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

Information Technology Services Summary Introduction What is obsolescence? Types of obsolescence Research approach Obsolescence and sustainability Concluding comments RMIT University©2008 Information Technology Services

Information Technology Services Definitions There are two core meanings: “1 (a) no longer in use or no longer useful (b) of a kind or style no longer current; 2 of a plant or animal part : indistinct or imperfect as compared with a corresponding part in related organisms.” From a property perspective, ‘obsolescence’ can be defined as “a loss in value due to a decrease in the usefulness of property caused by decay, changes in technology, people’s behavioural patterns and tastes, or environmental changes. Obsolescence is sometimes classified according to items of outmoded design and functionality, items with structural design unable to meet current code requirements, and factors arising outside the asset, such as changes user demand” (API Glossary 2008). RMIT University©2008 Information Technology Services

Information Technology Services What is obsolescence Economic Functional Physical Technological Social Market RMIT University©2008 Information Technology Services

Information Technology Services Information Technology Services 5 RMIT University©2008 RMIT University©2008 Information Technology Services Information Technology Services 5

Information Technology Services What is obsolescence RMIT University©2008 Information Technology Services

Findings from the research: Methods Survey Instruments Valuers Online Questionnaire – 3 themes Structured and unstructured questions Likert scales, ranking questions and free response Distributed through PINZ, API and RICS to qualified valuers Investors Unstructured Interview 9 questions – three themes Interviews held with senior executives, general managers, fund and portfolio managers of institutional investment vehicles like REITS, unlisted trusts, funds and companies The valuers were surveyed via a closed fixed response method which was conducted through hard copy survey and online survey composed of both structured and unstructured questions. The desire to maximise the response rate from the valuation field a questionnaire was developed enabled valuers to answer a series of structured questions in addition some unstructured comments were added to allow comments. the questionnaire utilised a combination of structured and unstructured questions to provide quicker and easier data collection (Neuman, 2007) The investor data was collected by means of an unstructured interview in the form of a standardised open-ended interview. Relational analysis was used to allow quantification of the data where applicable for statistical analysis providing statistical justification and support for the theories identified (Busch et al, 2005). The structured responses were categorised and coded to enable frequency of responses and statistical analysis of results. Quantitative content analysis has been undertaken where appropriate to assess the frequency of particular themes or comments from respondents, this has enabled statistical analysis of the responses (Riffe, Lacy et al. 1998). Relational content analysis, also known as semantic analysis, has been used to gain greater understanding of these relationships and statistics are utilised to establish the findings. hierarchical clustering analysis has been used to identify particular groups of investors and by using multidimensional analysis has enabled interpretation of these groups. Hierarchical clustering analysis is used as a multivariate technique to reveal groupings of variables (Cox and Cox 2001). The results are presented in Dendrogram, and are often used in conjunction with multidimensional scaling. Chi-squared measures were used to determine distances between data points and values. Multidimensional scaling is a multivariate statistical method, which is used to explore similarities and dissimilarities between multiple variables (Kruskal 1964; Gifi 1990). The use of multidimensional scaling is common in investigating relationships and perceptions along with other variables (Forgas 1979).

Results and Analysis Valuer data collection Investor data collection Conducted in Australia and New Zealand, 244 responses Analysis of data used a combination of qualitative and quantitative analysis Investor data collection Conducted in Australia and New Zealand 30 responses Analysis of data collected from investors used primarily qualitative analysis and some limited quantitative analysis Analysis Techniques Content Analysis Qualitative and Quantitative Content analysis Statistical analysis Hierarchical clustering analysis Multidimensional analysis 107 New Zealand Valuers and 137 Australian Valuers 16 from Australia and 14 from New Zealand Investors

Information Technology Services Sustainability focus Investors Response Rationale for Energy Cost benefits – a financial return easily identifiable Measureable! Mitigation against increasing resource costs and other legislative risks ETS Compulsory disclosure Analysis of portfolio on an energy basis Divestment of non-performing stock Anticipation of two tier market RMIT University©2008 Information Technology Services

Relationship between obsolescence and sustainability Sustainability factors Physical Energy and water usage considered too high Technological aspects of building technology regarding sustainability management of property Advances in current technologies for sustainability may quickly become outdated Economic Energy and water costs (escalation) Reduced rentals and achievable sale price as a result of non-sustainability Market changes, desire of tenants/owners changes as a result of increasing requirements for sustainability, consequently a form of market obsolescence Social Tenant attraction & retention (reduced as a result of non-sustainability) High operational costs Reduced quality of indoor environment Potential degradation of brand RMIT University©2008 Information Technology Services

Valuers Ranking of Obsolescence General Valuation Context Sustainability Yield Rental growth Vacancy Discount rate Level of outgoings Letting up allowances Risk premium Terminal sale price Capital expenditure Obsolescence Yield Rental growth Vacancy Level of Outgoings Letting up allowances Risk premium Discount rate Terminal sale price Capital expenditure Obsolescence RMIT University©2008 Information Technology Services

Consequences for the market Valuers lack of acknowledgement of obsolescence and sustainability having a relationship and being taken into account in practice Investors are anticipating a two tier market, evidence apparent through: Portfolio analysis regarding sustainability levels Anticipation of future requirements and risk mitigation Divestment of non-performing stock If valuer ignore this developing trend and market dynamic, there could be major ramifications for the market in the future. More research is required in addressing the issue of sustainability as a form of obsolescence, and Development of better mechanisms for valuers to incorporate obsolescence in property valuation RMIT University©2008 Information Technology Services

Information Technology Services Thank you Any questions Contact details: Dr Georgia Warren-Myers georgia.warren-myers@rmit.edu.au Prof Richard Reed r.reed@deakin.edu.au RMIT University©2008 Information Technology Services