustm ent Factor (WAF) = MAR x AAP x VEA After applying the WAPEC-Scoring the valuer can calculate the weighted adjustment factor (WAF rent ), which determines the specific valuation parameter adjustment (VPA rent ) as input variable for the estimated rental value (ERV) of the subject property. Due to this verification the WAF can be calculated as follows: WAFrent = MARrent AAPrent VEA = 25% 5.0% 50% +0.63% The current rental impact of energy efficiency, defined as VPA rent yields in: VPA rent = WAFrent rmarket = 0.63% 5.75 /m² p.m /m² p.m Pitfalls within the process IMMOVALUE IEE/07/553/SI Page 64 of 221

65 Market transparency Market transparency Information quality concerning energy-efficiency Information quality concerning LCC Market data has been collected from various sources such as real estate agencies, direct contact with owners, etc. Drawing conclusions from actual transactions is not possible without limitations. It is even hard to obtain comparable objects for deriving prices of undeveloped plots. The survey with real estate agencies showed that the market reacts only slowly to the issue of energy efficiency. The EPC is hardly demanded by customers. Therefore finding comparable objects having an EPC is not an easy task. In this special case the valuated object does not have an EPC. The LCC issue is not present within the population. Therefore no impact on the market may be derived. IMMOVALUE IEE/07/553/SI Page 65 of 221

66 2.1.5 Pilot Project 5 Condominium in Feldkirch Toster In this case the EPC is available and mentioned in the report as well. However the EPC is not integrated in the valuation. The appraiser applies the income approach. The modified method features a valuation of the object compared to a low-energy building (LEH) Key figures of the Property valuation Key figures Starting point Figures Region/Town 6800 Feldkirch - Tosters Year of construction 1973 Year of last (intensive) renovation n.a. Main use flat Location quality (A to D) B Construction quality (A to D) C Maintanance quality (A to D) C Market data transparency (A to D) D Property data transparency (A to D) C Lettable area Vacancy in % 0% Gross external area n.a. Gross internal area n.a. Valuation methodology applied income approach Valuation Company court-approved appraiser Current rent n.a. (market rent: 6,55 /m²) Date of valuation 30th of April 2009 Measured energy use n.a. n.a. Calculated final energy demand (thermal energy demand = 79 kwh/m².a) EPC existing (Y/N) Y LCC calculation existing (Y/N) N Market value 128,298 Applying the modified approach Figures Methodology for developed market (Y/N) N LCC carried out (Y/N) N Revised Value 126,685 IMMOVALUE IEE/07/553/SI Page 66 of 221

67 Results from ordinary valuation The following chapter expresses the main parts and issues, which have to be addressed within an ordinary property valuation report and calculation. This is based on an actual property valuation carried out by a court-approved appraiser. The valuation report appraises a condominium. In this case the EPC is available but not included in the original valuation. The modified method offers the opportunity of using the EPC for evaluating the buildings energy efficiency. The original valuation report, however, does not feature the EPC as a whole. Therefore only the thermal heat demand has been available to the authors. LCC aspects have not been included in both valuation methods, due to the missing market evidence and awareness to this topic General description and explanation Background/Initial Situation Valuation of property was made for a bankruptcy proceeding. The valuation is needed as an initial position for a public sale and the appraiser ascertains the market value of the property. Scope of Work The property has been inspected on 30 th of April 2009, which also represents the date of valuation. The structural condition has been evaluated in the course of the visual inspection. Detailed analyses of property condition, used construction material and installation, as well as technical equipment have not been carried out in accordance with the valuation agreement. The property has been evaluated by applying the cost approach and the income approach. All further analyses concentrate on the income approach. Basis of valuations Valuation was carried out in accordance with LBG (Liegenschaftsbewertungsgesetz the Austrian code on building appraisal) The valuation has been based on the following documents: - land register abstract of title - cadastral map excerpt - designation of area and zoning map - information on maintenance costs (incl. Fit-outs) - current rent rol - literature of valuation practice - energy performance certificate (in line with the EU Directive 2002/91/EG) IMMOVALUE IEE/07/553/SI Page 67 of 221

68 Legal Status/ Statutory Considerations/ Town Planning Location Site description Property description (construction) Structural condition and repair In addition to the mentioned documents the valuer relies on the following facts: - results of site inspection - observable property condition - Present observable market condition and situation of the local real estate market. Austrian law Vorarlberg regional planning It is assumed that the property has been constructed according to building codes and standards for construction valid at the time of construction. The property is situated in Feldkirch next to the church and the school. Property: The land development plan declares the plots where the dwelling is situated as a housing zone. The property consists of a comprehensive construction over several plots with, in total, four multi-family dwellings (House A to D) with a basement garage in the middle. The property subject to valuation is an apartment building with cellar, ground floor and three floors above the ground. Condominium: The apartment is situated in the second floor in the properties north-western corner. The flat is a four-room apartment with square meters. Construction took place in 1972/1973 Type of construction: ferro concrete Floor: pavement with different floor covers external wall: massive wall facade: construction easy windows: double glazing doors (inside): wood door (outside):wood roof: flat roof with thermal insulation heating system: central heating oil heating Property: The concrete as well as the façade has been refurbished in 2007 yet no thermal insulation has been applied. The flat roof has been refurbished and insulated as well. Condominium: The apartment is very well maintained. Only the bathroom showed minor cracks in the grouting and small bursts. IMMOVALUE IEE/07/553/SI Page 68 of 221

69 Market condition (rental, investment) The general investment market in Austria has slowed down in 2008 due to arising effects of the global financial crisis. Due to decreasing demand rapid decompression of yields of about 20 to 50 basis points have been observed. In 2009 property transaction activities have gained momentum and lead to positive market perspective. The expert was not informed whether a rental agreement exists or not. In order to estimate obtainable rent actual comparable rents are used. This yields a span from /m² p.m. Therefore rent is fixed at 6.55 /m² p.m. for the object. In this market comparable objects are calculated at a rate of 4 %. Valuation methodology and commentary For obtaining the value the cost approach as well as the income approach is applied. As mentioned above this analysis concentrates on the latter Key Valuation parameter Gross rental income Non-recoverable Operating expenses Applied yield (Austrian capitalisation rate) Due to the observable market rent the rental income of the subject property exceeds an annual amount of 7,440 EUR, which on average equals a monthly rental income of approx /m² p.m. The current annual non-recoverable operating expenses (OPEX) account for the positions maintenance and risk of loss of rental income. Hence the OPEX accumulates to 1,699 p.a. The applied yield was estimated at 4.00 % regarding the recommendation of the association of valuers Derivation of other key valuation figures Average residual term of contract Land value No information was available to the valuer. Therefore estimation of rents is obtained via market rents. The achievable land value has been estimated by various sources. Nearby developable plots, local experts, market reports and own investigations have been used for calculation. The achievable land value in the market for similar plots has been ascertained with 220 /m² to 240 /m². IMMOVALUE IEE/07/553/SI Page 69 of 221

70 Economic lifetime Vacancy rate The average economic lifetime for residential properties has been estimated with 90 years this corresponds to various widespread and accepted literatures (such as Kleiber, et al.). Remaining economic lifetime is therefore calculated by 90-36=54 years The expert did not obtain any information on this matter. Therefore calculation is based on a zero vacancy rate Ordinary Valuation calculations and results Market Value (MV) 128,298 Lettable Area (GLA) m² Net Initial Yield (MV as basis) 4.47 % Date of valuation 30 th of April 2009 Input Parameter Austrian Income Capitalisation Approach Lettable Area m² Current Rent 0 /m² p.m. Estimated Rental Value (ERV) 6.55 /m² p.m. Annual Gross Rental Income 7,440 Total non-recoverable OPEX -1,699 Annual Net Rental Income 5,741 Plot size 1,766 m² (lot: 99 / 1527) Land value 207 /m² Land value 23,700 Capitalisation rate (applied yield Austria) 4.00 % Annual return on land value 23,700 x 0, Annual Net Income 4,793 Capitalisation rate (applied yield Austria) Economic lifetime of property 4.00 % 90 years Year of construction 1973 Remaining economic lifetime 54 years IMMOVALUE IEE/07/553/SI Page 70 of 221

71 Annuity factor 54 ( %) 1 54 ( %) 4.00% Preliminary Income Value (building only) 105,398 Depreciation (damage in construction, etc.) -800 Land Value 23,700 Income Value 128,298 Market Value 128, Results applying the modified methodology This chapter applies the modified methodology. The EPC is used for evaluating the buildings energy efficiency. It is assumed that low-energy buildings (LEH) are regarded as standard in the real estate market. Therefore the object is valuated in comparison to a LEH property. Since this object has a higher heat demand than a LEH this leads to a discount. That is to say the revised value is marginally lower than the original value Description of key findings Result of ordinary (conventional) valuation 128,298 Result of modified valuation approach 126,685 Rental impact (nominal) Discount of 0.06 /m² p.m. Rental impact (percentaged) Discount of 0.92 % Value impact (nominal) -1,613 Value impact (percentaged) Discount of 1.27 % Explanatory notes The results of the applied modified methodology in comparison to conventional valuation show that the impact of energy efficiency on property rents and values is still at a negligible and insignificant scale. In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition IMMOVALUE IEE/07/553/SI Page 71 of 221

72 regarding buildings energy efficiency in an appropriate way and leads to reliable and plausible results Descriptive integration of aspects affecting buildings energy efficiency Building Equipment and Appliances Heating and cooling The object has an oil-based central heating system. Warm water is provided via domestic hot water tanks on electricity basis. Ventilation, air conditioning and indoor air quality Lighting and day lighting Use of renewable energy resources Plumbing and hot-water heating Other equipment none Natural lighting via windows The subject property is neither equipped with a solar heating system nor a photovoltaic (PV) or other alternative energy supply system, and consequently does not directly use renewable energy resources. No special system available none Energy efficiency and other sustainable features of the property Energy efficiency Energy source Green lease agreements According to the available EPC the subject property achieves an overall annual thermal energy demand of approx kwh/m².a (energy efficiency class C ) Again it must be pointed out, that the original EPC has not been available to the authors. Hence only the thermal heat demand is cited here. The subject property is equipped with double glazed insulated windows in a very well condition. The façade refurbishment did not apply a thermal insulation. Contrarily the roof has been insulated in Oil based central heating, warm water conditioning with electricity. There are no green lease agreements with tenants/occupiers in force. The property does not have a green building certification (LEED, BREEAM, DGNB, CEN, etc.). IMMOVALUE IEE/07/553/SI Page 72 of 221

73 LCC Further no environmental management systems such as EMAS or ISO or carbon reduction commitment (CRC) are in place and addressed by the owners management. No Life-Cycle-Costing analysis or investigations are available or have been carried out Observable property market sensitivity and maturity for energy-efficient or sustainable properties Real estate market sensitivity Market information available Public awareness Beside the already given information about the current property market situation and condition following additional observations concerning the real estate markets awareness, sensitivity and maturity regarding energy efficiency and sustainability are necessary. In general the Austrian property market started so far to recognise the importance of property s energy efficiency and sustainability. This was as well supported by the suffering economic situation and property market condition throughout the last year, which had lead the Austrian real estate market to pay more attention on efficiency in general and need for energy-efficient and sustainable developments. Although the awareness of property owners, tenants, occupiers, etc. for energy efficiency and sustainability is rising, such aspects are still not recognised in most cases within the decision making process so far (e.g. in the course of leasing a property or part of it, etc.). This seems to be one of the main reasons why the market currently does not show price elasticity for energy-efficient buildings in comparison to non-energy-efficient ones. In addition as well no proven evidence for higher willingness to pay for energy-efficient properties can be observed in the market so far. But due to the fact that investigations on international level already show some examples, in which global acting, international companies already started to focus and rent just energy-efficient or sustainable properties, proven evidence just seems to be a matter of time and is expected in the short run. Even thought a mandatory disclosure of property owners for EPC is existing potential tenants just get informed about the energy efficiency if they explicitly ask for it. In most cases lettings are offered with no EPC or other information about buildings energy efficiency. The public media in general already start to recognise the IMMOVALUE IEE/07/553/SI Page 73 of 221

74 General circumstances and mandatory regulations importance of sustainability and energy efficiency and start to inform about activities on a broader scale, etc. in the field of sustainability. This already has lead to increase of sensitivity and awareness for sustainability and energy efficiency of the society. Governmental institutions and policy makers already realised the importance of and promote energy-efficient and sustainable developments. Therefore mandatory regulations and directives on national as well European level have been established e.g. EPBD (2002/91/EG), EN (sustainability assessment of buildings), etc. to measure and strengthen the transparency of data and information about buildings energy efficiency. On national level building standards and guidance (e.g. ÖIB-Guidance 6) already encompass energy efficiency requirements for new developments. Further it is observable that low-energy building (LEH) requirements (energy demand below 25 kwh/m².a) are on the way to become the general building standard Valuation calculation results of modified method Revised Value (RV) 126,685 Lettable Area (GLA) m² Net Initial Yield (RV as basis) 4.47 % Date of valuation 30 th of April 2009 Input Parameter Austrian Income Capitalisation Approach Lettable Area m² Current Rent 0 /m² p.m. Market rent 6.55 /m² p.m. VPA rent Estimated Rental Value (ERV) 0.06 /m² p.m /m² p.m. Annual Gross Rental Income 7,366 Total non-recoverable OPEX -1,699 Annual Net Rental Income 5,667 Plot size 1,766 m² (lot: 99 / 1527) Land value 207 /m² IMMOVALUE IEE/07/553/SI Page 74 of 221

75 Land value 23,700 Capitalisation rate (applied yield Austria) 4.00 % Annual return on land value 23,700 x 0, Annual Net Income 4,719 Capitalisation rate (applied yield Austria) Economic lifetime of property 4.00 % 90 years Year of construction 1973 Remaining economic lifetime Annuity factor 54 years 54 ( %) 1 54 ( %) 4.00% Preliminary Income Value (building only) 103,785 Depreciation (damage in construction, etc.) -800 Land Value 23,700 Income Value 126,685 Market Value 126,685 To derive the above mentioned valuation parameter adjustment (VPA) the developed methodology for quantifying the rental impact of energy efficiency determined by the EPC (see IMMOVALUE report 7.2) has been applied. One of the first steps therefore requires collecting information from comparable properties, which are necessary to verify a market rent, average energy demand, etc. of a reference building (defined as a peer of comparable properties). Due to the fact that the key figures regarding energy efficiency of comparable properties are not available and therefore cannot be applied to quantify the average adjustment parameter (AAP) the AAP is estimated with 5.0 % on the basis of results of the building s energy efficiency in relation to current energy efficiency requirements. These 5.0 % may be found in studies as well as interviews with market actors. These sources estimate the increased rent due to energy efficiency at approx. 5 % to 10 %. Since these figures are estimations the AAP is set to 5.0 %. IMMOVALUE IEE/07/553/SI Page 75 of 221

76 To verify the current market sensitivity for energy efficiency, which determines the markets degree of willingness to pay for energy efficiency, the market adjustment rate (MAR) has to be estimated. Therefore the illustrated scoring model has been applied. The results of the WAPEC-scoring show, that the market already shows low to medium sensitivity for energy efficiency and achieves a MAR of around 25 % due to valuers expectation based on observable market conditions and circumstances. Furthermore the Valuers estimation adjustment (VEA) has been chosen with a size of 75 % due to uncertainty and probability of occurrence regarding the estimated AAP of 5.0 %. The VEA is at 75 % because various experts and limited scientific research or empirical surveys expect an impact on rents for energy efficient properties of about 5.0 % to 10 %. In addition a survey by phone showed an increased willingness to pay by 5 % if it is possible to save energy costs. IMMOVALUE IEE/07/553/SI Page 76 of 221

77 Weighted Adjustment for valuation Parameter Effecting Characteristics (WAPEC) Market maturity Opaque (Emerging) Market --> Discount for non energy-efficient building (primarilly in emerging market) Significant adjustment Medium adjustment Low adjustment neutral - high price elasticity - low price elasticity observable - high awareness of tenants for sustainability and energy efficiency - om nipresence of green building issues in the broad m edia - tenants partly start to focus on energy efficiency and sustainability aspects in their decision m aking process - sustainability and energy efficiency aspects are recognised by a broad m edia - m arket start to note price elasticity - tenants get inform ed about energy efficiency but it does not play a m ain role to the tenant yet - just specific m edia start to address green building and energy efficiency aspects. - m arket does not reflect price differences due to energy efficiency or sustainability at all - tenants do not pay attention on sustainability and energy efficiency at all - m edia does not recognise green buildings benefits at all - property m arket is willing to pay rental prem ium s for green or energy-efficient buildings - high m arket sensitivity for operating expenses and energy costs (especially in gross rent-orientated property markets) - It is observable that few tenants start to just rent energy-efficiency or sustainable properties - m ajority of property m arket is not willing to pay rent prem ium for green buildings - m arket pays attention to energy efficiency and sustainability independent of market condition. - suffering econom ic situation - lead m arket to pay attention on efficiency and need for energy-efficient or green buildings becom es a topic - just low attention on energy efficiency even though m arket situation lead to focus on efficiency in general - good general econom ic situation - low-energy houses are quite rare and represents unique selling proposition - low-energy standards are on the way to becom e building standard - m ajority of building stock receive low-energy or passive house standard - zero-carbon house are required building standards - m onetary penalties/restrictions for nonenergy-efficient properties - subject property achieves low-energy (LEH) or passiv house (PH) standards - m onetary restrictions for non-energy-efficient building are discussed by governm ent and policy m akers - subject property achieves better energy-efficiency than current standards - governm ent and policy m akers realise im portance and prom ote energy efficiency and sustainable developm ents - subject property achieves current energyefficiency or sustainable standards and requirem ents - governm ent and policy m akers do not push m arket to focus on energy efficiency and sustainabiltiy - subject property does not achieve energy efficiency requirem ents and perform ance standards Market adjustment rate +/ % +/ % +/ % +/ % Estimated MAR -25 % x AAP +/- 5% [%] --> Average Adjustm ent Param eter derived from m arket evidence/valuers expectations due to replicable argum entation or x estim ation VEA +/- 75% [%] --> Valuers estim ation adjustm ent (VEA) due to probability of occurrence, uncertainty, etc. regarding the AAP = WAF +/ [% ] --> Weighted Adjustment Factor (WAF) = MAR x AAP x VEA After applying the WAPEC-Scoring the valuer can calculate the weighted adjustment factor (WAF rent ), which determines the specific valuation parameter adjustment (VPA rent ) as input variable for the estimated rental value (ERV) of the subject property. Due to the verification of WAF can be calculated as follows: WAFrent = MARrent AAPrent VEA = 25% 5.0% 75% -0.94% The current rental impact of energy efficiency, defined as VPA rent achieves VPA rent = WAFrent rmarket = 0.94% 6.55 /m² p.m /m² p.m. IMMOVALUE IEE/07/553/SI Page 77 of 221

78 Pitfalls within the process Market transparency Market transparency Information quality concerning energy-efficiency Information quality concerning LCC Market data has been collected from various sources such as real estate agencies, direct contact with owners, etc. Drawing conclusions from actual transactions is not possible without limitations. It is even hard to obtain comparable properties for deriving prices of undeveloped plots. The survey with real estate agencies showed that the market reacts only slowly on the issue of energy efficiency. The EPC is hardly demanded by customers. Therefore finding comparable objects having an EPC is not an easy task. In this special case the valuated object does not have an EPC. The LCC issue is not present within the population. Therefore no impact on the market may be derived. IMMOVALUE IEE/07/553/SI Page 78 of 221

79 2.1.6 Pilot Project 6 Commercial Unit in Vienna Freehold Interest In this case the EPC is not available. This fact is also mentioned in the report. Nevertheless the appraiser explicitly points out that the building has good energy efficiency. This fact, however, is not regarded in the valuation report itself. The ordinary valuation applies the income approach. The modified method contrasts the subject property with a low-energy building (LEH) Key figures of the Property valuation Key figures Starting point Figures Region/Town 1190 Vienna Year of construction 1995 Year of last (intensive) renovation n.a. Main use office / retail Location quality (A to D) B Construction quality (A to D) B Maintanance quality (A to D) A Market data transparency (A to D) D Property data transparency (A to D) D Lettable area Vacancy in % 0 Gross external area n.a. Gross internal area n.a. Valuation methodology applied income approach Valuation Company court-approved appraiser Current rent n.a. (market rent: 10,50 /m²) Date of valuation 22th of January 2009 Measured energy use n.a. Calculated final energy demand n.a. EPC existing (Y/N) N LCC calculation existing (Y/N) N Market value 141,079 Applying the modified approach Figures Methodology for developed market (Y/N) N LCC carried out (Y/N) N Revised Value 141,982 IMMOVALUE IEE/07/553/SI Page 79 of 221

80 Results from ordinary valuation The following chapter expresses the main parts and issues, which have to be addressed within an ordinary property valuation report and calculation. This is based on an actual property valuation carried out by a court-approved appraiser. The valuation report appraises a small retail/office building. In this case the EPC is not available and energy efficiency is not considered in the valuation report General description and explanation Background/Initial Situation Scope of Work Basis of valuations Legal Status/ Statutory Valuation of property was made for a bankruptcy proceeding. The valuation is needed as an initial position for a public sale and the appraiser ascertains the market value of the property. The property has been inspected on 22 th January 2009, which also represents the date of valuation. The structural condition has been evaluated in the course of the visual inspection. Detailed analyses of property condition, used construction material and installation, as well as technical equipment have not been carried out according to the valuation agreement. The property has been evaluated by applying the income approach. Valuation was carried out in accordance with LBG (Liegenschaftsbewertungsgesetz the Austrian code on building appraisal) Main basis for the valuation have been the documents supported as follows: - land register abstract of title - cadastral map excerpt - designation of area and zoning map - information on maintenance costs (incl. Fit-outs) - current rent rol - literature of valuation practice In addition to the mentioned documents the valuer relies on the following facts: - results of site inspection - observable property condition - current observable market condition and situation of the local real estate market. Austrian law Vienna regional planning IMMOVALUE IEE/07/553/SI Page 80 of 221

81 Considerations/ Town Planning Location Site description Property description (construction) Structural condition and repair Market condition (rental, investment) It is assumed that the property has been constructed due to building codes and standards for construction valid at the time of construction. The location is mainly characterised as a fine residential area with a partly intensive old and new development. The ground floor may be used as a store and offers a medium quality regarding its location. The quality of living in this quarter may be rated as good. Infrastructure for daily requirements is available in the surrounding area. Property: The property is characterised as housing estate and was constructed in The main parts are oriented via the street. The legal density of construction is fully exhausted. The property has a basement, five floors and two attic storeys. Access is possible via three staircases with elevators. In total there are 91 apartments and several offices and stores in the first floor. Retail/office: The retail area is situated in the ground floor with a separate entrance. All rooms are oriented via the street. Year of construction: 1995 Type of construction: ferro concrete Floor: pavement with different floor covers external wall: massive wall with thermal insulation facade: construction high quality windows: double glazing (plastic) doors (inside): wood door (outside): plastic roof: steep roof heating system: central heating - oil heating Property: Fair condition, no obvious damages Flat: Depreciation according to the age no damages. The general investment market in Austria has slowed down in 2008 due to arising effects of the global financial crisis. Due to decreasing demand rapid decompression of yields of about 20 to 50 basis points could be observed. In 2009 property transaction activities have gained momentum and lead to positive market perspective. There is no rental contract in force. The sustainable rent may be estimated at /m² p.m. IMMOVALUE IEE/07/553/SI Page 81 of 221

82 In this market comparable objects are assessed at a rate of 5.5 %. Valuation methodology and commentary In this case the income approach is applied Key Valuation parameter Gross rental income Non-recoverable Operating expenses Applied yield (Austrian capitalisation rate) The rental income of the subject property due to the observable market rent exceeds an annual amount of 9,138 EUR, which on average equals a monthly rental income of approx /m² p.m. The annual amount also includes the rent for the basement, a garage and an external terrace. The current annual non-recoverable operating expenses (OPEX) cover the positions maintenance and the vacancy and collection loss. The OPEX amounts to 1,016 p.a. The applied yield was estimated with 5.50 % Derivation of other key valuation figures Average residual term of contract Land value Economic lifetime Vacancy rate The expert did not receive any information on this topic. The sustainable rent is estimated by comparable properties. The land value is included in the capitalization. The included share for the object itself is capitalized on its expected economic lifetime. The included share for the plot is regarded as perpetuity. Remaining economic lifetime is estimated at 58 years. The property is used by the owner and therefore vacancy is zero Ordinary Valuation calculations and results Market Value (MV) 141,079 Lettable Area (GLA) m² Net Initial Yield (MV as basis) 5.76 % Date of valuation 22 th of January 2009 Input Parameter Austrian Income Capitalisation Approach Lettable Area m² IMMOVALUE IEE/07/553/SI Page 82 of 221

83 Current Rent Estimated Rental Value (ERV) 0 /m² p.m /m² p.m. Cellar 1.6 m² 3 /m² p.m. Garage 1 part 75 p.m. Terrace 18 m² 3 /m² p.m. Annual Gross Rental Income 9,138 Total non-recoverable OPEX -1,016 Annual Net Rental Income 8,122 Capitalisation rate (applied yield Austria) Remaining economic lifetime Annuity factor 5.50 % 58 years ( %) ( %) % Income Value 141,079 Market Value 141, Results applying the modified methodology This chapter applies the modified methodology to the subject property. The EPC is not available anyhow the construction quality and energy efficiency may be assumed as good. For this reason it is straightforward to consider this type of construction as a reference building. Since the original valuation does not consider energy related issues the revised value is expected to be higher than the original value Description of key findings Result of ordinary (conventional) valuation 141,079 Result of modified valuation approach 141,982 Rental impact (nominal) Premium of 0.07 /m² p.m. Rental impact (percentaged) Premium of 0.66 % Value impact (nominal) 903 Value impact (percentaged) Premium of 0.64 % Explanatory notes The results of the applied modified IMMOVALUE IEE/07/553/SI Page 83 of 221

84 methodology in comparison to conventional valuation show that the impact of energy efficiency on property rents and values is still at a negligible scale. In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate way and leads to reliable and plausible results Descriptive integration of aspects affecting buildings energy efficiency Building Equipment and Appliances Heating and cooling Ventilation, air conditioning and indoor air quality Lighting and day lighting Use of renewable energy resources Plumbing and hot-water heating Other equipment Heating system is a central heating on oil basis none Natural lighting via windows The subject property is neither equipped with a solar heating system nor a photovoltaic (PV) or other alternative energy supply systems, and consequently does not directly use renewable energy resources. No special system available. none Energy efficiency and other sustainable features of the property Energy efficiency The EPC is not available. Therefore the net heat demand cannot be quoted. Type and quality of construction suggest an energy efficient design. The double-glazing and the building s thermal insulation underpin this issue. Facade and windows are in a very good condition. Energy source Green lease agreements The object is heated by the oil based central heating. There are no green lease agreements with tenants/occupiers in force. The property as well does not have green building certifications (LEED, BREEAM, DGNB, CEN, etc.). Further no environmental management systems such as IMMOVALUE IEE/07/553/SI Page 84 of 221

85 LCC EMAS or ISO or carbon reduction commitment (CRC) are in place and addressed by the owners management. No Life-Cycle-Costing analysis or investigations are available or have been carried out Observable property market sensitivity and maturity for energy-efficient or sustainable properties Real estate market sensitivity Market information available Public awareness Beside the already given information about the current property market situation and condition following additional observations concerning the real estate markets awareness, sensitivity and maturity regarding energy efficiency and sustainability are necessary. In general the Austrian property market so far started to recognise the importance of property s energy efficiency and sustainability. This was as well supported by the suffering economic situation and property market condition throughout the last year, which had lead the Austrian real estate market to pay more attention on efficiency in general and need for energy-efficient and sustainable developments. Although the awareness of property owners, tenants, occupiers, etc. for energy efficiency and sustainability is rising, such aspects are in most cases still not recognised within decision-making process so far (e.g. in the course of leasing a property or part of it, etc.). This seems to be one of the main reasons why the market currently does not show price elasticity for energy-efficient buildings in comparison to non-energy-efficient ones. In addition as well no proven evidence for higher willingness to pay for energy-efficient properties can be observed in the market so far. But due to the fact that investigations on international level already show some examples, in which global acting, international companies already started to focus and rent just energy-efficient or sustainable properties, proven evidence just seems to be a matter of time and is expected in the short run. Even though a mandatory disclosure of property owners for EPC exists potential tenants just get informed about the energy efficiency if they explicitly ask for it. In most cases lettings are offered with no EPC or other information about buildings energy efficiency. The public media in general already start to recognise the importance of sustainability and energy efficiency and start IMMOVALUE IEE/07/553/SI Page 85 of 221

86 General circumstances and mandatory regulations to inform about activities on a broader scale, etc. in the field of sustainability. This already has lead to increase of sensitivity and awareness for sustainability and energy efficiency of the society. Governmental institutions and policy makers already realised the importance of and promote energy-efficient and sustainable developments. Therefore mandatory regulations and directives on national as well European level have been established e.g. EPBD (2002/91/EG), EN (sustainability assessment of buildings), etc. to measure and strengthen the transparency of data and information about buildings energy efficiency. On national level building standards and guidance (e.g. ÖIB-Guidance 6) already encompass energy efficiency requirements for new developments. Further it is observable that low-energy building (LEH) requirements (energy demand below 25 kwh/m².a) are on the way to become the general building standard Valuation calculation results of modified method Revised Value (RV) 141,982 Lettable Area (GLA) m² Net Initial Yield (RV as basis) 5.76 % Date of valuation 22 th of January 2009 Input Parameter Austrian Income Capitalisation Approach Lettable Area m² Current Rent 0 /m² p.m. Market rent /m² p.m. VPA rent Estimated Rental Value (ERV) 0.07 /m² p.m /m² p.m. Cellar 1.6 m² 3 /m² p.m. Garage: 1 part 75 p.m. Terrace 18 m² 3 /m² p.m. Annual Gross Rental Income 9,190 Total non-recoverable OPEX -1,016 Annual Net Rental Income 8,174 IMMOVALUE IEE/07/553/SI Page 86 of 221

87 Capitalisation rate (applied yield Austria) Remaining economic lifetime Annuity factor 5.50 % 58 years ( %) ( %) % Income Value 141,982 Market Value 141,982 To derive the above mentioned valuation parameter adjustment (VPA) the developed methodology for quantifying the rental impact of energy efficiency determined by the EPC (see IMMOVALUE report 7.2) has been applied. One of the first steps therefore requires collecting information on comparable properties, which is necessary to verify a market rent, average energy demand, etc. of a reference building (defined as a peer of comparable properties). Due to the fact that the key figures regarding energy efficiency of comparable properties are not available and therefore cannot be applied for quantifying the average adjustment parameter (AAP) the AAP is estimated with 5.0 %. These 5.0 %, however, represent an assumption relying on surveys with market participants. These sources estimate the increased rent for energy efficiency at 5.0 % to 10 %. Since this is an estimate the AAP is set to 5.0 %. To verify the current market sensitivity for energy efficiency, which determines the markets degree of willingness to pay for energy efficiency, the market adjustment rate (MAR) has to be estimated. Therefore the illustrated scoring model has been applied. The results of the WAPEC-scoring show, that the market already shows low to medium sensitivity for energy efficiency and achieves a MAR of around 25 % due to valuers expectation based on observable market conditions and circumstances. Furthermore the valuers estimation adjustment (VEA) has been chosen with a size of 50 % due to uncertainty and probability of occurrence regarding the estimated AAP of 5.0 %. The VEA is above 50 % because various experts and limited scientific research or empirical surveys expect an impact on rents for energy efficient properties of about 5.0 % to 10 %. In addition a survey by telephone with real estate agents showed that tenants are ready to pay 5.0 % more rent if energy costs may be IMMOVALUE IEE/07/553/SI Page 87 of 221

88 cut. This needs to be taken with caution since the appraiser in this case has estimated energy efficiency. Weighted Adjustment for valuation Parameter Effecting Characteristics (WAPEC) Market maturity Opaque (Emerging) Market --> Premium for energyefficient building (primarilly in emerging market) Significant adjustment Medium adjustment Low adjustment neutral - high price elasticity - low price elasticity observable - high awareness of tenants for sustainability and energy efficiency - om nipresence of green building issues in the broad m edia - tenants partly start to focus on energy efficiency and sustainability aspects in their decision m aking process - sustainability and energy efficiency aspects are recognised by a broad m edia - m arket start to note price elasticity - tenants get inform ed about energy efficiency but it does not play a m ain role to the tenant yet - just specific m edia start to address green building and energy efficiency aspects. - m arket does not reflect price differences due to energy efficiency or sustainability at all - tenants do not pay attention on sustainability and energy efficiency at all - m edia does not recognise green buildings benefits at all - property m arket is willing to pay rental prem ium s for green or energy-efficient buildings - high m arket sensitivity for operating expenses and energy costs (especially in gross rent-orientated property markets) - It is observable that few tenants start to just rent energy-efficiency or sustainable properties - m ajority of property m arket is not willing to pay rent prem ium for green buildings - m arket pays attention to energy efficiency and sustainability independent of market condition. - suffering econom ic situation - lead m arket to pay attention on efficiency and need for energy-efficient or green buildings becom es a topic - just low attention on energy efficiency even though m arket situation lead to focus on efficiency in general - good general econom ic situation - low-energy houses are quite rare and represents unique selling proposition - low-energy standards are on the way to becom e building standard - m ajority of building stock receive low-energy or passive house standard - zero-carbon house are required building standards - m onetary penalties/restrictions for nonenergy-efficient properties - subject property achieves low-energy (LEH) or passiv house (PH) standards - m onetary restrictions for non-energy-efficient building are discussed by governm ent and policy m akers - subject property achieves better energy-efficiency than current standards - governm ent and policy m akers realise im portance and prom ote energy efficiency and sustainable developm ents - subject property achieves current energyefficiency or sustainable standards and requirem ents - governm ent and policy m akers do not push m arket to focus on energy efficiency and sustainabiltiy - subject property does not achieve energy efficiency requirem ents and perform ance standards Market adjustment rate +/ % +/ % +/ % +/ % Estimated MAR +25 % x AAP +/- 5% [%] --> Average Adjustm ent Param eter derived from m arket evidence/valuers expectations due to replicable argum entation or x estim ation VEA +/- 50% [%] --> Valuers estim ation adjustm ent (VEA) due to probability of occurrence, uncertainty, etc. regarding the AAP = WAF +/ [% ] --> Weighted Adjustm ent Factor (WAF) = MAR x AAP x VEA After applying the WAPEC-Scoring the valuer can calculate the weighted adjustment factor (WAF rent ), which determines the specific valuation parameter adjustment (VPA rent ) as input variable for the estimated rental value (ERV) of the subject property. Due to the verification the WAF can be calculated as follows: WAFrent = MARrent AAPrent VEA = 25% 5.0% 50% +0.63% The current rental impact of energy efficiency, defined as VPA rent achieves IMMOVALUE IEE/07/553/SI Page 88 of 221

89 VPA rent = WAFrent rmarket = 0.63% /m² p.m /m² p.m Pitfalls within the process Market transparency Market transparency Information quality concerning energy-efficiency Information quality concerning LCC Market data has been collected from various sources such as real estate agencies, direct contact with owners, etc. Drawing conclusions from actual transactions is not possible without limitations. It is even hard to obtain comparable objects for deriving prices of undeveloped plots. The survey with real estate agencies showed that the market reacts only slowly on the issue of energy efficiency. The EPC is hardly demanded by customers. Therefore finding comparable objects having an EPC is not an easy task. In this special case the valuated object does not have an EPC. The LCC issue is not present within the population. Therefore no impact on the market may be derived. 2.2 Pilot Projects from Germany and Sweden The project partner Leopoldsberger+Partner valuated four pilot project applying the modified income approach developed in the IMMOVALUE project: three from the German market and one from Sweden. The four case studies were chosen because the subject properties show a comparably good energy performance. All pilot projects - except one - had available an EPC and therefore some energy key figures could be taken into account while estimating the valuation parameters. IMMOVALUE IEE/07/553/SI Page 89 of 221

90 2.2.1 Pilot Project 7 Community Center in the Ruhr Area Key figures of the Property valuation Key figures Starting point Figures Region/Tow n Ruhr area Year of construction 2008 Year of last (intensive) renovation - Main use mixed used Location quality (A to D) B Construction quality (A to D) A Maintanance quality (A to D) A Market data transparency (A to D) C Property data transparency (A to D) B Lettable area 10,757 m² Vacancy in % 0% Gross external area 30,000 Gross internal area 12,908 Valuation methodology applied German income capitalisation Valuation Company DLP Current rent Retail small /m² Retail large /m² Office / m² Gastronomy / m² Date of valuation 1st November 2009 Measured energy use n.a. Calualated energy demand kwh/ m³* a EPC existing (Y/ N) Y LCC calculation existing (Y/ N) N Market value 34,900,000 Applying the modified approach Figures Methodology for developed market (Y/ N N LCC carried out (Y/ N) N Revised Value 34,900,000 IMMOVALUE IEE/07/553/SI Page 90 of 221

91 Results from ordinary valuation General description and explanation Background/Initial Situation Valuation of property for the owner for internal purposes. Scope of Work Site inspection: 10 th November 2009 Date of valuation: 1 st November 2009 The condition of the construction has been assessed due to the discovered conditions during the local site inspection and the supplied material and informations given by the customer. Detailed analysis of the property conditions, like contaminations of the ground, the used construction materials, installation, as well as technical equipment have not been carried out. The valuer has carried out analysis of the location and the property market situation. The property has been valued by using the German direct capitalisation methodology (WertV: Ertragswert). Basis of valuations Legals Status/ Statutory Considerations/ Town Planning Valuation was carried out in accordance to the legal requirements of the German Market Value ( 194 BauGB) and the legal ordinances of WertV and WertR. Main informations supplied to the valuer: - land register abstract - cadastral map excerpt - designation of area and zoning map - current rent role - energy performance certificate (in line with 13 EnEV 2007) - rent roll - Legal Due Diligence Report - Floor Plans - Information out of the Land Charges Register - planning information from the developer In addition to the mentioned documents the valuer as well take following considerations into account: - results of the site inspection - several market research reports - information to the ground value of the site - information to the building regulations Some further potential for constructive extension could be possible. Audit of existence of planning and building permission and other official permission required for the IMMOVALUE IEE/07/553/SI Page 91 of 221

92 Location Site description Property description (construction) Structural condition and repair usage of the property hasn t been carried out in detail. Due to the presented planning permission it is assumed that the property has been constructed due to the effective building codes and standards. The site of the property is designated as a commercial landuse area. The Property is situated in the German Metropolitan Ruhr Area with 10 Million inhabitants. It has a very good and close link to the individual transport system (National Primary Roads and Highway) and a specific bus stop in front of the property. The surrounding area is mainly characterised by one family houses and residential properties. Further commercial properties besides the property being valued didn t exist. Specific retail space among a residential area. The location is provided with access to the basic public utilities (e.g. electricity, district heating, water, sewerage system, etc.). The plot is defined by an irregular layout. Due to the statement of an environmental expert report officially the site is free of contaminations. The site is not located in endangered areas, which might be affected by natural disasters like avalanches, earthquakes, soil erosion, etc. The construction of the property was finished in 2007 and encompasses a gross floor area (GFA) of approx. 12,908 m² with a lettable area (LA) of around 10,757 m². The property represents a concrete building made out of prefab elements and some wall glass facades. Instead of the glass elements the facade is maid out of insulated sandwich panels. The property and its retail units are accessed via a main entrance and some side-entrances in the ground floor. The gastronomy units mostly got specific entrances and the office and doctors offices can be reached upon extra entrances and staircases. Two elevators exist. The retail and office spaces mainly consist of brickworks. The completions of the lettable units were done as tenants fit out individually. The property is equipped with a district heating system, sprinkler system and emergency-power supply. The tenants integrated the air conditioning systems in some retail units. Ventilation should be done conventional, so there is no specific ventilation system besides the sanitary rooms. The property is in a very good condition, due to its year of construction. No backlogs of maintenance and repair, as well as structural damages have been observed. Therefore no IMMOVALUE IEE/07/553/SI Page 92 of 221

93 Market condition (rental, investment) Valuation methodology and commentary major repairs, improvements or renovations are required. Adequate function of electric, sanitary and other equipment and appliances, as well as the supply and disposal utilities are assumed. The general investment market in Germany has slowed down in 2008 and 2009 due to consequences of the global financial crisis. Very few, if any, transactions could be observed and therefore analysed. Due to the falling demand rents decreased as well as yields increase about 50 until 100 basis points, which depends on local property market and building quality conditions. In the end of 2009 property transaction activities have gained momentum and lead to positive market perspectives by the market participants. The current net initial yields for offices in the Ruhr area are on average in the range of 6.25 %. Retail net initial yields for prime retail spaces in the city centres are around 5.75 until 6.00 %. The Committee of valuation experts for the local property market released applied capitalisation Liegenschaftszinssätze in a range of 4.6 and 7.4 % for business premises. Currently office rents on average ranges between 8.00 and /m² p.m. and prime rents are around /m². Retail spaces in secondary and sub locations achieve rents between and /m² for smaller units and between /m² and /m² in large sized units. In the short-run maybe higher risk for letting high standard areas due to current market conditions (financial crisis, decreasing demand, etc.) may lead to higher vacancy risk in some property markets. Usually commercial properties are held and operated to gain income, so an income related approach have to be chosen to quantify the market value of the subject property. The Ertragswertverfahren, the German direct income capitalisation method has been applied. The valuer estimate the gross annual return of a property less non-recoverable operating expenses and the annual return of the land value and capitalize them with the yield ( Liegenschaftszinssatz ), a specific yield for properties, for the remaining economic lifetime of the building to achieve the value of the building. To obtain the market value of the property the land value have to be added. IMMOVALUE IEE/07/553/SI Page 93 of 221

94 Key Valuation parameter Current gross rental income Non-recoverable operating expenses Applied Capitalisation ( Liegenschaftszinssatz ) Ground Value The rental income of the subject property due to current tenancy agreements exceeds an annual amount of 2,063,475. It is separated to the different usage of the lettable spaces as followed: Retail (small): /m² p.m. Retail (large): /m² p.m. Office: /m² p.m. Gastronomy: /m² p.m. The current annual non-recoverable operating expenses have been derived by empirically established figures for comparable properties. The following estimates were chosen: Maintenance costs: 7.00 /m² p.a. for retail, office and gastronomy /m² p.a. for outside parking spaces Management costs: 3.00 % of the gross annual return Non-recoverable operating costs: 1.00 % of the gross annual return Vacancy and collection loss: 3.25 % of the gross annual return (in general 4.00 %, but due to the good building standard respectively the energy efficiency of the building being valued, it is assumed that the duration of marketing and letting will be shortened due to the high standard) The applied capitalisation ( Liegenschaftszinssatz ) for the capitalisation was estimated due to the location, the condition of the building and the local property market 5.00 %. It encompasses adjustments for location, property configurations, and risks adjustments for expected shortterm difficulties. The expert committee of the local property market published a ground value of /m² for the subject property. Land Value 18,043 m² x 400,00 /m² = 7,200,000. Total economic lifetime The total economic lifetime is estimated up to 60 years. Remaining economic lifetime The remaining economic lifetime due to the year of construction amounts 58 years. Market rent Observable market rental levels are comparable to the contract rents. So market rents are estimated to match the IMMOVALUE IEE/07/553/SI Page 94 of 221

95 contract rent Ordinary Valuation calculations and results Market Value (MV) 34,900,000 Lettable Area (LA) 10,757 m² Applied Capitalisation 5.00 % ( Liegenschaftszinssatz ) Input Parameter Lettable Area Current Rent = Market Rent: Retail (> 200 m²) 7, m² Retail (< 200 m²) 1, m² Office 1, m² Gastronomy m² Total m² Retail (> 200 m²) /m² Retail (< 200 m²) /m² Office /m² Gastronomy /m² Annual Gross Rental Income 2,063,475 Total non-recoverable Expenses - 230,652 Annual Net Operating Income = 1,832,823 Annual Return of the Land Value % x 7,200,000 Annual NOI of the Building = 1,472,823 Applied Capitaliziation ( Liegenschaftszinssatz) Multiplier ( Vervielfältiger ) 5.00 % ( %) 58 1 ( %) 58 5,0% x Income Value of the Building = 27,700,000 Land Value + 7,200,000 Market Value = 34,900,000 IMMOVALUE IEE/07/553/SI Page 95 of 221

96 Results applying the modified methodology The following explanations illustrate an applicable way how valuers could address energy efficiency aspects or further sustainability issues in an appropriate manner within the already existing qualitative/descriptive parts of a property valuation report. It further illustrates in a comprehensible way how the derivation of reliable measures in general for quantitative integration of energy efficiency into property valuation calculations could be done if property markets willingness to pay is observable but no reliable numerical evidence is available. While in the conventional valuation approach it is assumed that the duration for marketing and letting will be shorter due to the good energy building standard and therefore the vacancy and collection loss was adapted down to 3.25 %, it has to removed to 4.00 %, which are used in general for comparable buildings, to avoid redundancies Descriptive integration of aspects affecting buildings energy efficiency Building Equipment and Appliances Heating and cooling Ventilation, air conditioning and indoor air quality Lighting and daylighting Use of renewable energy resources Plumbing and hot-water heating Other equipment A central district heating system with low temperature boiler provides the heating. It is conventional operated with oil, gas and electricity. The property did not have controlled ventilation and air conditioning system. Only the sanitary rooms got some single air condition and ventilation systems. If some air conditioning exists, the tenants did it. Due to the buildings structure the minority of lettable retail areas have access to natural lights. Artificial lighting is mostly required. The office and gastronomy premises got access to natural light sources, so there are less artificial lighting systems necessary. The availability of natural daylight in the offices and gastronomy units supports efficient use of energy source (electricity). The subject property is not equipped with renewable energy resources. The subject property is equipped with modern plumbing systems due to the current building standards and therefore supports efficient use of water resources. The subject property is further equipped with fire protection IMMOVALUE IEE/07/553/SI Page 96 of 221

97 appliances (automatic fire detection system, a sprinkler system) and emergency-power supply Energy efficiency and other sustainable features of the property Energy efficiency Energy source Green lease agreements LCC Property configuration According to the available EPC the subject property achieves an overall annual primary energy demand of kwh/m³*a (energy efficiency: green due to current EPC standard) and deceed the acceptable maximum value. The energy efficiency of the subject property therefore can be evaluated as good. The use of gas, oil and electricity for energy supply did not ensure the long-term security of energy supplies. The supply depends on the natural energy sources, which will become more rare in the future. The building did not use renewable energy sources. There are no green lease agreements with tenants/occupiers. No Life-Cycle-Costing analysis or investigations are available. The property s configuration supports and sets the basis for the possibility of efficient and flexible use of space (A/V ratio of 0.37/m according to the EPC), which as well influence the buildings energy efficiency. The overall loss of heat ( Transmissionswärmeverlust ) amounts 0.39 W/(m²*K). Since EnEV 2009 became effective the maximum for loss of heat of the opaque components of the building should not exceed 0.35 W/(m²*K). For transparent components of the building except curtain walls, glass roofs or domed roof lights the overall loss of heat should not exceed 1.90 W/(m²*K). Therefore the overall loss amounts only a bid more than the maximum of the new legal requirements for the opaque building components the efficiency of the building envelope can be rated as above-average Observable property market sensitivity and maturity for energy-efficient or sustainable properties Real estate market sensitivity Besides the already mentioned information about the current property market situation and condition following additional observations concerning the real estate markets awareness, sensitivity and maturity regarding energy IMMOVALUE IEE/07/553/SI Page 97 of 221

98 Market information available Public awareness General circumstances and Mandatory regulations efficiency and sustainability are necessary. In general the German property market start to recognise the importance of property s energy efficiency and sustainability. The awareness of property owners, tenants, occupiers, etc. for energy efficiency and sustainability is rising, such aspects are in most cases still not recognised within decision-making processes so far (e.g. in the course of leasing a property or part of it, etc.). Therefore currently no price elasticity for energy efficient buildings can be observed. Moreover no proven evidence for higher willingness to pay for energy-efficient properties can be seen in the property markets so far. But international research projects show some evidence for rental premiums of sustainable properties. So it seems to be a matter of time that markets will acknowledge energy efficiency as well as sustainability of properties. Even though there exists a mandatory disclosure of property owners for EPC potential tenants just get informed about the energy efficiency if they explicitly ask for it. In most cases where lettings are offered no EPC or other information about buildings energy efficiency are available or even exist. In this valuation case no comparable properties were available. The public media in general already start to recognise the importance of energy efficiency due to the constantly rising energy prices and the international political debate regarding the reduction of the green house gas emissions, which are mainly driven by the holding stock of buildings. So some increase of sensitivity and awareness for sustainability and energy efficiency can be recognised in the society. Governmental institutions and policy makers already realised the importance of and promote energy-efficient and sustainable developments. Therefore mandatory regulations and directives on national as well European level have been established e.g. EPBD (2002/91/EG), EnEV 2009 (Energy Savings Ordinance for buildings), etc. Beyond low-energy building requirements (energy demand below 25 kwh/m².a) are on the way to become the general building standard. Moreover passive houses are at the forefront. IMMOVALUE IEE/07/553/SI Page 98 of 221

99 Application of the modified Valuation Method As described in IMMOVALUE report 7.2 valuers could use a scoring model, WAPEC- Scoring to derive valuation parameter adjustment (VPA rent ). The developed methodology for quantifying the rental impact of energy efficiency determined by the EPC will be applied in the case study (see Figure 1). Figure 1: WAPEC-Scoring: Example office rent One of the first steps should be collecting information of comparable properties, which are necessary to verify the market rent, average energy demand, etc. They can be defined as a peer of comparable properties. But in the case of the subject property no comparable buildings were available, so the valuer has to estimate the AAP rent with the aid of his experience and knowledge. Due to the high insulation building standard AAP rent is estimated to achieve 2.50 %. So it is assumed, that in the mid run tenants will honour the good thermal quality of the building, because they can spend money due to less energy consumption than expected, compared to the conventional building stock. IMMOVALUE IEE/07/553/SI Page 99 of 221

100 To verify and estimate the current market sensitivity for energy efficiency, which determines the markets willingness to pay for energy efficiency, the market adjustment rate (MAR) has to be estimated. Therefore the in Figure 1 illustrated WAPEC-scoring model has been applied. Because of the upcoming discussions and international research programs, the starting awareness of the market participants the MAR in line with the assessments and interpretations of the literature and publications is estimated to gain 40.0 %. To consider the uncertainty of the future development regarding the willingness of the market participants to honour the extraordinary energy efficiency of buildings, the VEA, which expresses the valuers estimation of the probability of occurrence regarding the estimated AAP rent is assumed to be 75.0 %. After assessing the AAP, the MAR and the VEA, these factors are connected with the aid of multiplication to obtain the weighted adjustment factor (WAF rent ) (see Equation 1 and Equation 2). Due to the verification the WAF rent can be calculated as follows: WAF rent = MAR rent AAP rent VEA = 40% 2.5% 75% 0.75% (1) Equation 1: Calculation of WAF rent mixed used building Ruhr Area The current rental impact because of the good energy quality of the building, defined as VPA rent for the office units for example achieves: VPA rent = WAF rent r market = 0.75% /m² = 0.08 /m² (2) Equation 2: VPA rent office rent The other rental parameters for the small- and big-sized as well as the gastronomy areas of the community center will also be adapted like demonstrated in Equation 1 and Equation 2 (see Input parameters VPA rent in the following subchapter ) Valuation calculation results of modified method Market Value (MV) 34,900,000 Lettable Area (LA) 10,757 m² Applied Capitalisation 5.00 % ( Liegenschaftszinssatz ) IMMOVALUE IEE/07/553/SI Page 100 of 221

101 Input Parameter Lettable Area Market Rent VPA rent Adjusted Market Rent Retail (> 200 m²) 7, m² Retail (< 200 m²) 1, m² Office 1, m² Gastronomy m² Total 10, m² Retail (> 200 m²) /m² Retail (< 200 m²) /m² Office /m² Gastronomy /m² Retail (> 200 m²) 0.11 /m² Retail (< 200 m²) 0.19 /m² Office 0.08 /m² Gastronomy 0.16 /m² Retail (> 200 m²) /m² Retail (< 200 m²) /m² Office /m² Gastronomy /m² Annual Gross Rental Income 2,079,420 Total non-recoverable Expenses - 247,404 Annual Net Operating Income = 1,832,016 Annual Return of the Land Value % x 7,200,000 Annual NOI of the Building = 1,472,016 Applied Capitalisation ( Liegenschaftszinssatz ) Multiplier ( Vervielfältiger ) 5.00 % ( %) 58 1 ( %) 58 5,0% x Income Value of the Building = 27,700,000 Land Value 7,200,000 Market Value 34,900,000 IMMOVALUE IEE/07/553/SI Page 101 of 221

102 Description of key findings Result of ordinary (conventional) valuation 34,900,000 Annual gross operating income 2,063,475 Result of modified valuation approach 34,900,000 Rental impact (nominal) Premium between 0.08 and 0.19 /m² p.m. Annual gross operating income 2,079,420 Rental impact (in %) Premium of 0.77 % Rental impact (in ) 15,945 Value Impact 0 % Explanatory notes The results of the applied modified methodology in comparison to the conventional valuation show that the impact of energy efficiency on property rents is still at a negligible scale. An impact on property value could not be observed, because redundancies have to be avoided. Therefore the valuation parameter of the vacancy and collections loss, which implies a shorter period for marketing and letting due to the good energy efficiency of the building had to be returned to the usual 4.00 %, because it is explicitly considered within the higher market rents. In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate manner and obviously lead to plausible results. IMMOVALUE IEE/07/553/SI Page 102 of 221

103 2.2.2 Pilot Project 8 Multi-family Building in the Rhine-Main Area Key figures of the Property valuation Key figures Starting point Figures Region/Tow n Rhine-Main area Year of construction 1970 Year of last (intensive) renovation 1990 Main use residential Location quality (A to D) B Construction quality (A to D) B Maintanance quality (A to D) B Market data transparency (A to D) C Property data transparency (A to D) B Lettable area 4,095 Vacancy in % 0% Gross external area 3,000 Gross internal area 6,120 Valuation methodology applied German income capitalisation Valuation Company DLP Current rent 7.03 /m² p.m. Date of valuation 1st March 2009 Measured energy use 109 kwh/m²* a Calualated energy use n.a. EPC existing (Y/ N) Y LCC calculation existing (Y/ N) N Market value 5,730,000 Applying the modified approach Figures Methodology for developed market (Y/ N N LCC carried out (Y/ N) N Revised Value 5,730, Results from ordinary valuation General description and explanation Background/Initial Situation Valuation of property for the owner for a legal procedure. IMMOVALUE IEE/07/553/SI Page 103 of 221

104 Scope of Work Site inspection: 26 th February 2009 Date of valuation: 1 st March 2009 The condition of the construction has been assessed due to the discovered conditions during the local site inspection and the supplied material and informations given by the customer. Detailed analysis of the property conditions, like contaminations of the ground, the used construction materials, installation, as well as technical equipment have not been carried out. The valuer has carried out analysis of the location and the property market situation. The property has been valued by using the German direct capitalisation methodology (WertV: Ertragswert). Basis of valuations Legals Status/ Statutory Considerations/ Town Planning Location Valuation was carried out in accordance to the legal requirements of the German Market Value ( 194 BauGB) and the legal ordinances of WertV and WertR. Main informations supplied to the valuer: - land register abstract - cadastral map excerpt - designation of area and zoning map - rent role - energy performance certificate (in line with 13 EnEV 2007) - tenancy agreements (contracts) - Floor Plans - Information out of the Land Charges Register - planning information from the developer In addition to the mentioned documents the valuer as well take following considerations into account: - results of the site inspection - different market research reports - information to the ground value of the site - information to the building regulations Some further potential for constructive extension can not be observed. Audit of existence of planning and building permission and other official permission required for the usage of the property hasn t been carried out in detail. It is assumed that the property has been constructed due to the effective building codes and standards. The site of the property is designated as a residential landuse area. The Property is situated in the South-East of the IMMOVALUE IEE/07/553/SI Page 104 of 221

105 Site description Property description (construction) Structural condition and repair Market condition (rental, investment) Metropolitan area Rhine-Main with 5.5 Million inhabitants. It has a good link to the individual and public transport system (National Primary Roads, Highway, bus). The surrounding area is mainly characterised by multifamily houses, one- and two-family properties. Some shopping facilities exist in the near surrounding. They can be reached in a few minutes by feet. Specific multi-storey residential area. The location is provided with access to the basic public utilities (e.g. electricity, district heating, water, sewerage system, etc.). The plot is defined by a regular rectangular layout. We assume that the site is free of contaminations. The site is not located in endangered areas, which might be affected by natural disasters like avalanches, earthquakes, soil erosion, etc. The construction of the property was finished in 1970 and encompasses a gross floor area (GFA) of approx m² with a lettable area (LA) of around 4,095 m² in 42 units (three- and four-room apartments, three entrances with 14 units in each case, around 80 and115 m² lettable living area per unit). The property represents a concrete building. The façade is insulated and was reorganised in 2002 (balconies and colour). The property is accessed via three main entrances to 14 residential units in each entrance. Each staircase has an elevator (1972: 6 persons, 450 kg). So three elevators exist. The features of the building correspond to ordinary quality due to the year of construction. The sanitary facilities were renewed between 1989 and 1992 completely. So they are equipped like standard in The property is equipped with central heating oil-burning system (boiler: 2003, 170 kw; burner: 2004) with static radiators. The condition of the property corresponds to the year of construction. No specific backlogs of maintenance and repair, as well as structural damages has been observed. Therefore no major repairs, improvements or renovations are required. Adequate function of electric, sanitary and other equipment and appliances, as well as the supply and disposal utilities are assumed. The general investment market in Germany has slowed down in 2008 and 2009 due to consequences of the global financial crisis. Very less transactions could be observed and therefore IMMOVALUE IEE/07/553/SI Page 105 of 221

106 Valuation methodology and commentary analysed. Due to the decreasing demand rents decreased as well as yields increase about 50 until 100 basis points, which depends on local property market and building quality conditions. In the end of 2009 property transaction activities have gained momentum and lead to positive market perspectives by the market participants. The Committee of valuation experts for the local property market released property yields (Liegenschaftszinssätze) for multi-familiy homes in a range of 4.5 and 5.4 %. Rents for comparable residential units were concluded beyond 7.00 /m² during the last year. On average rents for residential units (on average m²) constructed between 1961 and 1970 ranges between 6.10 and 6.49 /m² p.m. Because of the total redevelopment of the sanitary facilities and of the façade we assume the adjusted construction year is estimated to Rents for residential space constructed between 1981 and 1990 ranges between 6.73 and 7.35 /m². Usually residential multi-family properties are held and operated to gain income, so an income related approach have to be chosen to quantify the market value of the subject property. The Ertragswertverfahren, the German direct income capitalisation method has been applied. The valuer estimates the gross annual return of a property less non-recoverable operating expenses and the annual return of the land value and capitalize them with the German applied capitalisation ( Liegenschaftszinssatz ), a specific yield for properties, for the remaining economic lifetime of the building to achieve the value of the building. To obtain the market value of the property the land value have to be added Key Valuation parameter Current gross rental income Non-recoverable Operating expenses The rental income of the subject property due to current tenancy agreements exceeds an annual amount of 345,557. This corresponds to an average rent of around 7.03 /m² p.m. The current annual non-recoverable operating expenses have been derived by empirically established figures for comparable properties. The following estimates were chosen: Maintenance costs: /m² p.a Management costs: /unit IMMOVALUE IEE/07/553/SI Page 106 of 221

107 Applied capitalisation ( Liegenschaftszinssatz ) Ground Value Non-recoverable operating costs: Not exist Vacancy and collection loss: 1.50 % of the gross annual return The applied capitalisation Liegenschaftszinssatz was estimated due to the location, the condition of the building and the local property market 4.75 %. It encompasses adjustments for location, property configurations, and risks adjustments for expected short-term difficulties. The expert committee of the local property market published a ground value of /m² for the subject property. Land Value 4,000 m² x /m² = 1,800,000. Total economic lifetime The total economic lifetime is estimated up to 80 years. Remaining economic lifetime The remaining economic lifetime due to the year of construction amounts 56 years. Market rent Ordinary Valuation calculations and results Observable market rental level derived from the market rent. The market rent is estimated as followed: 7.00 /m² p.m. Market Value (MV) 5,425,000 Lettable Area (LA) 4,095 m² Applied Capitalisation ( Liegenschaftszinssatz ) 4.75 % Input Parameter Lettable Area 4,095 m² Current Rent 7.03 /m² Market Rent 7.00 /m² Annual Gross Rental Income 343,980 Total non-recoverable Expenses - 56,820 Annual Net Operating Income = 287,160 Annual Return of the Land Value - 4,75 % x 1,800,000 Annual NOI of the Building = 201,660 IMMOVALUE IEE/07/553/SI Page 107 of 221

108 Applied Capitalisation ( Liegenschaftszinssatz ) Multiplier ( Vervielfältiger ) 4.75 % ( %) 56 1 ( %) % Income Value of the Building 3,930,000 Land Value 1,800,000 Market Value 5,730, Results applying the modified methodology Like in the previous case study the calculation using the modified methodology Descriptive integration of aspects affecting buildings energy efficiency Building Equipment and Appliances Heating and cooling Ventilation, air conditioning and indoor air quality Lighting and daylighting Use of renewable energy resources Plumbing and hot-water heating Other equipment Central oil burning heating system. The property did not have controlled ventilation and air conditioning system. Artificial lighting is required. The subject property is not equipped with renewable energy resources. The subject property is equipped with plumbing systems corresponding to the year of construction. The hot water supply is ensured via the central heating system. We assume that it supports on average correspond to an efficient use of water resources. The subject property is further equipped with main entry interphone and cable connection in every unit Energy efficiency and other sustainable features of the property Energy efficiency According to the available EPC the subject property achieves an overall annual energy consumption for heating and warming water of 109 kwh/m²*a (energy efficiency: green due to current EPC standard). The energy efficiency of the subject property due to the index in the EPC can be evaluated as good, means energy- IMMOVALUE IEE/07/553/SI Page 108 of 221

109 Energy source Green lease agreements LCC Property configuration efficient. The use of oil and electricity for energy supply did not ensure the long-term security of energy supplies. The supply depends on the natural energy resources, which will become more rare in the future. There are no green lease agreements with tenants/occupiers. No Life-Cycle-Costing analysis or investigations are available. The property s configuration supports the possibility of efficient use of space due to the solid construction and the insulating plastered façade, which as well influence the buildings energy efficiency. The energy consumption of 109 KWh/(m²*a) of the building in combination with the new can be rated as good. Though the EPC declares a good energy consumption of the building, the originator of the EPC suggests the inspection of some refurbishment, which may produce some further energy savings to decrease the overall energy consumption: - insulation of the roof - additional insulation of the façade - insulation of the low range of the building Observable property market sensitivity and maturity for energy-efficient or sustainable properties Real estate market sensitivity Besides the already mentioned information about the current property market situation and following additional observations concerning the real estate markets awareness, sensitivity and maturity regarding energy efficiency and sustainability are necessary. In general the German property market start to recognise the importance of property s energy efficiency and sustainability. The awareness of property owners, tenants, occupiers, etc. for energy efficiency and sustainability is rising, such aspects are in most cases still not recognised within decision-making processes so far (e.g. in the course of leasing a property or part of it, etc.). Therefore currently no price elasticity for energy efficient buildings can be recognised. Moreover no proven evidence for higher willingness to pay for energy-efficient properties especially in the residential IMMOVALUE IEE/07/553/SI Page 109 of 221

110 Market information available Public awareness General circumstances and mandatory regulations submarkets can be observed in the property markets so far. But international research projects show some evidence for rental premiums of sustainable properties it seems to be a matter of time that markets will acknowledge energy efficiency as well as sustainability of properties. Even though there exists a mandatory disclosure of property owners for EPC potential tenants just get informed about the energy efficiency if they explicitly ask for it. In most cases where lettings are offered no EPC or other information about buildings energy efficiency are available or even exist. In some cases when potential tenants ask for an EPC, they will be rejected as tenants especially in local residential markets where residential spaces are rare and demand is high. In this valuation case no comparable properties were available. The public media in general already start to recognise the importance of energy efficiency due to the constantly rising energy prices and the international political debate regarding the reduction of the green house gas emissions, which are mainly driven by the holding stock of buildings. So some increase of sensitivity and awareness for sustainability and energy efficiency can be recognised in the society. Governmental institutions and policy makers already realised the importance of and promote energy-efficient and sustainable developments. Therefore mandatory regulations and directives on national as well European level have been established e.g. EPBD (2002/91/EG), EnEV 2009 (Energy Savings Ordinance for buildings), etc. Beyond low-energy building (LEH) requirements (energy demand below 25 kwh/m².a) are on the way to become the general building standard. Moreover passive houses are at the forefront, for example in Frankfurt, which is situated in the greater surrounding of the subject property Application of the modified Valuation Method As described in IMMOVALUE report 7.2 valuers could use a scoring model, WAPEC- Scoring to derive valuation parameter adjustment (VPA rent ). The developed methodology for quantifying the rental impact of energy efficiency determined by the EPC will be applied in the case study (see Figure 2). IMMOVALUE IEE/07/553/SI Page 110 of 221

111 Figure 2: WAPEC-Scoring Multi-Family Building One of the first steps should be collecting information of comparable properties, which are necessary to verify the market rent, average energy demand, etc. They can be defined as a peer of comparable properties. But in the case of the subject property no comparable buildings were available, so the valuer has to estimate the AAP rent with the aid of his experience and knowledge. Due to the high insulation building standard AAP rent is estimated to achieve 2.50 %. So it is assumed, that in the mid run tenants will honour the good thermal quality of the building, because they can spend money due to less energy consumption than expected, compared to the conventional building stock. To verify and estimate the current market sensitivity for energy efficiency, which determines the markets willingness to pay for energy efficiency, the market adjustment rate (MAR) has to be estimated. Therefore the in Figure 2 illustrated WAPEC-scoring model has been applied. Because of the upcoming discussions and international research programs, the starting IMMOVALUE IEE/07/553/SI Page 111 of 221

112 awareness of the market participants the MAR in line with the assessments and interpretations of the literature and publications is estimated to gain 55.0 %. To consider the uncertainty of the future development regarding the willingness of the market participants to honour the extraordinary energy efficiency of buildings, the VEA, which expresses the valuers estimation of the probability of occurrence regarding the estimated AAP rent is assumed to be 75.0 %. After assessing the AAP, the MAR and the VEA, these factors are connected with the aid of multiplication to obtain the weighted adjustment factor (WAF rent ) (see Equation 3 and Equation 4). Due to the verification the WAF rent can be calculated as follows: WAF rent = MAR rent AAP rent VEA = 55% 2.5% 75% 1.03% (3) Equation 3: Calculation of WAF rent mixed used building Ruhr Area The current rental impact because of the good energy quality of the building, defined as VPA rent for the lettable residential spaces achieves: VPA rent = WAF rent r market =1.03% 7.00 /m² = 0.07 /m² (4) Equation 4: VPA rent rent multi-family building Valuation calculation results of modified method Market Value (MV) 5,730,000 Lettable Area (LA) 4,095 m² Applied Capitalisation 4.75 % ( Liegenschaftszinssatz ) Input Parameter Lettable Area 4,095 m² Current Rent 7.03 /m² Market Rent 7.00 /m² VPA rent Adjusted Market Rent 0.07 /m² 7.07 /m² Annual Gross Rental Income 347,420 Total non-recoverable Expenses - 60,346 IMMOVALUE IEE/07/553/SI Page 112 of 221

113 Annual Net Operating Income = 287,074 Annual Return of the Land Value - 4,75 % x 1,800,000 Annual NOI of the Building = 201,574 Applied Capitalisation ( Liegenschaftszinssatz ) Multiplier ( Vervielfältiger ) 4.75 % ( %) 56 1 ( %) % Income Value of the Building 3,930,000 Land Value 1,800,000 Market Value 5,730, Description of key findings Result of ordinary (conventional) valuation 5,730,000 Annual gross operating income 343,980 Result of modified valuation approach 5,730,000 Rental impact (nominal) Premium 0.07 /m² p.m. Annual gross operating income 347,420 Rental impact (in %) Premium of 1.0 % Rental impact (in ) 3,440 Value Impact 0 % Explanatory notes The results of the applied modified methodology in comparison to the conventional valuation show that the impact of energy efficiency on property rents using the modified methodology is still at a negligible scale. An impact on property value could not be observed, because redundancies have to be avoided. Therefore the valuation parameter of the vacancy and collections loss, which implies a shorter period for marketing and letting due to the good energy efficiency of the building had to be returned to the usual IMMOVALUE IEE/07/553/SI Page 113 of 221

114 2,50 %, because it is explicitly considered within the higher market rents. In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate manner and obviously lead to plausible results. IMMOVALUE IEE/07/553/SI Page 114 of 221

115 2.2.3 Pilot Project 9 Office Building in the Oresund-Region Key figures of the Property valuation Key figures Starting point Figures Region/Tow n Oresund-Region Year of construction 2006 Year of last (intensive) renovation - Main use office Location quality (A to D) A Construction quality (A to D) B+ Maintanance quality (A to D) A Market data transparency (A to D) A Property data transparency (A to D) B Lettable area 16,440 Vacancy in % 0% Gross external area 3,000 Gross internal area 23,014 Valuation methodology applied Investment Method Valuation Company DLP Current rent 2,000 SEK/m² p.m. Date of valuation 15th of August 2009 Measured energy use n.a. Calualated energy use n.a. EPC existing (Y/ N) N LCC calculation existing (Y/ N) N Market value 476,800,000 SEK Applying the modified approach Methodology for developed market (Y/ N LCC carried out (Y/ N) Revised Value Figures N N 476,800,000 SEK Results from ordinary valuation As well as in the previous pilot cases the ordinary valuation and the modified valuation will be illustrated in the same way. IMMOVALUE IEE/07/553/SI Page 115 of 221

116 General description and explanation Background/Initial Situation Valuation of property for the purpose of potential purchase. Scope of Work Site inspection: 30 th July 2009 Date of valuation: 15 th August 2009 The condition of the construction has been assessed due to the discovered conditions during the local site inspection and the supplied material and information s given by the customer. Detailed analysis of the property conditions, like contaminations of the ground, the used construction materials, installation, as well as technical equipment have not been carried out. The valuer has carried out analysis of the location and the property market situation. The property has been valued by using the investment methodology (RICS Red Book). Basis of valuations Legals Status/ Statutory Considerations/ Town Planning Location Valuation was carried out in accordance to the legal requirements of the Red Book of the RICS. Main information s supplied to the valuer: - cadastral map excerpt - Sales Memorandum - Environmental, technical and legal Due Diligence - rent role In addition to the mentioned documents the valuer as well take following considerations into account: - results of the site inspection - different market research reports - information to the building regulations Some further potential for constructive extension is not existing. Audit of existence of planning and building permission and other official permission required for the usage of the property hasn t been carried out in detail. It is assumed that the property has been constructed due to the effective building codes and standards. The site of the property is designated as a commercial landuse area. The Property is situated in the Oresund-Region, one of Europe s most dynamic cross-border regions. The Oresund- Region has about 3.7 Million inhabitants. It has a very good link to the individual and public transport system (Airport, National Primary Roads, Highways, subway, bus). The surrounding area is mainly characterised by mixed-used properties. IMMOVALUE IEE/07/553/SI Page 116 of 221

117 Site description Property description (construction) Structural condition and repair Market condition (rental, investment) City central area with commercial and residential properties. The location is provided with access to the basic public utilities (e.g. electricity, district heating, water, sewerage system, etc.). The plot is defined by a regular rectangular layout. Due to the described investigations in the due diligence report the site is free of contaminations. The site is not located in endangered areas, which might be affected by natural disasters like avalanches, earthquakes, soil erosion, etc. The construction of the property was finished in 2006 and encompasses a gross floor area (GFA) of approx. 23,014 m² with a lettable area (LA) of around 16,440 m². The property represents an in-situ concrete slab building with a façade made of natural stone and some curtain glass walls. The property is accessed via four entrances. Six staircases in the inner part of the building are extrapolating the office premises. Three of them are related to two elevators in each case. The features of the building correspond to extraordinary high standard quality due to the year of construction. The property is equipped with district heating via radiators and tempered input air, district cooling and electrical wiring. The condition of the property corresponds to the year of construction. No specific backlogs of maintenance and repair, as well as structural damages have been observed. Therefore no major repairs, improvements or renovations are required. Adequate function of electric, sanitary and other equipment and appliances, as well as the supply and disposal utilities are assumed. The general investment market in Sweden has slowed down in 2008 and 2009 due to consequences of the global financial crisis. Very less transactions could be observed and therefore analysed. Due to the decreasing demand rents decreased as well as yields increase about 50 until 100 basis points. Due to the central location and the slow recovery of the markets the office market is predicted to stabilize until the end of 2009 and Property yields for prime office premises in the region ranges between 6.25 and 6.5 %. Rents for comparable office spaces ranges between and SEK/m² per year. After a slight slowdown rents will stabilize at these levels. Some contracts of about IMMOVALUE IEE/07/553/SI Page 117 of 221

118 Valuation methodology and commentary SEK were also recognised in the last months. Office buildings are operated to gain income, so an income related approach have to be chosen to quantify the market value of the subject property. The Investment method, the British direct income capitalisation method has been applied. The valuer estimate the gross annual return of a property less non-recoverable operating expenses and capitalize them with the Net Initial Yield, which had been estimated in comparison to the transactions within the property market, to receive the market value Key Valuation parameter Current gross rental income Non-recoverable Operating expenses Applied Yield Market rent The rental income of the subject property due to current tenancy agreements exceeds an annual amount of 32,850,000 SEK p.a. This corresponds to a rent of around 1,998 SEK/m² p.a. Furthermore the 75 underground parking spaces achieve a annual rent of 14,500 SEK per unit p.a. The current annual non-recoverable operating expenses have been derived by empirically established figures for comparable properties. The following estimates were chosen: Maintenance costs: 80 SEK/m² p.a. 400 SEK/underground parking unit p.a Management costs: 4.0 % of the annual Gross Annual Return SEK/underground parking unit Non-recoverable operating costs: 1.0 % estimation by the occupier Vacancy and collection loss: 4.00 % of the Gross annual Return The applied net initial yield for the capitalisation was estimated due to the location, the condition of the building and the local property market 6.25 %. It encompasses adjustments for location, property configurations, and risks adjustments for expected short-term difficulties. Observable market rental level derived from the market rent. The market rent is estimated as followed: 2,000 SEK/m² p.a. IMMOVALUE IEE/07/553/SI Page 118 of 221

119 14,500 SEK/underground parking unit p.a Ordinary Valuation calculations and results Market Value (MV) 476,830,000 SEK Lettable Area (LA) 16,440 m² Net Initial Yield 6.25 % Input Parameter Lettable Area 16,440 m² Underground Parking Units 75 units Current Rent 1,998 SEK/m² p.a 14,500 SEK/unit p.a. Market Rent 2,000 SEK/m² p.a. 14,500 SEK/unit p.a. Annual Gross Rental Income 33,967,500 SEK Total non-recoverable Expenses Annual Net Operating Income - 4,166,269 SEK = 29,801,231 SEK Applied Yield 6.25 % Market Value 476,800,000 SEK Results applying the modified methodology Descriptive integration of aspects affecting buildings energy efficiency Building Equipment and Appliances Heating and cooling Ventilation, air conditioning and indoor air quality Electricity Lighting and daylighting District heating system and district cooling. Input air via cooling beams, exhaust air via pantries and toilettes. Electrical wiring using Wieland flat cables for maximum flexibility. The building contains low-voltage switchgear. Artificial lighting is required. Use of renewable energy The subject property is not equipped with renewable IMMOVALUE IEE/07/553/SI Page 119 of 221

120 resources Plumbing and hot-water heating Other equipment energy resources. The subject property is equipped with plumbing systems corresponding to the year of construction. We assume that it supports on average correspond to an efficient use of water resources. The subject property is further equipped with sprinkler system and a partial fire alarm Energy efficiency and other sustainable features of the property Energy efficiency Energy source Green lease agreements LCC Property configuration No EPC was provided for the subject property. The use of local district heating system for energy supply ensures long-term security of energy supplies. Further this energy source supports low CO 2 emission of the subject property itself. There are no green lease agreements with tenants/occupiers. No Life-Cycle-Costing analysis or investigations are available. But in the sales memorandum it is mentioned that the ventilation system is LCC purchased, which means not only the investment costs but also the operating costs during the whole life cycle were considered. The property s configuration supports the possibility of efficient use of space due to the flexible construction. The building got insulation windows in aluminium frames, which as well influence the buildings energy efficiency Observable property market sensitivity and maturity for energy-efficient or sustainable properties Real estate market sensitivity Besides the already mentioned information about the current property market situation and condition following additional observations concerning the real estate markets awareness, sensitivity and maturity regarding energy efficiency and sustainability are necessary. In general the Swedish property market start to recognise the importance of property s energy efficiency and sustainability. The awareness of property owners, tenants, occupiers, etc. for energy efficiency and sustainability is rising, but still such aspects in most cases are still not recognised within decision-making processes so far (e.g. in the course of IMMOVALUE IEE/07/553/SI Page 120 of 221

121 Market information available Public awareness General circumstances and mandatory regulations leasing a property or part of it, etc.). Therefore currently no price elasticity for energy efficient buildings can be recognised. Moreover no proven evidence for higher willingness to pay for energy-efficient properties especially in the residential submarkets can be observed in the property markets so far. But international research projects show some evidence for rental premiums of sustainable properties it seems to be a matter of time that markets will acknowledge energy efficiency as well as sustainability of properties. Even though there exists a mandatory disclosure of property owners for EPC potential tenants just get informed about the energy efficiency if they explicitly ask for it. In most cases where lettings are offered no EPC or other information about buildings energy efficiency are available or even exist. In this valuation case no comparable properties were available. The public media in general already start to recognise the importance of energy efficiency due to the constantly rising energy prices and the international political debate regarding the reduction of the green house gas emissions, which are mainly driven by the holding stock of buildings. So some increase of sensitivity and awareness for sustainability and energy efficiency can be recognised in the society. Governmental institutions and policy makers already realised the importance of and promote energy-efficient and sustainable developments. Therefore mandatory regulations and directives on national as well European level have been established e.g. EPBD (2002/91/EG) etc. Beyond low-energy building, energy-efficient building are on the way to become the general building standard. IMMOVALUE IEE/07/553/SI Page 121 of 221

122 Application of the modified Valuation Method As described in IMMOVALUE report 7.2 valuers could use a scoring model, WAPEC- Scoring to derive valuation parameter adjustment (VPA rent ). The developed methodology for quantifying the rental impact of energy efficiency determined by the EPC will be applied in the case study (see Figure 3). Figure 3: WAPEC-Scoring Office Building One of the first steps should be collecting information of comparable properties, which are necessary to verify the market rent, average energy demand, etc. They can be defined as a peer of comparable properties. But in the case of the subject property no comparable buildings were available, so the valuer has to estimate the AAP rent with the aid of his experience and knowledge. Due to the high insulation building standard AAP rent is estimated to achieve 2.75 %. So it is assumed, that in the mid run tenants will honour the good thermal quality of the building, IMMOVALUE IEE/07/553/SI Page 122 of 221

123 because they can spend money due to less energy consumption than expected, compared to the conventional building stock. To verify and estimate the current market sensitivity for energy efficiency, which determines the markets willingness to pay for energy efficiency, the market adjustment rate (MAR) has to be estimated. Therefore the in Figure 3 illustrated WAPEC-scoring model has been applied. Because of the upcoming discussions and international research programs, the starting awareness of the market participants the MAR in line with the assessments and interpretations of the literature and publications is estimated to gain 40.0 %. To consider the uncertainty of the future development regarding the willingness of the market participants to honour the extraordinary energy efficiency of buildings, the VEA, which expresses the valuers estimation of the probability of occurrence regarding the estimated AAP rent is assumed to be 75.0 %. After assessing the AAP, the MAR and the VEA, these factors are connected with the aid of multiplication to obtain the weighted adjustment factor (WAF rent ) (see Equation 5 and Equation 6). Due to the verification the WAF rent can be calculated as follows: WAF rent = MAR rent AAP rent VEA = 40% 2.75% 75% 0.825% (5) Equation 5: Calculation of WAF rent Office Building Oresund-Region The current rental impact because of the good energy quality of the building, defined as VPA rent for the lettable residential spaces achieves: VPA rent = WAF rent r market = 0.825% 2000 SEK/m² = 17 SEK/m² (6) Equation 6: VPA rent rent office building Valuation calculation results of modified method Market Value (MV) 476,800,000 SEK Lettable Area (LA) 16,440 m² Applied Capitalisation 6.25 % ( Liegenschaftszinssatz ) Input Parameter Lettable Area 16,440 m² IMMOVALUE IEE/07/553/SI Page 123 of 221

124 Underground parking Market Rent VPA rent Adjusted Market Rent 75 units 2,000 SEK/m² p.a. 17 SEK/m² p.a. 2,017 SEK/m² p.a. Annual Gross Rental Income 34,246,980 SEK Total non-recoverable Expenses Annual Net Operating Income - 4,446,178 SEK = 29,800,802 SEK Applied Net Initial Yield / 6.25 % Market Value 476,800,000 SEK Description of key findings Result of ordinary (conventional) valuation Annual gross operating income Result of modified valuation approach Rental impact (nominal) Annual gross operating income 476,800,000 SEK 33,967,500 SEK 476,800,000 SEK Premium 17 SEK/m² p.a. 34,246,980 SEK Rental impact (in %) Premium of 0.82 % Rental impact (in ) 279,480 SEK Value Impact 0 % Explanatory notes The results of the applied modified methodology in comparison to the conventional valuation show that the impact of energy efficiency on property rents using the modified methodology is still at a negligible scale. An impact on property value could not be observed, because redundancies have to be avoided. Therefore the valuation parameter of the vacancy and collections loss, which implies a shorter period for marketing and letting due to the good energy efficiency of the building had to be returned to the usual 4,00 %, because it is explicitly considered IMMOVALUE IEE/07/553/SI Page 124 of 221

125 . within the higher market rents. In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate manner and obviously lead to plausible results. IMMOVALUE IEE/07/553/SI Page 125 of 221

126 2.2.4 Pilot Project 10 Care Retirement Home in the Ruhr Area Key figures of the Property valuation Key figures Starting point Figures Region/Tow n Ruhr area Year of construction 2009 Year of last (intensive) renovation - Main use residential Location quality (A to D) B Construction quality (A to D) A Maintanance quality (A to D) A Market data transparency (A to D) C Property data transparency (A to D) B Lettable units 105,000 Vacancy in % 0% Gross external area 3,000 Gross internal area 5,750 Valuation methodology applied German income capitalisation method Valuation Company DLP Current rent /m² p.d. Date of valuation 1st of August 2009 Measured energy use 38.8 kwh/m²* a Calualated energy use n.a. EPC existing (Y/ N) Y LCC calculation existing (Y/ N) N Market value 11,940,000 Applying the modified approach Figures Methodology for developed market (Y/ N N LCC carried out (Y/ N) N Revised Value 11,940, Results from ordinary valuation As well as in the previous chapters the ordinary valuation and the modified valuation will be illustrated in a similar manner. IMMOVALUE IEE/07/553/SI Page 126 of 221

127 General description and explanation Background/Initial Situation Valuation of property for the purpose of potential purchase. Scope of Work Site inspection: 29 th August 2009 Date of valuation: 1 st August 2009 The condition of the construction has been assessed due to the discovered conditions during the local site inspection and the supplied material and information s given by the customer. Detailed analysis of the property conditions, like contaminations of the ground, the used construction materials, installation, as well as technical equipment have not been carried out. The valuer has carried out analysis of the location and the property market situation. The property has been valued by using the German direct capitalisation methodology (WertV: Ertragswert). Basis of valuations Legals Status/ Statutory Considerations/ Town Planning Valuation was carried out in accordance to the legal requirements of the German Market Value ( 194 BauGB) and the legal ordinances of WertV and WertR. Main informations supplied to the valuer: - land register abstract - cadastral map excerpt - designation of area and zoning map - rent role - energy performance certificate (in line with 13 EnEV 2007) - tenancy agreement (contract) - Floor Plans - Information out of the Land Charges Register - planning information from the developer In addition to the mentioned documents the valuer as well take following considerations into account: - results of the site inspection - different market research reports - information to the ground value of the site - information to the building regulations Some further potential for constructive extension cannot be observed. Audit of existence of planning and building permission and other official permission required for the usage of the property hasn t been carried out in detail. Due to the delivered building permission it is assumed that the property has been constructed due to the effective IMMOVALUE IEE/07/553/SI Page 127 of 221

128 Location Site description Property description (construction) Structural condition and repair Market condition (rental, investment) building codes and standards. The site of the property is designated as a residential landuse area. The Property is situated in the German Metropolitan Ruhr Area with around 10 Million inhabitants. It has a very good and close link to the individual transport system (National Primary Roads and Highway) and a specific bus stop in front of the property. The surrounding area is mainly characterised by one family houses and residential properties. Further commercial properties besides the property being valued didn t exist. Specific mixed used area. The location is provided with access to the basic public utilities (e.g. electricity, district heating, water, sewerage system, etc.). The plot is defined by a regular rectangular layout. We assume that the site is free of contaminations. The site is not located in endangered areas, which might be affected by natural disasters like avalanches, earthquakes, soil erosion, etc. The construction of the property was finished in 2009 and encompasses a gross floor area (GFA) of approx. 5,750 m² with a lettable area (LA) of around 4, m² with 105 single-rooms. The property represents a concrete building. The façade and insulation of the building was built considering the legal standards of EnEV The property is accessed via a main entrance and two side entrances. Four elevators do exist. The features of the building correspond to quality standard required for retirement homes due to the year of construction. The property is equipped with a district heating system with radiators. The condition of the property corresponds to the year of construction. No specific backlogs of maintenance and repair, as well as structural damages have been observed. Therefore no major repairs, improvements or renovations are required. Adequate modern function of electric, sanitary and other equipment and appliances, as well as the supply and disposal utilities are assumed. The general investment market in Germany has slowed down in 2008 and 2009 due to consequences of the global financial crisis. Very less transactions could be observed and therefore IMMOVALUE IEE/07/553/SI Page 128 of 221

129 Valuation methodology and commentary analysed. Due to the decreasing demand rents decreased as well as yields increase about 50 until 100 basis points, which depends on local property market and building quality conditions. In the end of 2009 property transaction activities have gained momentum and lead to positive market perspectives by the market participants. The Committee of valuation experts for the local property market released no property yields (Liegenschaftszinssätze) for care retirment buildings. In the literature the yields ranges between 6.0 and 7.5 %. Rents for care retirement homes have to be derived from the consequential costs of investment. It secures the structural existence of the buildings by achieving appropriate rents. The administration that is in charge for negotiating this consequential costs published a daily rate of for a single-room per day. Usually residential multi-family properties are held and operated to gain income, so an income related approach have to be chosen to quantify the market value of the subject property. The Ertragswertverfahren, the German direct income capitalisation method has been applied. The valuer estimate the gross annual return of a property less non-recoverable operating expenses and the annual return of the land value and capitalize them with the German yield ( Liegenschaftszinssatz ), a specific yield for properties, for the remaining economic lifetime of the building to achieve the value of the building. To obtain the market value of the property the land value have to be added Key Valuation parameter Current gross rental income Non-recoverable Operating expenses The rental income of the subject property due to current tenancy agreement exceeds an annual amount of 843,150. This corresponds to a rent of around 22,00 /unit p.d. The current annual non-recoverable operating expenses have been derived by empirically established figures for comparable properties. The following estimates were chosen: Maintenance costs: 7.00 /m² p.a Management costs: 2.00 % of the gross annual return Non-recoverable operating costs: IMMOVALUE IEE/07/553/SI Page 129 of 221

130 Applied Capitalisation ( Liegenschaftszinssatz ) Ground Value Total economic lifetime Not exist Vacancy and collection loss: 1.50 % of the Gross annual Return The applied capitalisation ( Liegenschaftszinssatz ) for the capitalisation was estimated due to the location, the condition of the building and the local property market 6.25 %. It encompasses adjustments for location, property configurations, and risks adjustments for expected shortterm difficulties. The expert committee of the local property market published a ground value of /m² for the subject property. The total economic lifetime is estimated up to 60 years. Remaining economic lifetime The remaining economic lifetime due to the year of construction amounts 60 years. Market rent Observable market rental level derived from the market rent. We assume that the contract rent is market rent Ordinary Valuation calculations and results Market Value (MV) 11,940,000 Lettable Units / Area (LA) 105 single rooms / 4,286,38 m² Applied Capitalisation 6.25 % ( Liegenschaftszinssatz ) Input Parameter Lettable Units 105 Current Rent /unit p.d. Market Rent /unit p.d. Annual Gross Rental Income 843,150 Total non-recoverable Expenses - 78,556 Annual Net Operating Income = 764,594 Annual Return of the Land Value - 6,25 % x 900,000 Annual NOI of the Building = 708,344 Applied Capitalisation ( Liegenschaftszinssatz ) 6.25 % IMMOVALUE IEE/07/553/SI Page 130 of 221

131 Multiplier ( Vervielfältiger ) ( %) 60 1 ( %) % x Income Value of the Building = 11,040,000 Land Value + 900,000 Market Value = 11,940, Results applying the modified methodology Descriptive integration of aspects affecting buildings energy efficiency Building Equipment and Appliances Heating and cooling Ventilation, air conditioning and indoor air quality Lighting and daylighting Use of renewable energy resources Plumbing and hot-water heating Thermal power station with use of fossil energy resources and also pellets. The property did not have controlled ventilation and air conditioning system. Artificial lighting is required. The subject property is not equipped with renewable energy resources. The subject property is equipped with plumbing systems corresponding to the year of construction. The hot water supply is ensured via the heating system. We assume that it supports on average correspond to an efficient use of water resources Energy efficiency and other sustainable features of the property Energy efficiency Energy source According to the available EPC the subject property achieves an overall primary energy demand for heating and warming water of 38.8 kwh/m²*a (energy efficiency: green due to current EPC standard). The acceptable maximum is published with 74.1 kwh/m²*a in line with the 13 EnEV The energy efficiency of the subject property due to the index in the EPC can be evaluated as above average. The use of conventional resources as well as pellets for energy supply did ensure the long-term security of energy supplies while a switch from conventional resources to IMMOVALUE IEE/07/553/SI Page 131 of 221

132 Green lease agreements LCC Property configuration pellets or further new energy supplying materials may be easier. The supply did not depend 100 % on the natural energy resources, which will become more rare in the future. There are no green lease agreements with the tenant. No Life-Cycle-Costing analysis or investigations are available. The property s configuration supports the possibility of efficient use of space due to the solid construction and the insulated façade, which as well influence the buildings energy efficiency. The overall loss of heat ( Transmissionswärmeverlust ) amounts 0.42 W/(m²*K). The acceptable peak is published with 0.8 W/(m²*K). Since EnEV 2009 became effective the maximum for loss of heat of the opaque components of the building should not exceed 0.35 W/(m²*K). For transparent components of the building except curtain walls, glass roofs or domed roof lights the overall loss of heat should not exceed 1.90 W/(m²*K). So the energy-efficiency of the building envelope has to be rated as over-average and therefore as good Observable property market sensitivity and maturity for energy-efficient or sustainable properties Real estate market sensitivity Besides the already mentioned information about the current property market situation and condition following additional observations concerning the real estate markets awareness, sensitivity and maturity regarding energy efficiency and sustainability are necessary. In general the German property market start to recognise the importance of property s energy efficiency and sustainability. The awareness of property owners, tenants, occupiers, etc. for energy efficiency and sustainability is rising, such aspects are in most cases still not recognised within decision-making processes so far (e.g. in the course of leasing a property or part of it, etc.). Therefore currently no price elasticity for energy efficient buildings can be recognised. Moreover no proven evidence for higher willingness to pay for energy-efficient properties especially in the residential submarkets can be observed in the property markets so far. But international research projects show some evidence for IMMOVALUE IEE/07/553/SI Page 132 of 221

133 Market information available Public awareness General circumstances and mandatory regulations rental premiums of sustainable properties it seems to be a matter of time that markets will acknowledge energy efficiency as well as sustainability of properties. Even though there exists a mandatory disclosure of property owners for EPC potential tenants just get informed about the energy efficiency if they explicitly ask for it. In most cases where lettings are offered no EPC or other information about buildings energy efficiency are available or even exist. In some cases when potential tenants ask for an EPC, they will be rejected as tenants especially in local residential markets where residential spaces are rare and demand is high. In this valuation case no comparable properties were available. The public media in general already start to recognise the importance of energy efficiency due to the constantly rising energy prices and the international political debate regarding the reduction of the green house gas emissions, which are mainly driven by the holding stock of buildings. So some increase of sensitivity and awareness for sustainability and energy efficiency can be recognised in the society. Governmental institutions and policy makers already realised the importance of and promote energy-efficient and sustainable developments. Therefore mandatory regulations and directives on national as well European level have been established e.g. EPBD (2002/91/EG), EnEV 2009 (Energy Savings Ordinance for buildings), etc. Beyond low-energy building requirements (energy demand below 25 kwh/m².a) are on the way to become the general building standard. Moreover passive houses are at the forefront, for example in Frankfurt. IMMOVALUE IEE/07/553/SI Page 133 of 221

134 Application of the modified Valuation Method As described in IMMOVALUE report 7.2 valuers could use a scoring model, WAPEC- Scoring to derive valuation parameter adjustment (VPA rent ). The developed methodology for quantifying the rental impact of energy efficiency determined by the EPC will be applied in the case study (see Figure 4). Figure 4: WAPEC-Scoring Care Retirement Home Rhine-Ruhr area But there are no comparable buildings available, so the valuer has to estimate the AAP rent with the aid of his experience and knowledge. Due to the high insulation building standard AAP rent is estimated to achieve 3.00 %. So it is assumed, that in the mid run tenants will honour the good thermal quality of the building, because they can spend money due to less energy consumption than expected, compared to the conventional building stock. IMMOVALUE IEE/07/553/SI Page 134 of 221

135 To verify and estimate the current market sensitivity for energy efficiency, which determines the markets willingness to pay for energy efficiency, the market adjustment rate (MAR) has to be estimated. Therefore following illustrated scoring model has been applied (see Figure 4). Because of the upcoming discussions and international research programs, the starting awareness of the market participants the MAR in line with the assessments and interpretations of the literature and publications is estimated to gain %. To consider the uncertainty of the future development regarding the willingness of the market participants to honour the extraordinary energy efficiency of buildings, the VEA, which expresses the valuers estimation of the probability of occurrence regarding the estimated AAP rent is assumed to be %. After assessing the AAP, the MAR and the VEA, these factors are connected with the aid of multiplication to obtain the weighted adjustment factor (WAR) (Equation 7 and Equation 8). Due to the verification the WAF can be calculated as follows: WAF rent = MAR rent AAP rent VEA = 50.00% 2.50% 70.00% 0.875% (7) Equation 7: Calculation of WAF rent Care Retirement Home Rhine-Ruhr area The current rental impact of energy efficiency, defined as VPA rent for the big sized retail units achieves: VPA rent = WAF rent r market = 0.875% /unit p.d. = 0.19 /unit p.d. (8) Equation 8: VPA rent Care Retirement Home Rhine-Ruhr area Valuation calculation results of modified method Market Value (MV) 11,940,000 11,940,000 Lettable Units / area (LA) 105 single rooms / 4,286,38 m² 4,080 m² Applied Capitalisation ( Liegenschaftszinssatz ) 6.25 % 6.25 % Input Parameter Lettable Units 105 Market Rent /unit p.d. VPA rent Adjusted Market Rent /unit p.d /unit p.d. IMMOVALUE IEE/07/553/SI Page 135 of 221

136 Annual Gross Rental Income 850,432 Total non-recoverable Expenses - 85,317 Annual Net Operating Income = 765,115 Annual Return of the Land Value % x 900,000 Annual NOI of the Building = 708,865 Applied Capitalisation ( Liegenschaftszinssatz ) Multiplier ( Vervielfältiger ) 6.25 % ( %) 60 1 ( %) % x Income Value of the Building = 11,040,000 Land Value 900,000 Market Value = 11,940, Description of key findings Result of ordinary (conventional) valuation 11,940,000 Annual gross operating income 843,150 Result of modified valuation approach 11,940,000 Rental impact (nominal) Premium 0.19 /unit p.d. Annual gross operating income 850,432 Rental impact (in %) Premium of 0.86 % Rental impact (in ) 7,282 Value Impact 0 % Explanatory notes The results of the applied modified methodology in comparison to the conventional valuation show that the impact of energy efficiency on property rents using the modified methodology is still at a negligible scale. An impact on property value could not be observed, because redundancies have to be avoided. Therefore the valuation parameter of the vacancy and collections loss, which IMMOVALUE IEE/07/553/SI Page 136 of 221

137 implies a shorter period for marketing and letting due to the good energy efficiency of the building had to be returned to the usual 4,00 %, because it is explicitly considered within the higher market rents. In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate manner and obviously lead to plausible results Pitfalls within the valuation process Market transparency Market transparency Information quality concerning energy-efficiency Information quality concerning LCC Market data has been collected from different sources like real estate authorities etc. In between these sources no adequate market information regarding buildings energy efficiency or life-cycle-costs can be observed, because of the less transparency of the markets at the moment. The EPC includes a lot of detailed information. Various energy-efficiency figures can be seen within the EPC. Basically valuers need to be able to understand, interpret and use the expressive figures that underline the status quo of the energy-efficiency of buildings and do not compare different key-figures while comparing them with the market. Finding and collecting information on LCC analysis is quite more difficult. Because LCCA in the most cases are just applied in specific cases and mostly not undertaking in real estate practice. It can be mentioned that such analysis tools are too sophisticated and extensive that their application in property valuation practice can never be claimed. IMMOVALUE IEE/07/553/SI Page 137 of 221

138 3 Findings applying Modified Sales Comparison Approach Key Facts and Findings The modified cost comparison approach ( ESP method ) leads to good results, in the presented pilot project valuation. For a more comprehensive assessment of the methodology, however, more market data and more case studies are needed to validate the proposed methodology. The tested methodologies are based on energy demands that can be found in the EPC, but also on prices of energy that depend considerably on the source (gas, electricity, district heating system). For similar buildings, results may vary if sources of energy are different. Therefore the subject properties and comparables should have same source of energy for correct calculation. The market value estimated by using thermal retrofitted comparables is higher than the value calculated by the proposed methodology, which means that - for the Romanian market - the market adjustment rate (MAR) > 1. In the time when the pilot project was calculated, buyers/sellers from the city of Iasi were so sensitive to thermal retrofitting, that they had the willingness to pay more than possible energy savings amounts or costs of investments for thermal retrofitting. This may indicate that the energy efficiency is assumed by the Romanian real-estate market, to be part of a package of qualities specific to modern, healthy, good looking properties. The Romanian buyers/sellers seem to think more in terms of sustainability (in its broadest sense), than in terms of energy savings. It is too soon to analyze the direct impact of EPC on the Romanian real estate market, but an impact of thermal retrofitted buildings can be observed. Thermal retrofitted buildings value more than similar buildings having lower energy efficiency. 3.1 Pilot project from the Romanian Market The modified sales comparison approach which has been developed in the frame of the IMMOVALUE project was tested with a pilot project from Romania. The calculation has been conducted by the project partner TU Iasi with support of professional valuers. IMMOVALUE IEE/07/553/SI Page 138 of 221

139 3.1.1 Pilot Project 11 Residential property in Iasi Key figures of the Property valuation Key figures Starting point Figures Region/Town Iasi, Romania Year of construction 1974 Year of last (intensive) renovation 2008 Main use residential Location quality (A to D) B Construction quality (A to D) B Maintenance quality (A to D) B Market data transparency (A to D) C Property data transparence (A to D) B Lettable area (4 apartments) in m Vacancy in % 0% Gross external area of the building in m 2 3, Gross internal area of the building in m 2 3, Valuation methodology applied Sales Comparison Approach Valuation Company Expert Buildings Current rent in [ /m 2 ] Date of valuation 21 st of September 2009 Measured thermal energy use [kwh/year] 528,200 Calculated thermal energy use [kwh/year] 475,338 EPC existing (Y/N) Y LCC calculation existing (Y/N) N Value of the apartment calculated without thermal rehabilitation [ ] 51,484 Applying the modified approach Figures Methodology for developed market (Y/N) N LCC carried out (Y/N) N Revised value [ ] 54, Results from ordinary valuation The valuation company Expert Buildings from the city of Iasi (Romania) carried out the ordinary property valuation. This company is qualified for valuing real estate objects for courts, banks, annual financial reports of companies, etc. IMMOVALUE IEE/07/553/SI Page 139 of 221

140 In this report, the sales comparison approach is applied in two versions; as it is usually applied in the region and as a new methodology, which was presented in the report D5.1-D5.3 of IMMOVALUE project. Data for the comparables was collected from the market of the city of Iasi (Romania). The new methodology to be tested in this pilot project uses data extracted from the EPC to find an indicated value for a thermal retrofitted apartment. Results are compared with values obtained by the classic methodology. The pilot project followed several steps. Firstly, information was collected about which residential buildings from the city of Iasi have an EPC. Most of them were block of flats, constructed during Secondly, market data about these buildings was collected. Three districts were attentively monitored during August-September The most dynamic one, offering sufficient comparables, was the district Alexandru cel Bun. The subject property and the comparables are located in this district. The next step was filtering the selected buildings in accordance with age, so only buildings constructed within same construction codes were used. Finally, the valuer inspected the subject property and the calculation of estimated value using comparable properties was done General description and explanation Background/Initial Situation Scope of Work Basis of valuations Valuation of an apartment situated in a block of flats, in order to complete the pilot project of IMMOVALUE project IEE/07/533/SI The scope of the pilot project is to calculate the value of an apartment including calculation of added value generated by energy efficiency. A new methodology based on data extracted from the Energy Performance Certificate (EPC), which was presented in Report D5.1-D5.3 is used. The property has been inspected on 21st September The structural condition, construction materials and installations has been evaluated in the course of the visual inspection. No detailed technical analysis was made. Calculation of value was done in accordance with the scope of the work, type of property and recommendations of International Valuation Standards IVS1 and Romanian valuation procedures. Main basis for the valuation has been the documents supported as follows: - land register abstract of title IMMOVALUE IEE/07/553/SI Page 140 of 221

141 Legal Status/ Statutory Considerations/ Town Planning Location Site description Property description (construction) - cadastral map - designation of area and zoning map - energy performance certificate (in line with the EU Directive 2002/91/EG) - energy audit of the building, including recommendations for better energy efficiency - ownership contract. In addition to the mentioned documents the valuer as well take following considerations into account: - results of site inspection - observable property condition - current observable market condition and situation of the local real estate market. The legal status of the property results from the selling documents. The owners of the apartment have full property rights, without contractual restrictions, mortgages, etc. It is assumed that the property has been constructed due to building codes and standards for construction valid at the time of construction. No further extension of the zone is foreseen. The building is situated in the city of Iasi, a town with 350,000 inhabitants, from the North-East part of Romania. The area of the city is 96km 2. The valuation concerns an apartment with 67.34m 2 useful area, situated in a block of flats from Alexandru cel Bun district. The surrounding area is mainly characterised by residential properties and retail infrastructure is rare Alexandru cel Bun district is situated at 3-5 kilometres away from the city center. The main buildings are block of flats (303 from 330 in total), constructed during The apartment to be valuated is located in a block of flats which is part of a set of blocks with ground floor+10 floors, ground floor+ 4 floors, ground floor+ 7 floors. There are facilities for car access, pedestrian access, parking, public transport (tram, bus, mini bus), stores, food market, school, health center, parks, banks, etc. The development of the area has not been foreseen until now. The area is polluted by noise and CO 2. The site is not located in endangered areas that might be affected by natural disasters (e.g. avalanches, earthquakes, soil erosion, etc.). The building where the subject property is situated, is a residential block of flats, which underwent thermal IMMOVALUE IEE/07/553/SI Page 141 of 221

142 retrofitting in It is a building with basement+ground floor+10 floors, constructed in The gross internal area of the block of flats is 3, m 2. The ground floor and the first nine floors contain 2 apartments with m 2 useful area and 2 apartments with m 2 useful area. On floor 10, there is an apartment with m² useful area, an apartment with m² useful area and an apartment with m 2 useful area. The height of rooms is 2.51 m. On the top of the building there is an open terrace, with thermal and waterproof insulation, non pass permitted. The apartments are accessed by staircase and elevators. The structure of the building is made of concrete foundations and reinforced concrete frames. The walls are made of bricks. Last maintenance of the building was made during summer 2008, when the envelope underwent thermal retrofitting. The outside walls, the ceiling of the basement and the attic are insulated. The windows are energy efficient (double glazing windows with PVC frame). The building is supplied with utilities: water-sewage, telephone, electricity, gas, Internet, cable TV. Adequate function of electric, sanitary and other equipment and appliances, as well as the supply and disposal utilities are assumed. The apartment to be valuated is situated on the 9 th floor and it contains: living room, two bedrooms, entrance hall, kitchen, bathroom, balcony. The owner invested in design improvements such as: special sandstone and tile, natural wood floor. At the time of valuation, the owners, 2 persons, occupied the apartment. Structural condition and repair Market condition The building is with respect to its age in a good condition. No structural damages were observed. Major improvements, renovations or reparations are not required. Social, economic, environmental, governmental, political, international aspects affect the Romanian real estate market. Ongoing financial crisis caused a dramatic decrease in demand. End-users looking for a good investment are waiting for better opportunities. End users without financial possibilities want to buy, but depend on financial support from banks, which have stricter rules for approving loans and which increased instalments. Resellers withdrew from the market due to the increasing investment risk. At the time of this pilot project (September 2009), on the real-estate market from the city of Iasi, the supply is higher than the demand. This tendency occurred by August- IMMOVALUE IEE/07/553/SI Page 142 of 221

143 Valuation methodology and commentary September In the same period during 2007, the real estate market was active with increasing demand and by consequence with increasing prices. Since August- September 2008 the market is continuously declining. The effect is low demand, oversupply of offers, which generated decrease of value up to 40 %, during last year. In the city of Iasi, at the time of this study, the value of apartments from residential buildings was 450-1,600 /m 2 and the yield rate was %. The valuation methodologies used in this report are: 1) Classic sales comparison approach applied under the supposition that added value produced by thermal retrofitting is neglected. Calculations and results of valuation are presented in Table 1. 2) A new valuation was done by adding costs of investments for thermal retrofitting to the estimated value of the subject property calculated in Table 1. Results were presented in the section named Ordinary valuation calculation and results. 3) The new methodology for the sales comparison approach, as it is described above. IMMOVALUE IEE/07/553/SI Page 143 of 221

144 Key valuation parameter Price of comparable properties The estimated value was derived from transaction prices of comparables. The comparable properties were located near the subject property and constructed under same construction codes as the subject property Comparable Price [ ] Price [ /m 2 ] assets Comp 1 58, Comp 2 60, Comp 3 57, Ordinary valuation calculations and results Valuation was performed for an apartment with a useful area of m 2. The apartment is situated in a block of flats, which underwent thermal retrofitting, recently. The Romanian classic sales comparison approach considers two types of adjustments: market adjustments for age, conditions of financing, location, etc., in accordance with national valuation codes; adjustments as costs of investments for better design and comfort comparing to standard (modern doors, special tile, special sandstone, wood floor, individual heating systems, energy efficient windows, etc). Comparable properties which underwent thermal retrofitting are very difficult to be found. Ordinary valuation uses comparable properties that did not undergo thermal retrofitting. Table 5 presents calculation of estimated value without taken into consideration thermal retrofitting, as it is usually happens. The estimated value of the subject property is EUR 51,484 [ /m 2 ]. Comparison elements Table 5: Results of conventional valuation Subject property Comparable assets A B C Price [ ] 58,000 60,000 57,000 Useful area [m 2 ] Adjustment -5,924-5,400-5,130 Adjusted price [ ] 52,076 54,600 51,870 Age Adjustment Adjusted price [ ] 52,076 52,416 51,870 Conditions of financing Market Market Market Market Adjustment IMMOVALUE IEE/07/553/SI Page 144 of 221

145 Adjusted price [ ] 52,076 52,416 51,870 Floor/highest floor 9/10 6/10 8/10 6/10 Adjustment -1, , Adjusted price [ ] 50,514 51,892 50,314 Iasi, Alexandru cel same same same Location Bun district Adjustment Adjusted price [ ] 50,514 51,892 50,314 Improvements Indoor design investments Adjustment Adjusted price [ ] 50,314 51,892 50,644 Energy efficient windows Yes No No No Adjustment Adjusted price [ ] 51,154 52,732 51,484 Individual heating system Yes Yes Yes Yes Adjustment Adjusted price [ ] 51,154 52,732 51,484 Estimated value of the subject property 51,484. In reality, the subject property underwent thermal retrofitting, which cost 40 /m 2 (2,693 in total). These costs of investments should produce added value, neglected usually by ordinary valuation. According to Romanian valuation procedures, an awarded valuer may add to the value calculated by ordinary valuation, costs of investments for thermal retrofitting and find a new market value. The estimated value of the subject property would be EUR 54,177 [ /m 2 ], in this case Results applying the modified methodology The following chapter illustrates how valuers could address energy efficiency aspects in an appropriate manner, using sales comparison approach. It further illustrates how to derive reliable measure for quantitative integration of energy efficiency into property valuation calculations, if property markets willingness to pay is observable. As it is mentioned above, the EPC from Romania presents information on the so-called reference building, a fictive construction that corresponds to the building in question regarding geometry, orientation, and terms of use, but all the building envelope elements and installations correspond to the current legal standards regarding energy characteristics. In IMMOVALUE IEE/07/553/SI Page 145 of 221

146 Figure 5, the EPC from Romania is presented including indications about were the E demand and the E ref can be found, for each type of energy. In this case study, E ref from Equation 9 is the energy demand of the reference building extracted from the Romanian EPC. Page1. Energy demand E demand. Page 2. Energy reference E ref. Figure 5: Romanian Energy Performance Certificate A thermal retrofitted old building has very low ESP hypothetically zero, while nonretrofitted old buildings have high rates of ESP, even if both the retrofitted and the nonretrofitted building are constructed under same construction codes. The new methodology considers that costs of ESP, during the remaining economic life-time of the building generates depreciations/appreciations due to energy efficiency. By applying adjustments to each comparable in accordance with the added value calculated the estimated value of the subject property can be calculated. IMMOVALUE IEE/07/553/SI Page 146 of 221

147 Description of key findings This pilot project focuses on an apartment situated in a block of flats, which has undergone thermal retrofitting, recently. The new methodology for sales comparison approach calculates the added value generated the Energy Saving Potential (V ESP ) only for heating. No other type of energy is taken into consideration. Results of all methodologies are summarized in Table 6. The estimated value calculated by classic valuation using comparable properties that underwent thermal retrofitting, represents the market value to be reached by the new methodology. Table 6: Results of modified valuation Subject property Market value Value calculated by classic valuation, using non-retrofitted buildings as comparable properties Value calculated by adding cost of investments for thermal retrofitting to the value derived by classic methodology using nonretrofitted buildings as comparable properties Value calculated by the modified methodology Value [ /m²] Comparing to the market value, the calculated value of the subject property is: 6.2 % lower, if non-retrofitted buildings are considerate as comparable properties; 1.37 % lower, if costs of investments for thermal retrofitting are taken into consideration as adjustments in classic valuation using non-retrofitted buildings; 0.99 % lower, if the new methodology is used Descriptive integration of aspects affecting buildings energy efficiency Building Equipment and Appliances Heating and cooling Ventilation, air conditioning and indoor air quality Lighting and day lighting The heating is provided by the individual heating system using natural gas as source of energy. The apartment is not equipped with ventilation or air conditioning system. All rooms, except the entrance hall, have access to natural IMMOVALUE IEE/07/553/SI Page 147 of 221

148 Use of renewable energy resources Plumbing and hot-water heating light. All rooms are equipped with electric installations including artificial light. The subject property is not equipped with a solar heating system nor a photovoltaic (PV) or other alternative energy supply system, and consequently do not directly use renewable energy resources. The subject property is equipped with new plumbing installations. Hot-water heating is produced in each apartment by the individual heating systems. Other observations In the last 12 months, the entire building consumed 528,200 kwh/year, for heating and preparing warm water for domestic purposes. Price of thermal energy produced from natural gas was /kwh (VAT included) in this period. Data was delivered by the E.On Moldova, the Energy Company from the city of Iasi Energy efficiency and other sustainable features of the property Energy efficiency Energy source Green lease agreements LCC Property configuration According to the available EPC of the subject property, the annual thermal energy demand after thermal retrofitting, made in accordance with recommendations from the energy audit document should be kwh/m².a (the reference energy demand). In reality, the consumed energy for space heating was kwh/m².a., after thermal retrofitting. The thermal energy efficiency of the subject property can be evaluated as good. The average energy demand for 22 nonretrofitted buildings, constructed under same construction codes as the subject property and situated in the same district is kwh/m².a. Natural gas is used for the individual heating system. The does not have a green building certifications (LEED, BREEAM, DGNB, CEN, etc.). No Life-Cycle-Costing analysis have been carried out. The property s configuration A/V=0.376, 11 floors Observable property market sensitivity and maturity for energy efficient or sustainable properties Real estate market sensitivity The Romanian real-estate market started to recognize IMMOVALUE IEE/07/553/SI Page 148 of 221

149 importance of energy efficiency, since national programs for thermal retrofitting of old buildings was applied. Many owners, without waiting financial support from the government, started to invest in measures for better energy efficiency: thermal insulation of walls, energy efficient windows, modern heating installations. During transactions, these investments are considerate added value comparing to standard and the market is usually sensitive to it. Market information available Public awareness General circumstances and mandatory regulations In the present study, EPC for the subject property and comparables were available. In current transactions of apartments, EPC are not used in Romania, because they are not mandatory yet. The public media start to be interested in energy efficiency aspects. The law 372/ regarding the transposition of the EPBD 2002/91/EC into national law came into force on 1 January The law 372/2005 stipulates that for buildings with a total useful floor area over 1000 m 2, occupied by public authorities and by institutions providing public services (e.g. teaching units, hospitals, offices) an energy certificate must be placed in a prominent place clearly visible to the public. The sensitivity of the market is expected to increase when the EPC will become compulsory for dwellings and apartments in residential buildings when are sold or rented. In Romania, governmental institutions and policy makers promote energy performing in buildings. The values of energy performance and economic assessment are the result of methodological standards for the application of 372/2005 law, which were published in Official Monitor nr.695/ art.19 and art Valuation calculation results of the new methodology The market value of the subject property, calculated by using comparables that underwent thermal rehabilitation is EUR 54,932 [ /m 2 ]. The purpose of the pilot project is to find an estimated value close to this market value, by applying the modified methodology (ESP method) for calculation of adjustments generated by better energy efficiency. Only energy for heating was taken into account. The subject property and the comparables were apartments situated in block of flats constructed in the period , under the construction codes STAS IMMOVALUE IEE/07/553/SI Page 149 of 221

150 Details on calculation of the added value generated by thermal retrofitting is presented in Table 7. The following data was used: the current price of natural gas is C E = /kwh; market adjustment rate MAR=1; discount rate 8.0 %; total economic life-time of the building 60 years. The derived value of the subject property by applying the new methodology is EUR 54,392 [ /m 2 ]. Table 7: Results of the case study Subject Comparable assets Comparison elements Property A B C 1 Value calculated with classic inputs [ ] 51,154 52,732 51,484 2 Estimated value of the subject property using the classic method [ ] 51, E demand [kwh/m².year] E ref [kwh/m².year] ESP [kwh/m².year] t [years] t ( ) ( ) 1+ i 1 t 1+ i i S [m 2 ] V ESP [ ] ,067 3,209 2, Value calculated by ESP method [ ] 54,221 55,941 54,392 Estimated value of the subject property using ESP method [ ] 54,392 Profitability of investments in thermal retrofitting was checked by the German costs of saved energy method, based on comparisons between the cost of the unit of saved energy (C G ) and the expected average price of energy for the period under review (P AE ). In the studied case, a discount rate of 8% and a period of 15 years was taken into consideration, for calculation of (C G ). A period of 15 years with an increase of 5 % of the price of energy per year, starting with /kwh in the first year, was taken into consideration for calculation of (P AE ). The result is C G = < P AE = , therefore the investment in thermal retrofitting was profitable Pitfalls within the process IMMOVALUE IEE/07/553/SI Page 150 of 221

151 Market transparency Information quality concerning energy-efficiency Information quality concerning LCC Data concerning market values were collected from various sources: Internet, specialized press publicity, real estate agencies and direct contact with the owners. Two kinds of data were collected; of thermal retrofitted and of nonretrofitted buildings. After studying the collected data and after excluding the edge values, the comparables have been chosen. It must be underlined that finding thermal retrofitted buildings to be use as comparable properties is very difficult. Moreover, buildings having an EPC are rare at this moment, in Romania. The subject has an EPC and an energy audit, both elaborated in December 2006, before thermal retrofitting (2008). The E demand after retrofitting is supposed to be the E ref mentioned in the EPC and energy audit. LCC do not exist in Romania IMMOVALUE IEE/07/553/SI Page 151 of 221

152 4 Findings applying Modified Cost Approach Key Facts and Findings The study of the Austrian valuation practice (see chapter 5.2) and the detailed analysis of pilot project valuations show that the perception of the EPC on the market is still at a negligible level but slightly begins to rise. This is one of the main reasons why is not possible to observe any market changes relating to energy efficiency or energy performance certificate at the moment. The pilot project valuations, however, show that the modified cost approach developed in the frame of the IMMOVALUE project is applicable. All four case studies indicate no major problems in applying the modified approach. A closer look on the mechanisms of the modified method shows that the main purpose and advantage of this process has to be seen in the transparency. For example, in the pilot project 13 (single family house Nußdorf) the conventional approach and the modified approach come up almost with the, yet the modified method reflects the rather ambiguous market effects and incorporates it as a single purpose discount for energy efficiency. This increases transparency and perception of energy aspects. It remains to be seen which effects the EPC will have at the end on valuation practice with respect to the cost approach. The exact quantification mainly lacks of missing data data only can be provided in developed markets. But developed markets are rare and predictions on the actual effect cannot be made by now. 4.1 Findings from Pilot Projects applying cost approach for the Austrian market The pilot projects applying the modified cost approach have been valued by the project partner FH Kufstein. In order to test the modified cost approach, in a first step 142 (conventional) valuation reports from the Austrian market have been analyzed. A more detailed description of this assessment as well as a summary of the findings is included in chapter 5.2. From these 142 valuation reports, three typical ones were selected in order to analyze them in detail. The following chapters show the main important parts and issues, which have to be addressed within an ordinary property valuation report and calculation. All pilot project valuations are based on an actual property valuation carried out by a court-approved appraiser. In three cases the valuation report appraises a single-family house the fourth features the valuation of a condominium. IMMOVALUE IEE/07/553/SI Page 152 of 221

153 4.1.1 Pilot Project 12 Single-family House in St. Christophen The following pilot project valuation is based on an actual property valuation carried out by a court-approved appraiser for a single-family house. In this case the EPC is not available and the appraiser points out that the EPC is not available in the valuation report. Energy and LCC aspects are not taken into account because of the missing correlation and evidence between energy efficiency and properties value, etc. Property valuation thus is not affected Key figures of the Property valuation Key figures Starting point Figures Region/Town 3051 St. Christophen Year of construction ca. second world war (1962) Year of last (intensive) renovation 1962 (renovation and extenson) Main use single-family house Location quality (A to D) C Construction quality (A to D) B Maintanance quality (A to D) C Market data transparency (A to D) D Property data transparency (A to D) D Lettable area n.a. (single-family house) Vacancy in % n.a. (single-family house) Gross external area 270 Gross internal area n.a. Valuation methodology applied cost approach Valuation Company court-approved appraiser Current rent no (single-family house) Date of valuation 17th of March 2009 Measured energy use n.a. Calculated final energy demand n.a. EPC existing (Y/N) N LCC calculation existing (Y/N) N Market value 93,200 Applying the modified approach Figures Methodology for developed market (Y/N N LCC carried out (Y/N) N Revised Value 93,200 IMMOVALUE IEE/07/553/SI Page 153 of 221

154 Results from ordinary valuation The following explanation contains the original description of the valuation report. The description is structured in three main parts. In the first part the report is explained and in second part the calculation inputs are analyzed in detail. The last part shows the original calculation of the appraiser General description and explanation Background/Initial Situation Valuation of property was made for a bankruptcy proceeding. The valuation is needed as an initial position for a public sale and the appraiser ascertains the market value of the property. Scope of Work The property was inspected on 5 th of March The structural condition was evaluated in the course of the visual inspection. The property has been evaluated by applying the cost approach. Basis of valuations Legal Status/ Statutory Considerations/ Town Planning Location Site description Property description Valuation was carried out in accordance to LBG (Liegenschaftsbewertungsgesetz the Austrian code on building appraisal) The following documents have been the main fundament for the valuation: land register abstract of title cadastral map excerpt designation of area and zoning map literature of valuation practise Austrian law Lower Austria regional planning It is assumed that the property was constructed due to building codes and standards for construction. Property is situated in lower Austria St. Christophen and is located near the highway. The surrounding area is mainly characterised by residential properties. The single family house is situated in a densely populated area of mainly single family houses. The property is located near a highway passing it in the east. Other properties are situated on the other side which are in private ownership. Near the property is a bus stop which is a connection to the centre of the village. The property characteristics are best described as a small single-family house with a small outbuilding. The building IMMOVALUE IEE/07/553/SI Page 154 of 221

155 Construction description Quality: (A (high) D (low)) Size of property 506 m² Structural condition and repair has a cellar, a ground floor and a top floor. The construction of the building was started approximately in the second world war. In the year 1962 a renovation and extension of the building was undertaken. Floor: massive ferroconcrete and wood external wall: 40 cm brick wall facade: plastering windows: wooden windows with single glazing doors (inside): wood door (outside):wood with glass roof: couple roof roof covering: brick clay heating system: oil heating B: massive type of construction Main building: The house was built after the second world war and shows, according to the age, a normal construction level. Outbuilding: The house was built in the year 1962 and shows, according to the age, a low construction level. Gross floor area Main building: m² Cellar: m² Ground floor: m² Top floor: m² Outbuilding: m² Building volume Main building: m³ Cellar: m³ Ground floor: m³ Top floor: m³ Outbuilding: m³ Remaining economic lifetime of property Market commentary Appendix Valuation methodology and commentary Main building: 60 years Due to the fact that, the property is situated directly to the highway, the property loses attractivity. No appendix available. In Austria as usual for single-family properties the cost approach has been applied to quantify the market value of the subject property. IMMOVALUE IEE/07/553/SI Page 155 of 221

156 Ordinary valuation calculation input Value of the land Replacement costs of the building 55.0 /m² Main building: Cellar: Ground floor: Top floor: Outbuilding: 150 /m³ 290 /m³ 200 /m³ 150 /m³ Depreciation Lifetime: 100 years Age: 40 years Remaining life: 60 years Linear depreciation: 40.0 % Construction defect -6.0 % Adjustment based on market evidence % Statement: Due to the fact that the property is situated next to the highway, the property loses attractivity Ordinary Valuation calculations and results Input Parameter Cost Approach Replacement Costs of the building 174,700 Technical depreciation 40.0 % -69,880 Adjustment based on market 18.0 % -31,440 Constructional defect /structural damage 6.0 % -10,480 Causeless premium 8,000 Value of the land 27,800 Cost value 98,700 Servitude -5,500 Market Value 93, Results applying the modified methodology In this case the EPC is not available and therefore the information of the certification can t be used to describe the building. There is no information concerning LCC of the building. The original report and pictures give an overview of energy efficiency. From the description a IMMOVALUE IEE/07/553/SI Page 156 of 221

157 poor quality of energy efficiency can be derived. For example a thermal insulation or windows with thermal glass are not available Description of key findings Result of ordinary (conventional) valuation 93,200 Result of modified valuation approach 93,200 Value impact (nominal) 0 Value impact (percentage) No Discount/Premium Explanatory notes The results of the applied modified methodology in comparison with conventional valuation show that the impact of energy efficiency on property values is still at a negligibly insignificant scale. In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate way and leads to reliable and plausible results Modified aspects for report Energy efficiency LCC Heating and cooling Ventilation and air quality Lighting and day lighting Plumbing and hot-water heating Other sustainable features of the property No EPC is available. The building has a very low quality concerning energy efficiency. Based on this fact the EPC might have been showing a very low category or a rather high HWB. The construction of the main building was in 1962 and no main modifications have been undertaken. So the building shows no LCC gains. Building services include an oil heating as well as a wood based heating system There is no cooling system available. No ventilation system exists. No special lighting system exists Not specified. Not specified. IMMOVALUE IEE/07/553/SI Page 157 of 221

158 Based on these facts it might be concluded that this building has no gains in the sense of a green building. Neither energy efficiency nor LCC aspects have a special impact on this building Modified valuation calculation In this case comparable properties are not available. It is not possible to conclude from former sold properties. In order to get a feeling for the market structure local real estate agencies have been contacted. Since no real estate agency is situated in St. Christophen, real estate agencies from surrounding municipalities have been contacted for market information. The results of these consultations show clearly, that in this local market energy aspects do not play any role. A building with higher energy efficiency does not generate a higher value (price) due to the expectations of the market. In this case the Market Adjustment Rate (MAR) shows a neutral market perception and leads to an adjustment of zero percent. For this reason it results in an adjustment based on market evidence of zero. Compared to the original calculation in this case no changes were done. IMMOVALUE IEE/07/553/SI Page 158 of 221

159 Weighted Adjustment for Valuation Parameter effecting Characteristics (WAPEC) - Cost Approach Market maturity Opaque (Emerging) Market --> Discount for non energetic building as in the market available Significant adjustment Medium adjustment Low adjustment neutral - high price elastisity low price elasticity observable - high aw areness of users for sustainability and energy efficiency - omnipresence of green building issues in the media tenants partly start to focus on energy efficiency and sustainability aspects in their decision making process - sustainability and energy efficency aspects are recognised by a broad media - market start to note price elasticity - tenants get informed about energy efficency but it does not play a main role - just specific media start to adress green building and energy efficency aspects - market does not reflect price differences due to energy efficiency or sustainability at all - tenants do not pay attention on sustainability and energy efficiency at all - media does not recognise green buildings benefits at all - market postulate green buildings standards/codes - high market sensivity for operating expenses and energy costs it is observable that few buyers start to just buy energyefficiency or sustainable properties - majority of property market is not w illing to pay higher costs for green buildings - Market adjustment rate +/ % +/ % +/ % +/- 0-25% Estimated MAR 0% AAP +/- 0 [ ] --> AAP derived from remaining amount between peer groups and valuation building x VEA +/- 100% [%] --> Valuers estimation adjustment due to probability of occurrence, uncertainty, etc. regarding the AAP = WAF +/- 0 [ ] --> = MAR x AAP x VEA With the support of the consultation and the WAPEC Scoring the calculated adjustment based on market evidence is Zero. Compared to the original calculation the following modified calculation has no significant modification. The original calculation gives a market value of EUR 93,200 and the modified calculation gives a revised value of EUR 93,200. Since this market does not show any evidence of a higher demand for energy efficient buildings. It has been ascertained, that energy does not play a role for decision making in this market segment. Input Parameter Cost Approach Replacement Costs of the building -174,700 Technical depreciation 40.0 % -69,880 Adjustment based on market 18.0 % -31,440 Constructional defect /structural damage 6.0 % -10,480 Causeless premium 8,000 Value of the land 27,800 Cost value 98,700 IMMOVALUE IEE/07/553/SI Page 159 of 221

160 Servitude -5,500 Adjustment based on market evidence Discount: energy efficiency 0 (WAF) 0 Market Value 93, Pitfalls within the process Market transparency Information quality concerning energy-efficiency Information quality concerning LCC The building is in a rural area situated. In general is the market transparency in rural area lower than in urban areas. So it is very difficult to identify comparables properties. In general this is a problem to identify the value of the land. But also a problem to identify properties, to get information about energy efficiency or LCC. The area, where the building is situated can be seen as an undeveloped market in the case of EPC. Information about EPC or energy efficiency is not available. To get a feeling for the influence of the EPC or energy efficiency some real estate agencies were contacted. The survey shows that the EPC or energy efficiency does not play a role in the buying decision. But not only information of real estate agencies was collected, also information from municipalities. There is no information about LCC available. IMMOVALUE IEE/07/553/SI Page 160 of 221

161 Pilot Project 13 Single-family House in Nußdorf am Attersee This valuation report values a single-family house. As a basis a recent property valuation carried out by a court-approved appraiser has been used. The EPC is not available and the appraiser does not point out that no EPC is available. In this case energy efficiency plays a role and the appraiser includes the effect into the calculation. But the appraiser doesn t explicitly describe the energy aspects in the report Key figures of the Property valuation Key figures Starting point Figures Region/Town 4865 Nußdorf am Attersee Year of construction 1953 (1966) Year of last (intensive) renovation 1966 (extension of the building) Main use single-family house Location quality (A to D) B Construction quality (A to D) B Maintanance quality (A to D) C Market data transparency (A to D) B Property data transparency (A to D) D Lettable area n.a. (single-family house) Vacancy in % n.a. (single-family house) Gross external area 334 Gross internal area n.a. Valuation methodology applied cost approach Valuation Company court-approved appraiser Current rent n.a. (single-family house) Date of valuation 18th of March 2009 Measured energy use n.a. Calculated final energy demand n.a. EPC existing (Y/N) N LCC calculation existing (Y/N) N Market value 208,200 Applying the modified approach Figures Methodology for developed market (Y/N N LCC carried out (Y/N) N Revised Value 207,500 IMMOVALUE IEE/07/553/SI Page 161 of 221

162 Results from ordinary valuation The following explanation contains the original description taken from the valuation reports. The report, the calculation input and the calculation will be explained in detail General description and explanation Background/Initial Situation Scope of Work Basis of valuations Legal Status/ Statutory Considerations/ Town Planning Location Site description Property description Construction description Valuation of property was made for a bankruptcy proceeding. The valuation is needed as an initial position for a public sale and the appraiser ascertains the market value of the property. The property was inspected on 18 th of March 2009, which represents as well the date of the valuation. The structural condition was evaluated in the course of the visual inspection. The property has been evaluated by applying the cost approach. Valuation was carried out in accordance to LBG (Liegenschaftsbewertungsgesetz) The valuation is mainly based on the following documents: land register abstract of title cadastral map excerpt designation of area and zoning map literature of valuation practise building authorisation Austrian law Upper Austria regional planning. Property is situated in upper Austria Nußdorf am Attersee and is located near the Attersee. The single-family house is situated in an area densely populated with single-family houses. It is situated outside the centre but it is accessible well by bike or by foot. The location can be described as a nice area for living with a view over the Attersee. The property consists of a small single-family house with a garage. The building has a basement, a ground floor and a top floor. Floor: massive ferro concrete and wood external wall: brick wall windows: wooden window with single glazing IMMOVALUE IEE/07/553/SI Page 162 of 221

163 door (inside): wood door (outside): wood with glass roof: couple roof roof covering: bitumen sheeting heating system: oil heating Quality: (A (high) D (low)) B: massive type of construction Size of property 484 m² Structural condition and repair Main building: The house was built during years and shows a normal construction level according to the age. In the year a huge renovation and reconstructions 1966 was made. Garage: The house was built during the years and shows a normal construction level according to the age. Gross floor area Main building: m² Cellar: m² Ground floor: m² Top floor: m² Garage: m² Building volume Main building: m³ Cellar: m³ Ground floor: m³ Top floor: m³ Garage: m³ Remaining economic lifetime of property Main building: Outbuilding: 57 years 57 years Market commentary Appendix Valuation methodology and commentary Due to the fact that, the property is situated near the Attersee the attractiveness is high. No appendix available. As usual for single-family properties in Austria the cost approach has been chosen to quantify the market value of the property Ordinary valuation calculation input Value of the land Replacement costs of the building 232 /m² Main building: Cellar: 180 /m³ IMMOVALUE IEE/07/553/SI Page 163 of 221

164 Ground floor: Top floor: Outbuilding: 300 /m³ 280 /m³ 200 /m³ Depreciation Lifetime: 100 years Age: 43 years Remaining life: 57 years Linear depreciation: 43.0 % Construction defect -10,000 Adjustment based on market evidence % Statement: Sunk costs due to inferior layout Equipment, material and color choice Outdated heating facilities Thermal insulation not state of the art Inferior Energy efficiency Small headroom and steep staircase to the cellar Torrent passing the plot s boundaries Ordinary Valuation calculations and results Input Parameter Cost Approach Replacement Costs of the building 210,400 Adjustment Deferred maintenance -10,000 Technical depreciation 43.0 % -90,500 Purchase tax 20.0 % 21,980 Value of the building 131,900 Outdoor facility 3,600 Value of the land 106,500 Cost value 242,100 Adjustment based on market evidence 25.0 % of 135,500-33,900 Market Value 208, Results applying the modified methodology In this case the energy certification is not available and so the information of the certification can t be used to describe the building. There is also no information concerning LCC of the IMMOVALUE IEE/07/553/SI Page 164 of 221

165 building. The original report doesn t describe the energy efficiency but puts energy relevant aspects into the calculation Description of key findings Result of ordinary (conventional) valuation 208,200 Result of modified valuation approach 207,500 Value impact (nominal) 700 Value impact (percentage) Discount of 0.3 % Explanatory notes Comparing the modified methodology with the conventional valuation approach it is evident, that the impact of energy efficiency on property values is still low. The topic energy is regarded in the original valuation and also in the modified method Modified aspects for report In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate way and leads to reliable and plausible results. Energy efficiency LCC Heating and cooling Ventilation and air quality Lighting and day lighting Plumbing and hot-water heating Other sustainable features of the property No EPC is available. Concerning energy efficiency the building has a very low quality. Based on this fact the EPC would show a very low category or a rather high HWB. However due to the construction it is necessary to take constructional measures in order to obtain an energy efficiency class high enough to be honoured by the market. The construction of the main building was 1962 and no main modifications were done. So the building shows no LCC gains. Building services include an oil heating as well as a wood based heating system There is no cooling system available. No ventilation system is existing. No special lighting system is existing. Not specified. Not specified. IMMOVALUE IEE/07/553/SI Page 165 of 221

166 Based on these facts it can be assumed that this building has no gains in the sense of a green building. Neither energy efficiency nor LCC aspects have a special impact on this building Modified valuation calculation Comparable properties are very rare. A derivation of energy related market aspects from properties, which were sold in the past, is not possible. To get a feeling for the market structure the real estate agency, which is situated in the municipality Nußdorf am Attersee has been surveyed. Furthermore real estate agencies from surrounding municipalities have been consulted. The results of those consultations show different views. The real estate agencies observe low/medium sensitivity to the topic of energy. It is also observable that a lower price is achievable for non-energy efficient buildings. However it is not possible to obtain a minimum value of energy consumption (HWB net heat demand) demanded by the market. Yet objects must be up to the state of the art and apply to all legal codes. According to the OIB directive (being essential for Austria) the energy demand of a building constructed after have to be lower than 66 kwh/m²*a. In the case of a comprehensive refurbishment the limit is at 87.5 kwh/m²*a. Hence these figures might be considered as a minimum requirement in order to meet the state of the art. The property being valued has not been rated with an EPC and therefore no information on heating energy demand is available. Concluding from the construction it might be reasonable to assume a net heat demand (HWB) being higher than the one stated in the OIB directive No. 6. Therefore a refurbishment seems necessary in order to achieve the required net heat demand (HWB). Costs for these measures are estimated at 15 % of the replacement costs. Utilisation Replacement costs 15 % Gross area Total Main building 620 /m² 93 /m² 302 m² 28,086 Garage 400 /m² 60 /m² 32 m² 1,920 Total = Average adjustment parameter (AAP) ~ 30,000 The calculation shows that total refurbishment costs account for EUR 30,000 in order to achieve the state of the art. However the AAP only covers the technical effect. In order to obtain the market effect two more parameters need to be calculated. First the market adjustment rate needs to be defined. This parameter refers to the magnitude of perception IMMOVALUE IEE/07/553/SI Page 166 of 221

167 within the market. Findings of the surveys with the local real estate agencies and the municipality Nußdorf am Attersee it is possible to quantify the MAR with 50 % by applying the WAPEC-Scoring. (see WAPEC scoring) However this figure may be afflicted due to uncertainty and error of measurement. One way of taking this into account is the valuers estimation adjustment (VEA). It is evident that the derivation of the AAP is a considerably rough estimate. Therefore the VAE is set to 50 %. Valuation object Peer object AAP MAR VEA Lower energy efficiency than peer objects Ca. 60 kwh/m² 30, Adjustment based on market evidence (MAR x APP x VEA) - 7,500 The process of the WAPEC scoring is pictured in the following table. Weighted Adjustment for Valuation Parameter effecting Characteristics (WAPEC) - Cost Approach Market maturity Opaque (Emerging) Market --> Discount for non energetic building as in the market available Significant adjustment Medium adjustment Low adjustment neutral - high price elastisity low price elasticity observable - high aw areness of users for sustainability and energy efficiency - omnipresence of green building issues in the media tenants partly start to focus on energy efficiency and sustainability aspects in their decision making process - sustainability and energy efficency aspects are recognised by a broad media - market start to note price elasticity - tenants get informed about energy efficency but it does not play a main role - just specific media start to adress green building and energy efficency aspects - market does not reflect price differences due to energy efficiency or sustainability at all - tenants do not pay attention on sustainability and energy efficiency at all - media does not recognise green buildings benefits at all - market postulate green buildings standards/codes - high market sensivity for operating expenses and energy costs it is observable that few buyers start to just buy energyefficiency or sustainable properties - majority of property market is not w illing to pay higher costs for green buildings - Market adjustment rate +/ % +/ % +/ % +/- 0-25% Estimated MAR -50% AAP +/- 30,000 [ ] --> AAP derived from remaining amount between reference buildings and valuation building x VEA +/- 50% [%] --> Valuers estimation adjustment due to probability of occurrence, uncertainty, etc. regarding the AAP = WAF +/- -7,500 [ ] --> = MAR x AAP x VEA With the support of the consultation and the WAPEC Scoring the calculated adjustment based on market evidence is at 7,500. As stated in the original valuation the adjustment IMMOVALUE IEE/07/553/SI Page 167 of 221

168 based on market evidence (including e.g. equipment, material and color choice, Torrent passing the plot s boundaries, etc.) is at 20 %. This adjustment also includes energy efficiency matters. The original valuation yields a market value of EUR 208, and the modified valuation yields a revised value of EUR 207, Since the ordinary valuation includes energy efficiency the resulting difference between the two approaches is only or in other words a relative deviation of 0.3 %. This deviance is mainly due to errors in rounding and is quite low and consistent with the usual range in the valuation theory. The result shows the applicability of the adjusted method. This method earns the correct market value. However the advantage of this modified method is given by the transparency and comprehensibility when dealing with the topic of energy efficiency. This makes it easy to understand the calculation for the lay and offers the opportunity to exploit the given potential of energy efficient buildings. The modified method showed, that EUR 7, of the whole adjustment for market evidence is due to energy related aspects. Input Parameter Cost Approach Replacement Costs of the building 210,400 Adjustment Deferred maintenance -10,000 Technical depreciation 43.0 % -90,500 Purchase tax 20.0 % 21,980 Value of the building 131,900 Outdoor facility 3,600 Value of the land 106,500 Cost value 242,100 Adjustment based on market evidence 20 % of 135,500-27,100 Adjustment based on market evidence Discount: energie efficency -7,500 (WAF) -7,500 Market Value 207, Pitfalls within the process Market transparency The building is situated in a rural area. In general the market transparency in rural areas is lower than in urban areas. So it is very difficult to identify comparable properties. In general it is a problem to identify the value of the land. But also a problem to identify properties, to get information about energy efficiency or LCC. However it was possible to IMMOVALUE IEE/07/553/SI Page 168 of 221

169 Information quality concerning energy-efficiency Information quality concerning LCC obtain market information from various sources such as local real estate agencies and the local municipality. The area, where the building is situated may be regarded as an undeveloped market concerning energy certification. Information about EPC or energy efficiency in general is not available. In order to get a feeling about the influence of the EPC or energy efficiency several real estate agencies were contacted. The consultation shows that EPC or energy efficiency has a low/medium impact in the buying decision. So the effect of energy aspects needs to be included into the valuation. There is no information available about LCC. The market shows no reaction to the topic LCC. Most real estate agencies and the municipality don t know what LCC really means. IMMOVALUE IEE/07/553/SI Page 169 of 221

170 4.1.2 Pilot Project 14 Single-family House in St. Andrä i.l. This valuation report features a single-family house. The EPC is available and the key figure HWB is also included into the report, but there is no detailed description of the EPC or energy efficiency in the report itself. Information on the EPC or energy efficiency is not included into the calculation. Furthermore there is no information concerning LCC in the report Key figures of the Property valuation Key figures Starting point Figures Region/Town 9433 St.Andrä i.l. Year of construction 1955 Year of last (intensive) renovation 1999: (new windows) Main use single-family house Location quality (A to D) C Construction quality (A to D) B Maintanance quality (A to D) C Market data transparency (A to D) D Property data transparency (A to D) D Lettable area n.a. (single-family house) Vacancy in % n.a. (single-family house) Gross external area 270 Gross internal area n.a. Valuation methodology applied cost approach Valuation Company court-approved appraiser Current rent n.a. (single-family house) Date of valuation 26th of January 2009 Measured energy use n.a. n.a. Calculated final energy demand (thermal energy demand = 130,19 kwh/m².a) EPC existing (Y/N) Y LCC calculation existing (Y/N) N Market value 83,450 Applying the modified approach Figures Methodology for developed market (Y/N N LCC carried out (Y/N) N Revised Value 81,325 IMMOVALUE IEE/07/553/SI Page 170 of 221

171 Results from ordinary valuation The following explanation contains the original description taken from the valuation report General description and explanation Background/Initial Situation Scope of Work Basis of valuations Legal Status/ Statutory Considerations/ Town Planning Location Site description Property description Construction description Valuation of property was made for a dept proceeding. The valuation is used as an initial position for a public sale and the appraiser ascertains the market value of the property. The property was inspected on 26 th of January 2009, which represents as well the date of the valuation. The structural condition was evaluated in the course of the visual inspection. The property has been evaluated by applying the cost approach. Valuation was carried out in accordance with LBG (Liegenschaftsbewertungsgesetz) As a basis the following documents were used: land register abstract of title cadastral map excerpt designation of area and zoning map literature of valuation practise ÖNORM 1800 ÖNORM 1802 WKO real estate price comparison list Austrian law Carinthia regional planning. Carinthia St. Andrä im Lavanttal The single-family house is situated in a densely populated area with single-family houses. In the north side of the property a highway is located. Behind the highway unspoilt meadows have been used as a protecting strip for the coalfired power station in the past. The property consists of a small single-family house with a small outbuilding. The building consists of a basement, a ground floor and a top floor. Floor: massive ferro concrete external wall (cellar):mass concrete external wall (above ground): 25 cm brick wall with thermal insulation IMMOVALUE IEE/07/553/SI Page 171 of 221

172 windows: plastic windows with double-walled glazing door (inside): wood door (outside):plastic with glass roof: couple roof roof covering: fibrated concrete heating system: heat from a district heating network Quality: (A (high) D (low)) B: massive type of construction Size of property 739 m² Structural condition and repair Main building: The house has been built 54 years ago and has a normal construction level according to its age. About years ago a thermal insulation has been applied. About 10 years ago new windows as well as a connection to the district heating network have been installed. Outbuilding: The house has been built 43 years ago and has a low construction level according to the age. Gross floor area Main building: 235 m² Outbuilding: 35 m² Building volume Main building: 577 m³ Cellar: 171 m³ Ground floor: 227 m³ Top floor: 179 m³ Outbuilding: 138 m³ Ground floor and top floor: 138 m³ Remaining economic lifetime of property Main building: Outbuilding: 26 years 17 years Market commentary Generally difficult market condition for single-family houses in this area. Appendix Energy performance certificate (EPC) / date: / originator: Ing. Ernst M. Gutschi Valuation methodology and commentary As usual for single-family properties in Austria the cost approach has been applied to quantify the market value of the subject property Ordinary valuation calculation input Value of the land 30.0 /m² Less: 10.0 % ( Bebauungsabschlag - the property is IMMOVALUE IEE/07/553/SI Page 172 of 221

173 Replacement costs of the building Depreciation cropped) Plus: 5,000 (closing costs: canal, water, electricity) Main building: Cellar: 200 /m³ Ground floor: 360 /m³ Top floor: 360 /m³ Outbuilding: Ground floor and top floor: 150 /m³ Main building: Lifetime: 80 years Age: 54 years remaining life: 26 years parabolic depreciation: % Outbuilding: Lifetime: 60 years Age: 43 years remaining life: 17 years parabolic depreciation: % Outside facilities For stockade, planting, summer house: blanket 2,500 Adjustment based on market evidence % Statement: Generally difficult market situation, damage by moisture, high groundwater level, cramped space available, old structure Ordinary Valuation calculations and results Input Parameter Cost Approach Replacement costs of the main building 180,360 Adjustment Old floor plan configuration (-10.0 %) -18,036 Technical depreciation % -97,472 Value of the main building 64,852 Replacement costs of the outbuilding 20,700 Adjustment Old floor plan configuration (-10.0 %) -2,070 Technical depreciation % -12,757 Value of outbuilding 5,872 Outdoor facility 2,500 Value of the land 24,953 Cost value 98,177 IMMOVALUE IEE/07/553/SI Page 173 of 221

174 Economic depreciation 15.0 % of 98,177-14,726 Market Value 83, Results applying the modified methodology In this case the energy certification is available and the information of the certification can be used to describe the building. The EPC is mentioned in an own subchapter in the description. The subchapter is situated in the chapter building description. There is no information concerning LCC of the building. In this case the energy efficiency is not integrated into the original calculation. A survey with the local real estate agency showed that since short time a slight perception of the EPC is recognizable in the market Description of key findings Result of ordinary (conventional) valuation 83,450 Result of modified valuation approach 81,325 Value impact (nominal) 2,125 Value impact (percentage) Discount of 2.6 % Explanatory notes Comparing the results of the modified methodology to the conventional valuation it is evident, that the impact of energy efficiency on property values is still low. The EPC is mentioned in the original report but not integrated in the calculation. The modified method integrates the effect of energy efficiency. In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate way and leads to reliable and plausible results Modified aspects for report Energy efficiency EPC shows a thermal energy demand (HWB) of kwh/m²*a this is rated as category D. Thermal improvements can be made with the roof, external walls and windows. A detailed list of the costs is not displayed. Again in this case the original EPC has not been available. For this IMMOVALUE IEE/07/553/SI Page 174 of 221

175 LCC Heating and cooling Ventilation and air quality Lighting and day lighting Plumbing and hot-water heating Other sustainable features of the property reason the final energy demand may not be cited here. The construction of the main building was in 1955 and the thermal insulation is equivalent to the standard of this time. So the aspect of LCC does not play a role. The heating system draws its energy from the districtheating network this is up to today s standard. No ventilation system exists. No special lighting system exists. Not specified. Not specified Modified valuation calculation In this case comparable properties are very rare. Therefore it is not possible to derive energy related aspects from properties sold in the past. In order to assess the market structure real estate agencies were called. Since there are no real estate agencies situated in St. Andrä, real estate agencies from surrounding municipalities were called. The results of the consultation show different views. The EPC itself is rarely a subject of enquiries by customers. In the case of a customer being interested in the EPC it is regarded as sufficient if a property is not rated in the red area. Therefore the heating energy consumption is not regarded as such the customer rather focuses on the colours. According to the real estate agencies experience category C (light green) is being wholly accepted in the market. The subject property being valued has an energy demand (HWB) of kwh/m²*a. This is rated as category D yellow. Therefore the property is rated only one category above the market preference. In order to obtain a building rated as a C category it is necessary to improve the HWB by kwh/m²*a minimum. Taking the mentioned aspects into account it is assumed that costs for improvement amount to 10 % oft the replacement costs at least. This yields to the following calculation: Utilisation Replacement costs 10 % Gross area Total Main building 650 /m² 65 /m² 235 m² 15,275 Outbuilding 600 /m² 60 /m² 35 m² 2,100 IMMOVALUE IEE/07/553/SI Page 175 of 221

176 Total = Average adjustment parameter (AAP) ~ 17,000 The real estate agencies observe a low perception for the energy topic from the market. It is also observable that a lower price is achievable for non-energy efficient buildings. The calculation assumes costs of approx 17,000 in order to obtain the market-backed minimum requirement of category C. This AAP, however, only relates to the technical effect. In order to obtain the market effect two further parameters need to be accounted. The first is represented by the Market Adjustment Rate (MAR). This parameter refers to the perception of the EPC in the market. According to the surveyed real estate agencies a WAPEC of approx. 25 % may be obtained. (see WAPEC scoring) Yet the uncertainty in this calculation is corrected by the Valuers Estimation Adjustment (VEA). Again, in order to account for the roughness of this estimation the VAE is set to 50 %. Valuation object Peer object AAP MAR VEA Lower energy efficiency than peer objects >. 100 kwh/m² 17, Adjustment based on market evidence (MAR x APP x VEA) - 2,125 The following table summarizes the WAPEC scoring once again. IMMOVALUE IEE/07/553/SI Page 176 of 221

177 Weighted Adjustment for Valuation Parameter effecting Characteristics (WAPEC) - Cost Approach Market maturity Opaque (Emerging) Market --> Discount for non energetic building as in the market available Significant adjustment Medium adjustment Low adjustment neutral - high price elastisity low price elasticity observable - m arket start to note price elasticity - high awareness of users for sustainability and energy efficiency tenants partly start to focus on energy efficiency and sustainability aspects in their decision m aking process - tenants get inform ed about energy efficency but it does not play a m ain role - m arket does not reflect price differences due to energy efficiency or sustainability at all - tenants do not pay attention on sustainability and energy efficiency at all - om nipresence of green building issues in the m edia - sustainability and energy efficency aspects are recognised by a broad m edia - just specific m edia start to adress green building and energy efficency aspects - m edia does not recognise green buildings benefits at all - m arket postulate green buildings standards/codes - high m arket sensivity for operating expenses and energy costs - it is observable that few buyers start to just buy energy-efficiency or sustainable properties - m ajority of property m arket is not willing to pay higher costs for green buildings Market adjustment rate +/ % +/ % +/ % +/- 0-25% Estimated MAR -25% AAP +/- VEA + /- WAF +/ [ ] --> AAP derived from remaining amount between peer groups and valuation building x 50% [% ] --> Valuers estimation adjustm ent due to probability of occurrence, uncertainty, etc. regarding the AAP = [ ] --> = MAR x AAP x VEA With the aid of the consultation and the WAPEC Scoring the calculated adjustment based on market evidence is 2,125. The original calculation earns a market value of 83,450 and the modified calculation yields a revised value of 81,325. The difference is only 2,125 which is a relative deviation of 2.6 %. The original valuation report did not consider energy efficiency. However, the low value of the building and the low perception for energy related topics on the market result in a negligible difference between the revised value and the initial value. Input Parameter Cost Approach Replacement costs of the main building 180,360 Adjustment Old floor plan configuration (-10.0 %) -18,036 Technical depreciation % -97,472 Value of the main building 64,851 Replacement costs of the outbuilding 20,700 Adjustment Old floor plan configuration (-10.0 %) -2,070 Technical depreciation % -12,757 Value of outbuilding 5,872 Outdoor facility 2,500 IMMOVALUE IEE/07/553/SI Page 177 of 221

178 Value of the land 24,953 Cost value 98,177 Economic depreciation 15.0 % of 98,177-14,726 Adjustment based on market evidence Discount: energy efficiency -2,125 (WAF) -2,125 Market Value 81, Pitfalls within the process Market transparency Information quality concerning energy-efficiency Information quality concerning LCC The building is situated in a rural area. In general the market transparency in rural areas is lower than in urban areas. So it is very difficult to identify comparable properties. In general it is a problem to identify the value of the land. But also a problem to identify properties for getting information about energy efficiency or LCC exists. In order to assess the local market situation it is inalienable to survey local real estate agencies. It is also necessary to stress at this point that this survey must be taken with several different agencies since considering only one may lead to a biased perception. The area, where the building is situated can be regarded as an undeveloped market in the case of energy certification. The EPC is available and may be used for valuation of energy efficiency. The survey of real estate agencies showed that market participants are not focused on the key figure HWB but rather focus on the colored image. However the main importance is given to the fact that the object is within the green part of the figure. Hence very energy efficient buildings are not demanded by the market. There is no information about LCC available. IMMOVALUE IEE/07/553/SI Page 178 of 221

179 4.1.3 Pilot Project 15 Condominium in Braunau This case study features an object with an EPC. Comparables have not been found. Nonetheless with the aid of the EPC as well as by surveying local real estate agents the effect of energy efficient objects may be quantified Key figures of the Property valuation Key figures Starting point Figures Region/Town 5280 Braunau Year of construction 1989 Year of last (intensive) renovation 1996 (windows) Main use flat Location quality (A to D) B Construction quality (A to D) C Maintanance quality (A to D) B Market data transparency (A to D) D Property data transparency (A to D) D Lettable area Vacancy in % 0 Gross external area n.a. Gross internal area n.a. Valuation methodology applied cost approach Valuation Company court-approved appraiser Current rent n.a. Date of valuation 5th of October 2009 Measured energy use n.a. n.a. Calculated final energy demand (thermal energy demand = 58 kwh/m².a) EPC existing (Y/N) Y LCC calculation existing (Y/N) N Market value 120,400 Applying the modified approach Figures Methodology for developed market (Y/N N LCC carried out (Y/N) N Revised Value 119,300 IMMOVALUE IEE/07/553/SI Page 179 of 221

180 Results from ordinary valuation The following explanation contains the original description of the valuation report. The description is structured in three main parts. In the first part the report is explained and in the second part the calculation inputs are analyzed in detail. The last part shows the original calculation of the appraiser General description and explanation Background/Initial Situation Valuation of property was made for a bankruptcy proceeding. The valuation is needed as an initial position for a public sale and the appraiser ascertains the market value of the property. Scope of Work The property was inspected on 5 th of October The structural condition was evaluated in the course of the visual inspection. The property has been evaluated by applying the cost approach. Basis of valuations Legal Status/ Statutory Considerations/ Town Planning Location Site description Valuation was carried out in accordance to national property valuation law ( Liegenschaftsbewertungsgesetz (LBG) BGBl. Nr. 150/1992) and standards (ÖNORM B1802-1) The following documents have been the main fundament for the valuation: land register abstract of title cadastral map excerpt designation of area and zoning map literature of valuation practice information of the property management information on maintenance costs (incl. fit-outs) energy performance certificate (in line with the EU Directive 2002/91/EG) Austrian law Upper Austria regional planning It is assumed that the property has been constructed due to building codes and standards for construction valid at the time of construction The property is situated in a very favourable area in Braunau. Approximately in three kilometres distance to the city centre. A church, a grocery store and a nice inn are situated in the centre of the village. A bigger shopping centre is available in 1 km distance. The plot of the object is declared as housing zone. IMMOVALUE IEE/07/553/SI Page 180 of 221

181 Property description (construction) The construction of the property was finished in The subject property has four floors and a basement. The object features 36 apartments and parking lots in a basement garage. Access is possible from three entrances. The object is massively constructed and plastered. Wooden windows and doors to the loggia have double-glazing windows. The object seems to be cultivated very well and is equipped with an elevator. Structural condition and repair Market condition (rental, investment) Valuation methodology and commentary The property is in a good condition with respect to its age. Further no backlogs of maintenance and repair, as well as structural damages have been observed and therefore no major repairs, improvements or renovations are required. Adequate function of electric, sanitary and other equipment and appliances, as well as the supply and disposal utilities are assumed. The real estate market in Braunau has a quite low price level. This is due to the agile dwelling-construction within the last years. This disadvantageously influences prices of objects for sale. Within the market price discounts of % are observable. The income approach is mainly applied for profit-oriented objects. (e.g. dwellings or office buildings) Though the real estate market shows the tendency that smaller apartments are bought for subsequent renting this is hardly observable for bigger apartments such as the subject property. Objects like this are mainly bought for use by the owner. For this reason the cost approach is applied Key Valuation parameter Replacement costs of the building Depreciation - economic lifetime of property Adjustment based on market evidence Regarding size and type of construction as well as equipment the price per square meter residential space is estimated at 1,700 /m². The price of the loggia is estimated at 400 /m². With a total lifetime of 80 years and the given condition depreciation due to age is set to 19 %. General advantages premium: Cultivated condition of the property Bright and friendly rooms. (Since the object is freestanding and there are plenty of windows) IMMOVALUE IEE/07/553/SI Page 181 of 221

182 Sufficient parking lots and separate basement garage. Calm and favourable area. Elevator Close to city bus stop Very well known property management General disadvantages discount: Infrastructure such as shopping centres, schools and medical doctors are quite far away. Low price level in Braunau in general Advantage of the flat premium: Cultivated condition Loggia Bathroom und lavatory seperated Possibility of governmental subsidies Disadvantage of the flat discount: The flat is oriented via north-east while south-western orientations are favoured. Land value The achievable land value has been estimated by various sources. Nearby developable plots, local experts, market reports and own investigations have been used for calculation. The achievable land value in the market for similar plots has been ascertained with /m² Ordinary Valuation calculations and results Input Parameter Cost Approach Replacement Costs of the building 155,700 Adjustment: Depreciation - 19 % -29,600 Adjustment: underground car park 9,200 Value of the building 135,300 Value of the land 25,200 Cost value 160,500 Adjustment based on market evidence Premium: general Premium: flat 5 % 5 % 16,100 Adjustment based on market evidence -56,200 IMMOVALUE IEE/07/553/SI Page 182 of 221

183 Discount: general Discount: flat - 27,5 % - 7,5 % Market Value 120, Results applying the modified methodology In this case the EPC is available and this information is applied in the modified methodology. Furthermore this study features the cost approach. This is due to the presumption that the property is used by the owner and hence the costs are in the focus. It is assumed that low-energy buildings (LEH) are regarded as standard in the real estate market. Therefore the object is valuated in comparison to a LEH property. Since this object has a higher heat demand than a LEH this leads to a discount. Finally the revised value is lower than the original value marginally Description of key findings Result of ordinary (conventional) valuation 120,400 Result of modified valuation approach 119,300 Value impact (nominal) 1,100 Value impact (percentage) Discount of 0.9 % Explanatory notes Comparing the modified methodology with the conventional valuation approach it is evident, that the impact of energy efficiency on property values is still low. The topic energy is regarded in the original valuation and also in the modified method In addition it can be assumed, that the applied methodology seems to reflect the current market situation and condition regarding buildings energy efficiency in an appropriate way and leads to reliable and plausible results Descriptive integration of aspects affecting buildings energy efficiency Building Equipment and Appliances Heating and cooling The heating is provided by the local district heating supply IMMOVALUE IEE/07/553/SI Page 183 of 221

184 Ventilation, air conditioning and indoor air quality Lighting and day lighting Use of renewable energy resources Plumbing and hot-water heating Other equipment and installed floor-heating system. The property is not equipped with a controlled ventilation and air conditioning system. The indoor air quality is regulated manually by opening the windows. The heating system fulfils common standards and energy efficiency requirements. The building structure with its high windows and no surrounding buildings offers an optimal natural lighting. Hence rooms seem bright and friendly. none Warm water is provided with electricity operated local hot water tanks. No further equipment and appliances are installed, which would be necessary for estimation of buildings energy efficiency Energy efficiency and other sustainable features of the property Energy efficiency Energy source Green lease agreements LCC Property configuration According to the available EPC the subject property achieves an overall annual thermal energy demand of approx kwh/m².a (energy efficiency class C ) The building is equipped with double glazed insulated windows but no thermal insulation on the building s surface or the roof. As in the other cases the original EPC is not available. Hence only the thermal energy demand may be displayed here. The use of local district heating system for energy supply ensures long-term security of energy supplies. Further more this energy source supports low CO 2 emission of the subject property itself. Warm water is conditioned in each flat separately. There are no green lease agreements with tenants/occupiers in force. No Life-Cycle-Costing analysis or investigations are available or have been carried out. The thermal insulation of the building envelope can be evaluated as average in comparison to similar residential properties due to lack of thermal insulation but presence of double-glazing windows. IMMOVALUE IEE/07/553/SI Page 184 of 221

185 Observable property market sensitivity and maturity for energy-efficient or sustainable properties Real estate market sensitivity Market information available Public awareness General circumstances and Beside the already given information about the current property market situation and condition following additional observations concerning the real estate markets awareness, sensitivity and maturity regarding energy efficiency and sustainability are necessary. In general the Austrian property market so far started to recognise the importance of property s energy efficiency and sustainability. This was as well supported by the suffering economic situation and property market condition throughout the last year, which had lead the Austrian real estate market to pay more attention on efficiency in general and need for energy-efficient and sustainable developments. Although the awareness of property owners, tenants, occupiers, etc. for energy efficiency and sustainability is rising, such aspects are in most cases still not recognized within decision making process so far (e.g. in the course of leasing a property or part of it, etc.). This seems to be one of the main reasons why the market currently does not show price elasticity for energy-efficient buildings in comparison to non-energy-efficient ones. In addition as well no proven evidence for higher willingness to pay for energy-efficient properties can be observed in the market so far. But due to the fact that investigations on international level already show some examples, in which global acting, international companies already started to focus and rent just energy-efficient or sustainable properties, proven evidence just seems to be a matter of time and is expected in the short run. Even though a mandatory disclosure of property owners for EPC exists potential tenants just get informed about the energy efficiency if they explicitly ask for it. In most cases lettings are offered with no EPC or other information about buildings energy efficiency. The public media in general already start to recognise the importance of sustainability and energy efficiency and start to inform about activities on a broader scale, etc. in the field of sustainability. This already has lead to increase of sensitivity and awareness for sustainability and energy efficiency of the society. Governmental institutions and policy makers already IMMOVALUE IEE/07/553/SI Page 185 of 221

186 mandatory regulations realised the importance of and promote energy-efficient and sustainable developments. Therefore mandatory regulations and directives on national as well European level have been established e.g. EPBD (2002/91/EG), EN (sustainability assessment of buildings), etc. to measure and strengthen the transparency of data and information about buildings energy efficiency. On national level building standards and guidance (e.g. ÖIB-Guidance 6) already encompass energy efficiency requirements for new developments. Further it is observable that low-energy building (LEH) requirements (energy demand below 25 kwh/m².a) are on the way to become the general building standard. It is observable that low-energy buildings (LEH) are regarded as standard in this real estate market as well. Therefore valuation is based on this assumption. i.e. Valuation includes the reception of the market of energy efficient dwellings Valuation calculation results of modified method Input Parameter Cost Approach Replacement Costs of the building 155,700 Adjustment: Depreciation - 19 % -29,600 Adjustment: underground car park 9,200 Value of the building 135,300 Value of the land 25,200 Cost value 160,500 Adjustment based on market evidence 16,100 Premium: general Premium: flat 5 % 5 % Adjustment based on market evidence -56,200 Discount: general Discount: flat -27,5 % -7,5 % Adjustment based on market evidence Discount: energie efficency -1,121 (WAF) -1,121 Revised Value 119,279 ~119,300 The modified valuation differs only slightly from the original valuation. Nevertheless the modified method yields a marginally smaller revised value. This divergence is explained by IMMOVALUE IEE/07/553/SI Page 186 of 221

187 two main factors originating from this specific real estate sub-market. First due to active construction activities in this region supply exceeds demand. This leads to a weaker demand for worse buildings. A better EPC or energy efficiency therefore enables the seller to delineate the object to others. This advantage directly leads to a higher attractivity within the market. Therefore objects with a better EPC consequently benefit from this with a higher market premium objects with a lower EPC in turn are discounted for the same reason. It is straightforward to assume that low-energy buildings evolve to a new standard on the real estate market as a whole. Per definition LEHs have a net heat demand below 25 kwh/m²*a. The subject property has a net heat demand of 85 kwh/m²*a. In order to meet the requirements of a LEH as rule of thumb refurbishment costs of 300,000 must be expected. This would account for a share of 598/20,000 parts for the flat in discussion. Computing this in Euro, the flat s share amounts to a total of 8,970. This also represents the average adjustment parameter (AAP). In order to meet the requirements of a LEH this AAP needs to be paid by the owner. A survey with market participants and real estate agencies shows, that energy efficiency influences decision making weakly. By applying the WAPEC (see WAPEC scoring) the market adjustment rate (MAR) may be obtained. This enables a rough quantification of market perception regarding the topic of energy efficiency. In this case the real estate market of Braunau am Inn may best be estimated at a MAR around 25 %. However this figure may be afflicted by uncertainty and error of measurement. One way of taking this into account is the valuers estimation adjustment (VEA). It is evident that the derivation of the AAP is a considerably rough estimate. Therefore the VAE is set to 50 %. Valuation object Peer object AAP MAR VEA Lower energy efficiency than peer objects Ca. 25 kwh/m² 8, Adjustment based on market evidence (MAR x APP x VEA) - 1,121 The process of the WAPEC scoring is pictured in the following table. IMMOVALUE IEE/07/553/SI Page 187 of 221

188 Weighted Adjustment for Valuation Parameter effecting Characteristics (WAPEC) - Cost Approach Market maturity Opaque (Emerging) Market --> Discount for non energetic building as in the market available Significant adjustment Medium adjustment Low adjustment neutral - high price elastisity low price elasticity observable - m arket start to note price elasticity - high awareness of users for sustainability and energy efficiency tenants partly start to focus on energy efficiency and sustainability aspects in their decision m aking process - tenants get inform ed about energy efficency but it does not play a m ain role - m arket does not reflect price differences due to energy efficiency or sustainability at all - tenants do not pay attention on sustainability and energy efficiency at all - om nipresence of green building issues in the m edia - sustainability and energy efficency aspects are recognised by a broad m edia - just specific m edia start to adress green building and energy efficency aspects - m edia does not recognise green buildings benefits at all - m arket postulate green buildings standards/codes - high m arket sensivity for operating expenses and energy costs - it is observable that few buyers start to just buy energy-efficiency or sustainable properties - m ajority of property m arket is not willing to pay higher costs for green buildings Market adjustment rate + / % +/ % +/ % + /- 0-25% Estimated MAR -25% AAP +/- VEA +/- WAF +/ [ ] --> AAP derived from remaining am ount between peer groups and valuation building x 50% [% ] --> Valuers estimation adjustm ent due to probability of occurrence, uncertainty, etc. regarding the AAP = [ ] --> = MAR x AAP x VEA With the aid of market participants, real estate agencies and especially the WAPEC-scoring model the calculated adjustment based on market evidence is at 1,121. The original calculation yields market value of 120,400 and the modified calculation yields a revised value of 119,300. The difference is only ~1,100 or in other words a relative deviation of 0.9 %. It seems appropriate to note once again that an explicit adjustment for energy efficiency is only made in the modified calculation. However, this specific real estate market shows a subordinate perception of energy efficiency related matters. Consequently including this fact only slightly changes the actual value. The change in value accounts for less than one percent and is consistent with the usual band in the valuation theory. It is straightforward to expect a rising sensitivity for energy related issues in future. In this case the modified method enables a transparent and comprehensive inclusion of these aspects in the valuation report. IMMOVALUE IEE/07/553/SI Page 188 of 221

189 Pitfalls within the process Market transparency Market transparency Information quality concerning energy-efficiency Market data has been collected from various sources such as real estate agencies, direct contact with owners, etc. Drawing conclusions from actual transactions is not possible without limitations. It is even hard to obtain comparable objects for deriving prices of undeveloped plots. The survey with real estate agencies showed that the market reacts only slowly on the issue of energy efficiency. The EPC is hardly demanded by customers. Therefore finding comparable objects having an EPC is not an easy task. In this special case the valuated object does have an EPC. The challenge surely lies in the actual estimation of the AAP. This demands identifying reference buildings. These buildings represent the de facto standard in the respective market. This is followed by a calculation of refurbishment costs for matching object properties with the standard in the market. This needs experience of experts as well as standardized tables for costs. Information quality concerning LCC No information on LCC is available yet. The lack of relevance is evident since real estate agencies do not have a solid understanding of this topic and do not see the need for this. IMMOVALUE IEE/07/553/SI Page 189 of 221

190 5 Surveys on the application of EPC in valuation practice in Austria 5.1 Survey on application of EPC in the Income Approach The analysis is based on 182 valuation reports. All reports feature valuations of properties situated all across Austria. They were obtained from the publicly accessible homepage This platform publishes reports for properties subjected to auctions by judicial order. In order to be published the object must be valued by a court-approved appraiser. These experts are qualified for valuing real estate for courts. In order to apply for this occupation the appraisers have to meet certain requirements as well as have to absolve an assessment in front of a commission. Due to these considerably high requirements correctness of the analysed valuation reports is assumed. The valuation reports cited, feature valuations of the following types of real estate: - Common hold ownership properties - Condominiums - Tenements - Commercial properties The following table features a detailed description of the obtained valuation reports. Number of reports Common hold ownership properties Condominiums Tenements Commercial properties income other income other income other income other Burgenland Carinthia Lower Austria Upper Austria Salzburg Styria Tyrol Vorarlberg Vienna Total Table 8: Description of the analyzed the valuation reports. IMMOVALUE IEE/07/553/SI Page 190 of 221

191 Since the study focuses on the income approach the following remarks as well as explanations are constrained to the income approach. Table 8 shows the type of objects as well as the region in which the object is situated. It can be easily seen a slight shift towards the eastern states in Austria. Partly it is in line with the economic structure of Austria as well as the population density. However other patterns may not be that easy be explained. Remarkable is the missing of commercial properties in Salzburg and the small amount in Vienna. A reason might be the small period of time in which these reports were conducted. 80 unique experts compiled the 125 valuation reports using the income approach to derive the market value. This results in an average of 1.5 reports per valuer. The conducted analysis features in two directions: an evaluation of the describing part and the valuation part of the reports. The latter has been evaluated with an emphasis on the EPC and energy efficiency. As already mentioned, regarding the geographical distribution of the reports a certain unbalance in favour of the eastern states in Austria can be stated. A more detailed view on the distribution of the obtained reports as well as the experts is available in Figure 6. number of appraisers / reportsl Bgld. Kä NÖ OÖ Sbg. Stmk. Ti. VBG W reports appraiser Figure 6: Geographical distribution of the valuation reports in Austria. In this particular case a representative sample regarding appraisers but also regarding the regional distribution is important. The former offers a broader view on valuation practice of the several experts. This is important for obtaining different views on the topic of interest. In this case 80 experts have conducted a valuation report. It offers a quite stable sample and IMMOVALUE IEE/07/553/SI Page 191 of 221

192 gives the opportunity of analyzing the whole sample. The regional diversification is important for determining if different regions lay different emphasis on the analyzed issue. However this will be explained in detail subsequently. At this point it may be sufficient to point out that the distribution reflects the economic strength of regions and gives a good overview. However statements may be limited for several states, e.g.burgenland because of the very small sample of available valuation reports. 79 valuation reports, i.e % did not even mention the EPC at all. The missing EPC neither has been mentioned in the report (the describing part) nor in the calculation. Technical characteristics of the objects have been mentioned, e.g. the type of heating, the construction of the façade etc. Nevertheless these characteristics have not been described in a more detailed way in the valuation reports. The missing of the EPC has been mentioned in 45 cases (36.0 %). But in the most cases it was not considered any further. In addition some valuation reports mentioned that the valuer presumes that the grade of the buildings energy efficiency is appropriate to the age of the property. 17 reports (13.6 %) dedicated a separate chapter to the EPC. In nearly all cases the chapter was constrained to the statement that the EPC is not available to the valuer. Further specifications regarding the EPC have not been made. Independently to the EPC no attempt of specifying energy efficient construction types has been undertaken. At least it have to be pointed out that in three valuation reports (2.4 %) energy efficiency has been analyzed without having an EPC. One of these cases is illustrated in detail in case 1. Only two valuation reports, i.e. 1.6 % considered energy relevant aspects within the calculation despite the fact that no EPC has been available to them expert in both cases. Obviously all considerations are based on the expert s experience. The subsequent Table 9 features a summary of the findings for all Austrian states separately. IMMOVALUE IEE/07/553/SI Page 192 of 221

193 survey - valuation reports EPC mentioned (not available) energy aspect independent EPC aspects mention in calculation EPC not EPC own EPC available mentioned chapter income other income other income other income other income other income other Burgenland Carinthia Lower Austria Upper Austria Salzburg Styria Tyrol Vorarlberg Vienna Total Table 9: Results of the analysis It may be appropriate to analyse the geographical distribution right now. But evidently the table demonstrates although having the most number of reports not even a single report for lower Austria mentions the EPC within an own chapter. In contrast approximately one fifth of all reports has an own chapter on the EPC when looking at Vienna. This share is even bigger for Styria. It might be a challenge to figure out the origin of these differences. However it not can be founded in economics or population. Origins might actually be given by market structures and the awareness of the property market for energy-efficiency. Interestingly Styria has one of the lowest real estate prices in Austria and Vienna has one of the highest rates. The study reveals that energy-efficiency related aspects play a minor role on the Austrian real estate market by now. In general it might be concluded that experts do not seem to have a common sensitization regarding energy-efficiency and the connection to the market value of properties. The EPC seems to influence consumers choice only marginally. This in turn is reflected in the market values as well. Regarding its regional influence no clear reflection may be drawn. This statement is done largely due to the limited availability of data. What might be concluded from the given Table 9 is that sensitivity for the EPC depends on regions and/or market structures. With great caution it might be seen a more frequent inclusion of the EPC in the valuation process in rather developed regions with increased competition (e.g. Vienna) IMMOVALUE IEE/07/553/SI Page 193 of 221

194 Regarding life cycle costs (LCC) no specific evidence is available. LCC has neither been mentioned in any report explicitly nor have specific components of the objects been described in detail (which would be necessary for calculating LCC). This directly leads to the assumption that LCC aspects do not influence real estate values so far. 5.2 Survey on application of EPC in the Cost Approach The analysis is based on 142 valuation reports. All reports feature valuations of single-family homes situated all across Austria and were obtained from the publicly accessible homepage This platform publishes reports for properties subject to auctions by judicial order. In order to be published the property must be valued by a court-approved appraiser. These experts are qualified for valuing real estate objects for courts. In order to apply for this occupation the appraisers have to meet certain requirements as well as have to absolve an assessment in front of a commission. Due to these considerably high requirements correctness of the used valuation reports is assumed. 70 unique experts have compiled the 142 valuation reports. This results in an average of two reports per valuer. The conducted analysis features in two directions: an evaluation of the describing part and the valuation part of the valuation reports. The latter have been evaluated with an emphasis on the EPC and energy efficiency. Regarding the geographical distribution of the reports a certain unbalance in favour of the eastern states in Austria can be stated. A more detailed view on the distribution of the obtained reports as well as the experts is available in Figure 7. IMMOVALUE IEE/07/553/SI Page 194 of 221

195 60 rts o p re / r ise ra p a f o r e b m u n Vbg. Ti. Sbg. OÖ Stmk. Kä. Bgld. NÖ W appraiser reports Figure 7: Geographical distribution of the valuation reports in Austria. In 101 out of 142 reports, i.e %, neither energy efficiency nor the EPC has been mentioned at all. In the most cases the building description included the (water) heating system but a detailed description has not been conducted. However these aspects have been disregarded for the building appraisal itself. For 39 valuation reports (27.5 %) the appraiser mentioned explicitly that no EPC was available to the expert. The following list features some comments of the appraisers: No Energy Performance Certificate is available No Energy Performance Certificate is available and none has been created since the mandate only includes the valuation of the object. An Energy Performance Certificate in terms of the directive 2002/91/EG issued by the European Parliament is not available to the expert. Hence the energy-related quality of the building is assumed to comply with the age and type of the object. Regarding the possible sale of the object it is explicitly pointed out that no Energy Performance Certificate is available though it must be attached when selling the object after The expert did not receive an Energy Performance Certificate from the client. Hence the valuation is based on the assumption that energy efficiency complies with the age and type of object according to 5 of the Austrian energy certification law (EAVG). Furthermore the expert emphasizes that costs for obtaining an Energy Performance Certificate are not included in the valuation. The majority of all experts explicitly stated that it is assumed that energy efficiency complies with the type and age of the object. This is assured by the Austrian law indicating that this IMMOVALUE IEE/07/553/SI Page 195 of 221

196 assumption is necessary when the EPC is missing. Furthermore energy efficiency is not specified in detail. This fact is not considered or mentioned in the valuation process. Yet the EPC as well as energy efficiency is displayed differently in the reports. The two main ways of display are very individual. At the one hand the use of an own chapter on the EPC was rather rare. This would indicate a rather high status within the valuation process. On the other hand in most cases the EPC is only mentioned briefly and not regarded any further. Only in two cases it was stated that an EPC was available to the appraiser. Both reports mentioned the name of the assessor for the EPC and the annual energy consumption (abbreviated HWB ref net heat demand). But a more detailed specification of the net heat demand has not been carried out. In addition only in one case the valuation report does include the EPC as an attachment. However both valuation reports do not account for any effect of the EPC neither in the valuation part nor in the description part. Hence the existence and the inclusion in the valuation report did not lead to any effect on the value of the property. Totally energy efficiency was considered in five cases. Yet none of the experts obtained an EPC for valuation. The incorporation of energy efficiency therefore did not rely on the figures presented in the EPC. Energy efficiency of the properties has been approximated by the appraisers based on certain characteristics such as age condition and construction as well as the experience of the valuer. Subsequently Table 10 features a full set of explanations on decisions taken by the appraisers in order to account for energy efficiency in the valuation reports. Table 10: Summary of valuers comments on applied discounts.. Type Extent Statement Report A Replacement costs The description featured a discussion of the energy efficiency, which was considered in the valuation as well. Based on the young age of the building a modular home in a noggin piece construction (constructed according to current state of the art with a thermal insulation) the appraiser assumes good energy efficiency (in this case Energy Efficiency Class B C ). This was incorporated in the construction costs. IMMOVALUE IEE/07/553/SI Page 196 of 221

197 The description did not feature a discussion of energy efficiency however in course of the valuation a market discount has been regarded. Statement: Report B Market discount 10 % With the common developments in the energy sector showing a continuous increase of the already very high price level, operating costs (especially heating) are gaining importance. This is also expressed in jurisdiction by the introduction of the EPC. Under the current conditions of the object a good energy related valuation may not be expected due to the used materials and construction type The description did not feature a discussion of energy efficiency however in course of the valuation a market discount has been regarded. Statement: Report C Market discount 25 % The construction is rather run down and has structural damages e.g. fissuring (partly due to settling). With the common developments in the energy sector showing a continuous increase of the already very high price level, operating costs (especially heating) is gaining importance. This is also expressed in jurisdiction by the introduction of the EPC. Under the current conditions of the building a good energy related valuation may not be expected due to the used materials and construction type The description did not feature a discussion of energy efficiency however in course of the valuation a market discount has been regarded. The discount is composed as follows: Sunk costs due to inferior layout Equipment, material and color choice Outdated heating facilities Thermal insulation not state of the art Inferior Energy efficiency Small headroom and steep staircase to the cellar Torrent passing the plot s boundaries Report D Market discount % Report E Market discount % The description did not feature a discussion of energy efficiency however in course of the valuation a market discount has been regarded. The discount is composed as follows: Sunk costs due to inferior layout Equipment, material and color choice Inferior Energy efficiency Table 10 clearly shows, that in three cases a discount of more than 20 % has been applied. However this is not only due to inferior energy efficiency but also due to other characteristics of a building. Hence an identification of the energy related effect alone is not possible. This, in addition, does not allow for drawing general conclusions regarding the quantification of energy aspects. Furthermore it is evident, that in any case a market related premium has been applied due to an energy efficient construction type. IMMOVALUE IEE/07/553/SI Page 197 of 221

198 The subsequent Table 11 features a summary of the findings for all Austrian states separately in a compact manner. EPC available EPC not mentioned valuation reports - single family houses EPC mentioned (not available) EPC own chapter energy aspect independent EPC Energy aspects mention in calculation NÖ W Bgld OÖ Kä Sbg Ti Vbg Stmk Gesamt Table 11: Results of the analysis The analysis focused on single-family homes and therefore these findings are only partly applicable to market of dwellings as a whole. It is important to keep in mind that the EPC needs to be presented only at the point of sale or lease. These reports have the purpose of appraising the value of a property in order to obtain a guiding price for the following auction. This difficulty is symptomatic for all processes of appraisal as well as sales due to the fact that the appraisal of the property precedes the following sale. Furthermore the Austrian law on this matter came into effect by for nearly all types of buildings. In a short period of time it was not possible to gain profile for the EPC in the general public. Those reports featuring energy efficiency as a topic in valuation incorporated this fact as a market discount due to the lack of energy efficiency. Furthermore no report showed a premium for superior energy efficiency. IMMOVALUE IEE/07/553/SI Page 198 of 221

199 6 Results of Web-based Survey on current valuation practice 6.1 Approach of the Survey Purpose The development of the survey within the status report of the project has been aimed to get an overview respectively impression of the current practice of integrating energy-efficiency respectively LCC-aspects into current property valuation. Furthermore the results of the survey shall be giving a feeling of the valuation experts estimation about the future development while dealing with building certification and LCC characteristics. So after all: the upcoming trend and expected future development did not reflect respectively replace a scientific developed questionnaire Dissemination To ensure a valuable amount of participants at the survey a lot of different contacts and dissemination channels were used. In Austria the members of RICS Austria and the ÖVI was contacted via an distribution list. In Germany the Newsletters of RICS Germany, gif e.v., BIIS e.v. and the website of the Bundesanzeiger was used to gain survey participants. The Romanian appraisers where personally addressed due to the participation at two Conferences of the Romanian Valuation Society ANEVAR in October and December To achieve also Pan-European valuers the Newsletter of RICS Europe, the distribution list of FIABCI and personal contacts were used. Furthermore the project was introduced at the autumn general Assembly Meeting of TEGoVA that took place at 13 and 14 of November The participation at the survey was able while using a web-based questionnaire as well as a download for a printed version. The survey was available in English and German. For the Romanian participants the questionnaire was distributed personally in printed Romanian versions. All in all the amount of estimated number of 1,000, which should be addressed to join the survey could be achieved. At the end 153 respondents were taking part. The detailed composition of the respondents will be described in the following section. IMMOVALUE IEE/07/553/SI Page 199 of 221

200 6.1.3 Composition of the universe As already stated 153 respondents were taken part at the survey. 35 % of them were from Germany, 33 % from Romania and 25 % from Austria. The remaining participants from United Kingdom, Norway, Sweden, Belgium, Czech Republic and the United Arabian Emirates together with the two missing statements to the origin gain the remaining 7 % of the respondents (see Figure 8). Figure 8: Distribution of the survey participants across Europe of the 153 respondents, i.e. around 71%, stated that they are self-employed or employed valuers. The remaining 29 % are allocated to the core businesses banking and investment, facility management and real estate agencies. Figure 9 illustrates the profession of the survey respondents. 1 Copyright 2006 Educational Testing Service. IMMOVALUE IEE/07/553/SI Page 200 of 221

201 7,19% 5,88% 16,34% 40,52% Self-employed Surveyor Employed Surveyor Investment & Banking Facility Management Real Estate Agency 30,07% Figure 9: Profession of the respondents. Furthermore part of the survey was the question about the experience in property valuation in years. The following Figure 10 shows the diversification of the different property professions in combination to the working experience. Most respondents, i.e. a tight majority of 51 %, were property appraisers with working experience between three and 15 years. 30,00% 25,00% 20,00% 15,00% 10,00% 5,00% 0,00% 0 years < 3 years 3 up to 5 years 5 up to 10 years 10 up to 15 years 15 up to 20 years 20 years n/a Self-employed Surveyor Employed Surveyor Investment & Banking Facility Management Real Estate Agency Figure 10: Working experience in years by different professions. Another quite important information about the respondents is the field of activities while valuing properties. The majority, i.e. 86 %, of them are working in local, regional as well as IMMOVALUE IEE/07/553/SI Page 201 of 221

202 national property markets. 31 % of them are mainly dealing with residential properties and the other 69 % with commercial properties. Additional 10 % stated to deal as well with European properties and 4 % within Global commercial property markets. 35,00% 30,00% 25,00% 20,00% 15,00% 10,00% 5,00% 0,00% Local Regional National Europe World Residential Commercial 6.2 Results Figure 11: Type of properties and type of property markets respondents are dealing with Question 1: Already quantitative differences mentioned? The answers to the question if the respondents already determine and consider quantitative differences in market values while valuing energy-efficient/sustainable properties compared to non-energy-efficient/non-sustainable comparable properties show the following results. The majority, i.e. 57 % stated that they didn t recognize any difference. As well Figure 12 show the responses in combination to the profession of the survey participants. As it can be seen almost the same ratio appears while analyzing only the responses of the employed and self-employed property valuers. IMMOVALUE IEE/07/553/SI Page 202 of 221

203 Self-employed Surveyor Employed Surveyor Investment & Banking Facility Management Real Estate Agency Yes No Figure 12: Difference in market values in combination to profession of the respondent. The upcoming questions 2 until 4 are only connected to the 65 respondents (43 % of the whole universe), who were already mentioning some differences in market value while valuing energy efficient/sustainable in comparison to non-efficient/non-sustainable buildings Question 2: How could the difference be expressed? depends 29,23% Discount 15,38% Premium 55,38% 0,00% 10,00% 20,00% 30,00% 40,00% 50,00% 60,00% Figure 13: Kind of the expression of the mentioned difference in market values. IMMOVALUE IEE/07/553/SI Page 203 of 221

204 Furthermore the question was extended to the magnitude of the mentioned difference in market values. Figure 14 shows the frequency expressed in percent. > 20,0% > 10,0% - 20,0% > 5,0% - 10,0% > 3,0% - 5,0% Premium Discount depends > 1,0% - 3,0% < 1,0% 0% 5% 10% 15% 20% 25% 30% 35% 40% Figure 14: Magnitude of the difference in market values. All in all 63 % percent are mentioning a difference between 3 % and 10 %, whereas 34 % were stating a difference between 3 % and 5 % and 29 % a difference between 5 % and 10 % Question 3: In which markets and category of properties did the differences mentioned occur mostly? The respondents were able to choose maximum three of the given answers. So 111 answers (21 with 1 answer and 45 with 2 answers) were given about the property market and 135 (22 with 1, 19 with 2 and 25 with 3 answers) about the type of property for which the difference in market value was determined. Additionally two of the 66 respondents were stating that differences were mentioned in every property market at every type of building. IMMOVALUE IEE/07/553/SI Page 204 of 221

205 Figure 15: Property market and type of property in which difference in market values occurred. In general Figure 15 give some hint about the possible future development of the importance of the aspect of energy-efficiency. The majority of the valuers given answers (red colored) stated that the difference in market values mostly occur in residential property markets. Merely 27 % were mentioning value differences in commercial property markets. While on the other side obviously the city, business and community centers, i.e. 68 % of the answers, are until now the property markets where valuers are mentioning differences in market values Question 4: Which parameter do you use to express the quantitative difference? This question should also be answered with maximum 3 of the given choices. 163 answers were given of the 66 respondents, who were already mentioning differences in market values. As you can see in Figure 16 most given answers are related to the input parameters of the income related valuation approaches. Additionally one of the respondents stated that all of the given parameter can be used to integrate the energy-efficiency/sustainability characteristics of a building, but he pointed out, that redundancies have to be avoided. Another respondent states that in his mind every of the mentioned valuation parameter is possible for integration except the lump sum and the vacancy and collection loss. IMMOVALUE IEE/07/553/SI Page 205 of 221

206 Figure 16: Valuation parameter used for express the difference in market value. The following questions refer again to the whole universe of the 153 respondents Question 5: Energy-efficient buildings/sustainable buildings should generate a higher market value. Due to the statement Energy-efficient buildings/sustainable buildings should generate a higher market value. the respondents had to choose between the answers strongly agree, agree, neither agree nor disagree, disagree and strongly disagree. Figure 17 demonstrates the opinions of the respondents regarding the statement. It can be seen that 93 % agree or strongly agree that buildings, which are more energy-efficient respectively sustainable than comparable ones finally are mentioned to be better and this should be reflected in a higher market value than in the non energy-efficient cases. IMMOVALUE IEE/07/553/SI Page 206 of 221

207 Figure 17: Energy-efficient buildings/sustainable buildings should generate a higher market value. Furthermore some of the given explanations of the respondents who agreed or strongly agreed are listed below: Tenants expecting lower energy costs and therefore net rents could get higher, because tenants are considering the overall emerging costs of renting (net rent plus operating expenses). The overall costs are important. Currently energy prices are still too low. That is why the market don t regulate this issue by himself. Ignoring any long-term environmental benefits (which I support), a sustainable building should have lower running-costs than a comparable standard building. As long as energy-efficient buildings are not market standard, they will generate a higher value, but if they get standard non energy-efficient buildings have to be discounted. In the next years such issues probably will have an effect at vacancy rates. But we have to consider it critically because we don t know if it will gain in higher profit or reduced investment costs. Because it s time to rethink! IMMOVALUE IEE/07/553/SI Page 207 of 221

208 By applying the substitution principle, the added value produced by energy efficiency should be at least the net present value of the energy saving potential. Energy efficiency produce saving in energy and maintenance costs. And finally some explanations of the respondents who disagreed will be mentioned: Energy-efficiency/sustainability should be a given. Properties with the lack of these characteristics should generate lower market values because they are not appropriate anymore. They can save money, so they should have higher costs Question 6: Did you already consider the energy-efficiency/sustainability aspect due to your experience as a property valuer for example within the qualitative descriptive parts of your valuation reports? The majority, i.e. 57 %, of the respondents are already considering the aspect of energyefficiency respectively sustainability. Further 34 % chose the possible answer No, but I am considering it. and the remaining 9 % stated only that they did not integrate it. As it can be seen in Figure 18 most respondents prefer the consideration within the different already existing parts of the valuation report like e. g. the building description. No. Seperate chapter No, but I am considering it. Integration into the various (existing) conventional parts of the building description and condition. Yes. 0% 10% 20% 30% 40% 50% 60% Figure 18: Qualitative integration: if and how. IMMOVALUE IEE/07/553/SI Page 208 of 221

209 The valuers mentioned some additional suggestions. So the most of them for example would integrate the aspects on the one hand into the building description and on the other hand would assess the status quo of the building in combination to legal current regulations and relevant literature in a separate chapter. Such aspects will have to be mentioned in different chapter for example also in the discussions of the current and future marketability. In the opinion of some respondents a trivial hint EPC available or not available could be mentioned in the report Question 7: Which sources of literature or information, do you recommend to verify the quantitative and/or qualitative impact at property valuation practise for energy-efficient/sustainable in comparison to non-energy-efficient/nonsustainable properties? Some suggestions of the respondents are: RICS publications like the VIP No. 13. Research information of the different market participants like RREEF, DEGI, CBRE, USGBC. National legislation and regulations. Sustainability Certification: DGNB, LEED, BREEAM. Code for sustainable homes. Analysis of the service charge costs of Jones Lang LaSalle OSCAR. Research reports like ESI-Indicator from CCRS. Improvements for a better energy efficiency, supplementary thermal insulation inside and outside, energy efficient windows. Newspapers, internet, specialized references. Investment costs (thermal insulation, local healing system). Energy costs extracted from bills. Usual ones. IMMOVALUE IEE/07/553/SI Page 209 of 221

210 6.2.8 Question 8: What do you think could be an important source for assessing the difference between energy-efficient/sustainable and non-energy-efficient/nonsustainable buildings? This question aimed at the imaginable important existing and maybe upcoming sources to get additional information about the energy-efficiency of a building. Therefore five possible answers were specified. The respondents should choose maximum two of the given possibilities. Figure 19 demonstrates the distribution of the frequencies of the answers. 8% 8% n = % 38% Energy Performance Certificates Energy Bills Life-Cycle-Cost-Analysis Management and Maintenance Cost Invoices Scientific research papers 32% Figure 19: Sources for assessing the energy-efficiency/sustainability of a building. Some respondents stated additional that every of the given answers can give good and liable information. Another respondent states that energy bills are highly correlated to the type of user, but he thinks LCCA regarding the service charge costs of a building could be definitely helpful to assess the energy efficiency of a building. Furthermore the problem of the availability of LCCA and their distribution in the valuation profession was mentioned Question 9: Valuation frameworks like IVS, EVS, Red Book and the other national/legislative standards need to be revised to reflect/integrate the aspects of energy efficiency and sustainability in the valuation process. While valuation practice is more or less regulated depending on the origin of the valuer it seems probable that valuers may need some regulation and explanation how to integrate and adapt their conventional valuation procedures. Figure 20 supports the statement because about two-thirds of the respondents agree respectively strongly agree that valuation frameworks should be adapted. IMMOVALUE IEE/07/553/SI Page 210 of 221

211 Figure 20: Adaptation of the valuation frameworks required? Furthermore the range of the framework is quite important, which leads to the next question Question 10: If changes are considered necessary for the legislative frameworks. Do you think there should be a country-specific practice varying across Europe or is there room for a pan-european framework? Figure 21 show the distribution of the meanings how wide-reaching the framework should be in the opinion of the respondents if they would be adapted due to the aspects of energyefficiency respectively sustainability. 12% 41% International Framework Pan-European Framework National frameworks 47% Figure 21: International vs. Pan-European vs. National frameworks. Some explanations for the different choices were: Answer National: Different climate, building standards and building structure. Energy policies and their results are very different across Europe. IMMOVALUE IEE/07/553/SI Page 211 of 221

212 Thermal rehabilitation costs are different in each country. It can certainly be common frameworks for the whole Europe. But it must also be room for national guidelines. There are differences in climate, etc., for example between Spain and Finland. Answer Pan-European: Energy-efficiency and sustainability are not specific only in regional markets. Capital is transnational. World is growing together, but change should start at least at European level. Valuation should reflect the market. Finally the market will show up differences between energy-efficient and non-efficient properties. At the end legal adaptations are not necessary. Answer Worldwide: I don't think we need to fundamentally change the valuation process, just increase the education of valuers and the greater market. As valuation is about market value and what the market is willing to pay - by changing the methodology this creates issues. In general international transactions and investment activities are the rule, due to this issue it should be targeted to find international guidelines Question 11: Which of the well-known valuation approaches is the most appropriate for the integration and reflection of energy efficiency/sustainability characteristics in a property? As it can be seen in Figure 22 the income related approaches, the direct capitalisation and discounted cash flow methodologies, i.e. up to 57 %, seem to be the most appropriate for the integration of the aspect of energy-efficiency respectively sustainability. Another 30% would prefer the sales comparison approach and the remaining 13 % choose the cost approach. IMMOVALUE IEE/07/553/SI Page 212 of 221

213 Figure 22: Most appropriate valuation approach for integration. Furthermore we were asking for an explanation to the choices. While choosing answers besides the DCF, most respondents were explaining that nevertheless DCF seems to be the most appropriate due to the reflection of detailed costs and revenues over a specific period of time, e.g. nuances in the OPEX can be projected. In general a lot of the respondents mentioned that every of the well recognized approaches are appropriate to reflect the energyefficiency/sustainability aspect. Finally it depends on data availability and the subject property Question 12: During the last few years you found an increasing need to incorporate energy-efficiency/sustainability into property valuations. Figure 23: Importance rose in the last few years? This statement maintains that the awareness almost increased and that it will get more important in the future. Furthermore we extend the question about the temporal horizon, which they expect it will continue to be more important. Some of the respondents who choose IMMOVALUE IEE/07/553/SI Page 213 of 221

214 the answer possibility of the importance will rise in 2 years were further mentioning that they expect that the importance will rise in 5 years soonest. 70% 60% 50% 40% 30%... in 2 years.... in 1 year.... in 6 months. 20% 10% 0% Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree Figure 24: Importance will increase in the future? When? A further required information is how valuers will be able to improve their knowledge about the specifics and complexity of energy-efficieny respectively sustainability. Figure 27 illustrate that this will be assured as a combination of the already existing advanced training possibilities. Until now the respondents get aware of the issues of energy-efficiency as well as sustainability due to the rising amount of publications and discussions in all the professions of the real estate businesses. n = % 29% 14% Seminars Literature Fair Trades (EXPO REAL, MIPIM, etc.) Congresses, Conferences Self Studies 8% 26% Figure 25: Knowledge will be adopted at? IMMOVALUE IEE/07/553/SI Page 214 of 221

215 Question 13: There can be one common approach for the integration of energy efficiency/sustainability regardless of how transparent and developed the individual property market is. As it can be seen in Figure 26 around 56 % agree respectively strongly agree that the integration of energy efficiency and/or sustainability characteristics should be solved in a common valuation approach for transparent as well as undeveloped real estate markets. Around one third of the respondents disagree or strongly disagree. Figure 26: Common valuation approach for transparent and non-transparent markets. Some explanations of respondents who agree or strongly agree: Yes, because the results must be similar does not matter how the market is. The approaches are same, does not matter the market is developed or not. The line of thought is wrong. The common approach is to reflect the market, no more no less. If the market distinguishes between energy efficient/ sustainable buildings and non-efficient/non-sustainable buildings the valuer have to demonstrate it. We need a change of paradigm. Valuers shouldn t consider only the net rent perspective. Obviously the marketability and finally the fungibility of properties depend on the total cost perspective, especially due to the rising energy costs. Sustainability is a transnational aspect. Some explanations of respondents who disagree or strongly disagree: IMMOVALUE IEE/07/553/SI Page 215 of 221

216 The integration will occur in tight local property markets e.g. in single user properties or in funds property due to special demands of the stakeholders. Valuation is a process based also on intuition specific for every market. For the development any methodology can be applied, but if the markets are undeveloped, the lack of information reduces options. Not useful. In my opinion the integration will lasts much longer in undeveloped markets. Undeveloped markets also won t be willing to demonstrate this aspect in transparent ways. A common approach is desirable but probably not convertible Question 14: The aspect of energy-efficiency and sustainability in general will matter in the future in the property valuation. The importance and relevance of these aspects will increase. 95% of the respondents stated that the importance of energy efficiency and sustainability in the property valuation process will increase in the future. Figure 27: Will the relevance will raise in the future? Some explanations of respondents who strongly agree: Self-explaining: The issue climate will gain more dramatic, legal regulations will more intensified, the amount of green tenants will increase etc. pp. IMMOVALUE IEE/07/553/SI Page 216 of 221