Introduction

At the time of the collapse of Lehman Brothers in 2008, the value of their real-estate holdings amounted to 23bn USD. Most of this was valued using the discounted cash flow (DCF) method and, almost exclusively, included office buildings and larger shopping malls. Since then, some of this portfolio has been sold, whereas others have been foreclosed. In 2011, the corresponding value diminished to an estimated 13.2bn USD, with received returns of 3bn USD during the 3-year period (2008-2011).

The fact that few have openly criticised this is bewildering - until one realises that apparently too much is at stake to get this mistake acknowledged. Two questions, however, arise about Lehman Brothers: (1) Why did the investors place 80% of their portfolio in the same 'basket'? (2) Did they even see what was written in the appraisal reports? Perhaps, no one dares to ask these kinds of questions, because as in Shakespeare's comedy: 'The more pity, that fools may not speak wisely what wise men do foolishly'.

As urgent as the financial crisis problem is, the range of problems affecting and being affected by property valuation issues is potentially much wider. It could also be argued that many of these problems - economic-financial, social-cultural and environmental-ecological ones - are interdependent. Therefore, this book sets out to look at valuation issues in general rather than focusing specifically on only one type of concern such as the so-called financial crisis. The logic underpinning how various kinds of real problems, misconceptions and dilemmas are interrelated, and possibly meshed with the ongoing sustainable development discourse, is a recurring topic of this book. Crucially, whilst sustainable development - or even real-estate sustainability - is not the sole focus of the book, the implications of this issue crystallise one key concern addressed within this book: the quality of valuations, that is to say, their reliability and robustness, transparency and traceability.

Apparently, the 'whys and wherefores' of valuation is an under-researched topic within real-estate economics. This is the principal justification for the selection of topics, and if the valuation process is one of the key topics of the book, another must be the basis of this valuation - that is to say, how empirical analyses of prior valuations and market evidence can help us reach such high-quality valuations. At the same time, homes, offices and other real estate that are subject to valuations need to be seen as part of a sustainable market context. However, the reinvestment of extra profits with long-term plans in mind - in other words, economic sustainability of real-estate-based assets, markets and values indeed - has also traditionally been a neglected topic (but see Bryson and Lombardi, 2009).

The aforementioned issues are the two lines we set up for our approach: one is about valuation seen as a process, and the other is about markets and other relevant context where value creation and price setting takes place. Thus, on the one hand, we are interested in how the valuer chooses to operate in a given situation; on the other hand, we are also interested in the changing environment within which the valuer eventually has to operate.

The Book's Main Theme

The way of perceiving the built environment is undergoing change. It has to, because of the new requirements attached to the sustainable development agenda (since the 1992 Rio Earth Summit, Local Agenda 21 and, more recently, the 2015 Paris Agreement hailed as an 'historic turning point') and the proposed policy solutions following the financial crisis of the late 2000s. Unfortunately, because of the complexity in the cause and effect in both our natural climate systems and our modern economic systems, there is unlikely to be a quick fix. However, beyond the complexity in the systems themselves, contributory factors may be intransigence, lack of understanding, lack of commitment or simply that the hegemony of money markets and their short termism makes it difficult to enable a broader-based interpretation of value where the currency of exchange is based on the environmental and social as well as the financial assets of a building.

This book explores the professional foundations on which the valuation exercise and the valuation profession rest. It aims to address this potentially limited understanding of the concept of property value by explaining the intrinsic linkages between economic, environmental, social and cultural measures and components of property value. In this way, it may be possible to pave the way towards a more holistic approach to property value.

Our conceptualisation of value goes beyond price. This is because we examine why a particular price is paid for a property asset, and we investigate in detail how professionals arrive at their estimate of value which will then influence their client's willingness to deal at a given price. Although, of course, price is based on estimates of value, this book attempts to unwrap many of the traditional assumptions that have underpinned market participants' decision-making over the past few decades.

When exploring the price-value association (or discrepancy), the book aims to incorporate social, environmental and economic concepts of value into a broader concept of property value. In doing so, the book puts forward the argument that a blindfold application of valuation theories and approaches adopted from finance is unlikely to be able to cope with the nature of property as an economic and public good. This claim is especially important at this moment in time, in a situation where the sustainability requirements being imposed are changing the decision-making environment concerning investment in the built environment.

Real-estate valuation plays a pivotal role in this decision-making, and we must ask ourselves the following question: how can this new body of knowledge improve the practice in both business and social domains, given the nature of specific professions - in our case, those pertaining to the real-estate industry? Hill and colleagues (2011) see this role 'embedded in some ideals, professional values, autonomy of practice and independence of opinion' (p. 315), and to be a professional requires not only a body of knowledge but also 'a role definition and sense of identity; public interest; and ethical conduct' (Hughes et al., 2013). Professional identity, independence, public interest and ethics therefore play a crucial role in a professional's assessment of real-estate valuation. As a process, such valuations therefore need to be sustainable in a broad sense. Here, we are concerned with financial sustainability, that is, how robust are the valuations performed to support investment decisions in the direct and indirect markets; environmental sustainability, that is, the impact of real-estate location, use and efficiency on the environment and social sustainability, that is, addressing the growing gap between those who have access and those deprived of access - both wealth creation and poverty creation and the impact on extremism at both ends.

The Book's Key Messages

The role of the valuation professional is to provide professional advice. This is not just about financial value, but it ought to, somewhere, cover the aspects of guardianship through appropriate management of landed and built assets. Too often, the advice is just about the price derived from limited criteria. This is more the role of an agent or a realtor and not of a professional adviser.

The role of the valuation profession is important in the struggle to implement sustainable development principles within the property sector in particular and within society in general. There are two main reasons for this: (1) 'the building sector contributes up to 30% of global annual green house gas emissions and consumes up to 40% of all energy' (UNEP SBCI, 2009, p. 3), and it therefore has the potential to provide the most cost-effective opportunities to cut down energy and resource use and to contribute to human health at the same time; (2) mainstream financial professionals and property market participants are less willing to include sustainability issues in property-related decision-making processes unless and until sustainable building features and related performance are integrated into property valuations. Deloitte (2014) believes that there is 'substantial room for deepening sustainability implementation in certified buildings, where in-use performance can remain stubbornly below design expectations.' (p. 2)

There are, however, some barriers to implementation. These are as follows:

• A gap exists between the current situation (in which the challenges imposed by sustainable development create new pressures and realities) and state-of-the-art valuation theory, standards and practices.
• Whilst it can be argued that in a growing number of cases, valuations reflect sustainable credentials of buildings, sustainable development thinking needs to be integrated at a deeper level into valuation theory, standards and everyday practice; that is to say, a new protocol or model for valuation and professionalism is needed.
• Financial valuation methods and approaches do not really work for property assets because property is not traded in a perfect market.

We need to better understand what we are doing when assigning value to a particular building or groups of buildings; that is to say, while considerable attention has been paid to...