What is the effect of green building practices on real estate valuation in India?

What is the effect of green building practices on real estate valuation in India?






TI cost



Tenant improvement costs that are incurred by the borrower and are related to extending or renewing existing leases or executing new leases.





Heating, ventilation and air conditioning


VOC paint


“Volatile organic compound” that are harmful to the environment


Halo effect



The glorification of products that are labelled eco-friendly





The practice of putting skylights, windows and another opening in places so that sunlight can indirectly or directly provide internal lightning


Green cleaning



The process of choosing cleaning products that are good for the environment


Net operating income


The before-tax figure which equals to all revenue from property, minus necessary operating expenses

Brown buildings

Buildings that are not built according to sustainable practices





In 2018, the United Nations published a report which suggested that if the emission of greenhouse gases were to continue at the current rate, the overall atmosphere temperature could rise by 2.7 degrees Fahrenheit by 2040, and the real estate industry which accounts for 30-40% of carbon dioxide emission will play a significant role in it (Gou & Xie, 2017). In 2015, the UN had established goals for sustainable development in order to address rapid changes in economic and social development issues which are a result of urban growth. The said goals outlined 17 targets, and as suggested by the World Green Building Council, green building practices can significantly contribute to sustainable development. According to Aghili, Mohammed and Sheau-Ting (2017), this provided a major opportunity for the real estate industry to promote sustainable future agenda. Sustainable or "green" building practices, in this context, refers to an integrated approach of building and designing cost-effective, healthy and environment-friendly working and living environments. Green building practices help in reducing waste and emission, developing sustainable sites, using eco-friendly building materials and increasing energy and water efficiency (Abdullah, Mohd, Pin, & Ahmad, 2018).

However, despite the increasing prevalence of green practices in property development, their effects on the valuation of such properties are still not clear (Saleh, Anuar, Al-Swidi& Omar, 2020). Olubunmi, Xia & Skitmore (2016) further mentioned that this ambiguousness in the valuation of property deters developers to engage in green building practices which is not only detrimental for the industry but the environment as a whole. This is because, property valuation is a crucial aspect of property development, and the proposed valuation figures become a reference for investors and real estate developers. Green buildings in this respect are those properties which focus on three key aspects of sustainability, namely environmental protection, economic prosperity and social advancement.

This paper aims to analyse the impact of green building practices on real estate valuation and in order to do so, it focuses on the Indian real estate industry. To investigate the degree of green building appreciation in India, the researcher decided to conduct a survey of real estate stakeholders in India real estate industry and to understand what they think is the impact of such practices on actual valuation of the property. The paper is divided into five sections. In the first section, the researcher presents a comprehensive literature review on the Indian real estate industry, green building practices and current valuation methods. In the second, the research methodology of the research is described which includes the details of the research design, data collection methods and data analysis. The third part deals with the findings of the research, while the fourth part is of analysis, in which the findings of the research are analysed with respect to the current literature. Finally, the research concludes by describing the way green building practices affect the real estate valuation in the Indian real estate industry.  


1.1.Research Background

Property valuation is one of the most essential aspects of property development in real estate industry, it not only provides a reference for real estate developers but also influences the way investment is made into the industry (Darko, Zhang & Chan, 2017).  The recent development of green buildings in India has garnered sufficient attention of the development community mainly since such practices are changing the market trends and preferences, which have a direct effect on property valuation. Olubunmi (2016) described the green building as an infrastructure that focuses on economic prosperity, environmental protection and social advancement concerning sustainable development. Such practices reduce pollution and protect the environment and thus, remain harmonious with the environment throughout their lifecycle.

As a part of the property market, green buildings are often described as the buildings that focus on improving the efficiency of resources such as energy, materials and water – while reducing the property’s effect on the environment and human health, during the complete lifecycle of the building. This is realized through improved planning, construction, design, activity, removal, and maintenance. Perera & Mensah (2019) reported that green building projects have significant importance in markets of mature economies like Europe, Korea, the UK, Japan, and the USA. Authors further mentioned that these economies have been engaging in green building practices for over 20 years, while on the other hand, developing economies like India are also taking the initiative to incorporate green development solutions for sustainable development. It is evident that buildings should be planned and managed in such a manner which reduces their cumulative effect on their surrounding environment. In addition to this, Royal Institution Chartered Surveyor (RICS) introduced the idea of  'green interest’, demonstrating whether or not sustainable development is generating income which will further be discussed in section 2.4.1. Furthermore, the green value also reflects the net added value of a property that has been certified green on the property market in contrast with the non-green or “brown” building.

Green building practices aim to bring together the priorities of economic prosperity, social equity and environmental quality (Shaikh, et al., 2017). Since sustainable practices are relatively new in the current real estate industry, quantified research on the effects of green building practices and property valuation is still in its infancy. One of the common definitions of sustainable development is a form of economic and social development which caters for the needs of the present generation without compromising the ability of future generation to meet its own need (Perera & Mensah, 2019). It has been observed in some markets that sustainable design is one of the key components for adding value to the product. However, appraisers can only believe in strong evidence, and currently, there is only circumstantial evidence available which states that green features improve the value of a property. Moreover, as Olubunmi, Xia & Skitmore (2016) mentioned, that the impacts of the green building development and design on the valuation of a particular property should be considered by the evaluators while estimating the value of a property. Determining whether a building with green features is more or less expensive in its market, as compared to a traditional building is the task of the appraiser. The appraiser should inquire if the marketplace accepts the importance of new practices such as sustainable and eco-friendly construction. This is one of the biggest challenges for the evaluators, as this particular area is relatively new and because of that, the market data on this particular topic is not very substantial. One of the biggest challenges in collecting hard evident data is that majority of these green buildings are a part of public sector property and are not constructed for commercial usage.  Apart from this, another problem in the valuation of green buildings is that some of the advantages of such building may only accrue to the tenant rather than the property developer or the owner of the property (Abdullah, Mohd, Pin, & Ahmad, 2018). Appraisers will need to change and fine-tune the approaches they use to tackle such issues. Moreover, even within the domain of the green properties, some of these buildings have still not changed hands as their respected owners/developers are not willing to provide financial/ monetary data on those assets.

This paper explores on-going methods in determining the actual value of the green buildings and discusses the connection between the value of the buildings produced for commercial usage and green building qualities. Moreover, the paper recommends potential solutions that may be adopted by the real estate industry in order to provide an accurate value to green buildings, as well as some recommendations that can be easily aligned with the practices which will help in the evaluation of the property. To do so, analyses of academic reports and industry publications was carried out by researchers, along with a survey of key stakeholders in the Indian real estate industry.

1.2.Research Aim and Objectives

The main aim of this research is to determine the effects of green building practices on the real estate valuation in India.

1.3.Research Questions

This research aims to answers the following question:

  1. What is the effect of green building practices on real estate valuation in India?

1.4.Research Objectives

Objectives of this research are as follows:

  1. To evaluate existing green building practices in real estate in India.
  2. To understand the concept of real estate valuation.
  3. To evaluate the implementation of real estate valuation in India.
  4. To determine the impact of green building practices on real estate valuation in India.

1.5.Research Rationale

While valuers understand that green building is the rightful future of the real estate industry, there is a major gap of information concerning the way green practices influence property valuation. This research aims to fill this gap by providing an analysis of property valuation and green building practices. In addition to this, this research also provides actionable insight for developers and customers regarding the development of green buildings and the way it affects them. It is becoming evident from informal pieces of evidence and some of the case study research that green and sustainable components are likely to affect the market value of buildings in case incorporated (Le & Warren-Myers, 2019). However, it also depends on other characteristics such as land, location, and conditions of the regional and local market. However, this research focuses specifically on the effect of green components on property valuation and will help the investors to assess the benefits of investment in green building practices (Webb & Ayyub, 2017).

2.Literature Review

While there has been much research on real estate valuation, few researchers have taken the impact of sustainable building practices on real estate valuation into consideration. This section of the paper presents a review of the existing literature related to research objectives, which includes green building practices and real estate valuation methods. In addition to this, it also describes current practices in real estate valuation, features of green buildings and the importance of effective green building valuation for involved stakeholders.

2.1.Valuation Purposes and Value Definitions

Property valuation specifies the monetary capital sum which reflects either or both the resulting benefits of the use of the property or the specific value of the subject property. Valuing property is important for purposes such as lending, accounting and transaction (Baum, Mackmin & Nunnington, 2017). The purpose of the valuation defines the underlying definition bases of the value, and along with the tenure of property, it specifies the appropriate method of valuation (Olubunmi, Xia & Skitmore, 2016). [Office1] [a2] One of the most widely used definition of property value is investment value (also known as worth) and the market value. In order to investigate the effect of green practices on market value, it is crucial to get a proper understanding of value definitions.

Investment value or worth is the value of an asset to a prospective owner for operational objectives or individual investment. Market value, on the other hand, refers to the estimated amount for which a liability or asset should exchange on the date of valuation between a willing seller and a willing buyer. Such a transaction is conducted after proper marketing and if the parties have acted prudently, knowledgeably and without compulsion (Sayce, 2018). The difference between the definitions of value [Office3] [a4] influences the choice of the adopted approach. In case of investment value, the appraisal is conducted according to the parameters which reflect the buyer’s expectations according to their views and future forecasts (Halil, Nasir, Hassan & Shukur, 2016). These can be below or above the market expectation and can differ for the average value in the given market. On the other hand, in market value, the appraiser primarily depends upon an analysis of the real-life transaction and respective data of comparable properties. It is often argued that market value is inherently backwards focusing because the valuation professional seeks to analyse what has already happened (Mooya, 2016). Moreover, researchers have also suggested that using past prices and the basis of appraisal leads to smoothing and lagging of appraisals as compared with pricing (Abidoye, Junge, Lam, Oyedokun & Tipping, 2019). However, French & Gabrielli (2018) mentioned that in theory, something like this should not happen as the valuation professional is using comparable evidence as the basis for interpreting market activity and sentiment. In real-life practice, behaviour studies like that of Evans, Launsberg & How (2019) have reported that using data of past appraisals can influence the judgement in such a manner that appraisals get affected by anchoring and heuristics. Anchoring and heuristics are a common form of cognitive bias in which the decision-maker uses an anchor as the starting point or the point of reference (Lausberg & Dust, 2017). For instance, when the previous data shows a lower value, appraisers tend to ascribe a lower value to the property. Lausberg & Dust (2017) described it as the human tendency to heavily rely on the first piece of information which is available during decision making. The initial piece of information acts as an anchor, and the subsequent judgements are made adjusting the anchor. Simply put, once an anchor has been set, there is a bias towards interpreting the new information around that anchor (Strack, Bahik & Mussweiler, 2016).

Therefore, while investment value or worth is influence by views and factors specific to certain players in the market and their future forecasts, market value is related to a generalised understanding of the market. The investment value may not be provable with the help of evidenced transactions, but over the years both of them can converge as the understanding of the market develops and decisions made as future forecasts are transformed into market data. [Office5] [a6] 

2.2.Difference in real estate and green building valuation

Real estate valuation helps an individual or organization to know the real worth of the property and facilitates the estimation of the fair price of building, land or factory. There are numerous reasons for property valuation, such as taxation, mortgage, for property transfer, compulsory acquisition and purchase and sale of a property (Mooya, 2016).

Robinson & Sanderford (2016) further mentioned that over the past two decades, there has been an evolution of building environments because of the emergence of sustainable building practices. Although it is agreed that sustainable building practices do increase the value (Huo & Yu, 2017), the residential market has been quite slow in terms of recognizing the value implications of green building practices. Robinson, Simons, Lee, & Kern (2016) stated that buyers more often than not, provide an increased monetary value on the location, decorating trends and square footage, than green features and energy-saving components.

In addition to this, Basias & Pollalis (2018) claimed that the valuation of non-green buildings is usually conducted using traditional approaches. Such approaches are typically dependent on evidence which is visible to the human eye such as leasing from multiple properties and data from sales. However, like Abdullah, Mohd, Pin & Ahmad (2018) mentioned, these approaches cannot be effectively applied for the evaluation of green building as such buildings are relatively new in the industry, most of them are still under construction which makes it difficult to gather the required data which is necessary for traditional models, or fall under the purview of public sector properties which makes it hard to gather relevant data (Mooya, 2016).  Parmar, et al. (2018) suggested that this creates a problem for valuation professionals as they are not able to use their skills to recognize the present value of sustainable or green buildings and the impact of green practices on the market value of the property.

Green Building Index (GBI) is recognized as one of the earliest initiatives undertaken for green technology program (Olubunmi, Xia & Skitmore, 2016). It is Malaysia’s industry recognised rating tool for green buildings which defines features of green buildings. According to Robinson & Sanderford (2016), there are criteria mentioned in GBI which are useful for the valuation of green buildings through the assessment of the benefit they deliver to occupants. These features of green buildings performance can be used to evaluate their value (How & Yu, 2017).

There are six variants or criteria, namely, water efficiency, environmental quality within the premises, energy efficiency, materials and resources and environmental quality. These variants will be used to cover most green building features in the questionnaire.

2.3.Methods for Real Estate Valuation

The existing literature describes five key methods that are used for property valuation in the real estate industry namely, comparison method, profit method, investment method, cost methods and income method.

Renigier-Bilozor & d’Amato (2017) stated that the property valuation methods for the evaluation of green buildings differ according to the country in which the property is situated. For instance, while determining the value of a property, the valuation professional will look at the prices of similar property in the similar environment. This gives the appraiser an estimate of value and then the necessary adjustments are made in the value to account for the variation in size, specification and condition of the property. This is mainly due to the fact that different counties follow different government policies and such policies have a significant impact on the valuation of property, especially in the case of green buildings (Kim, Lim & Kim, 2017). Authors further mentioned that the comparison method is one of the most commonly used approaches for property valuation, but in case of the evaluation of the green building, this model is not appropriate as there are not many green buildings, which make it harder to find comparable properties. Moreover, different buildings have different green features which further exacerbate the problem of comparing properties for valuation (Abdullah, Mohd, Pin & Ahmad, 2018). Adjustments must be made in this model to take differences among the subject and other properties under consideration during their evaluation (Yalpir & Bayrak, 2017).

Saleh et al. (2020) described the income method as an approach which uses the income generated by a property to identify its accurate value within the given marketplace. Simply put, income approach suggests that the higher the income potential of a property, the more potential buyers will be willing to pay. To calculate income valuation, valuers divide the discounted net rental income by the yield of property. The author further stated that it is also an appropriate method for the valuation of sustainable properties as it captures the changes in the value that can be witnessed in the cash flow forecast. Furthermore, this method also takes all relevant aspects of commercial buildings under consideration during property valuation, such as sales evidence of sustainable features and comparable rent (Yeh & Hsu, 2018). In case this approach is used for green buildings, the high rent and low levels of vacancy of such buildings that are used for commercial purposes will, in turn, decrease the net operating income which will be used to reflect upon the value of the property. Through this method, the operating cost, capitalisation, element of rental and discounts will be generated by sustainable features, while at the same time, the materials and design of green buildings will decrease the operating cost (Runde & Thoyre, 2017). The low operational cost of green buildings is also associated with a lower maintenance cost, and lower waste and energy cost. According to Dwaikat & Ali (2016), green buildings that are in the commercial sector have demonstrated, on average, 8% to 9% decrease in operating cost.

On the other hand, Abidoye, Judge, Lam, Oyedokun & Tipping (2019) claimed that according to the cost method, the total price a buyer offers for a building must be equal to the build cost of an equivalent building. Instead of focusing on the property's ability to generate income, cost method values a real estate property by calculating how much it would cost to build the property if it were to be destroyed and replaced. This method also factors in the loss of value and worth of land. Under this method, the valuer simply establishes the cost of replacing the building. For instance, if the said property burnt down, how much would it cost to rebuild the same building on that spot. However, it is quite difficult to apply this method to sustainable buildings in order to calculate their value as there is very limited information available in the literature regarding “green cost”. In addition to this, determining the accrued depreciation also presents a challenge in this valuation method.  Saleh, Anuar, Al-Swidi & Omar (2020) reported the same lack of available statistics on the actual cost of "green" building in their study; this is especially true in the case of LEED-certified green buildings.

Furthermore, according to Baum et al. (2017), the valuation in real estate corresponds to the ability of an asset to generate future cash flows. Authors mentioned that one of the easiest approaches for property valuation is a comparable sales approach in which the value of the property under consideration is based on the value of other properties in the given market. However, Robinson, Simons, Lee, & Kern (2016), suggested that no two properties are exactly similar and significant differences exist among properties which makes the comparable sales approach error-prone. Moreover, a sounder approach is suggested by Yeh & Hsu (2018) in which the author estimates the value of a property according to its ability to generate future cash flow, in short, the income approach. Also, in case no comparable market transactions are available, it becomes hard to forecast the future cash flows of a property correctly; the replacement cost can be used for property valuation through a cost approach. Since the existing literature is backed by anecdotal evidence, this dissertation aims to study 3 models that will strengthen understanding the essential characteristics of green buildings to determine the effect of those characteristics on asset value.

2.4.Green Buildings

Getting a proper understanding of sustainability facilitates the rapid identification of the way green buildings align with the intentions related to sustainability. According to Mathiesen et al. (2016), a green building is the one which optimises energy efficiency, generates less waste, uses less water, provides healthier spaces for occupants and conserves natural resources. While on the other hand, US green building council defines a green building as a holistic concept which begins with an understanding of the way-built environment can have both positive and negative impact on the natural environment. Moreover, green building practices according to the same, involves planning, construction, operations and design of a building with several considerations related to water use, material section, energy use, indoor environment quality and the effect of the building on the site (USGBC, 2014). The development of such buildings is the practice of using processes that are environmentally responsible and creating structures in a resource-efficient manner. The World Green Building Council, also share a similar definition of green buildings but also mentions that green buildings improve quality of life and preserve precious natural resources (Worldgbc, n.d.).

Development of green buildings complements and expands the traditional building design concerns of comfort, utility, durability and economy. Such buildings are also known as high-performance building or sustainable buildings (Abidoye, Junge, Lam, Oyedokun, & Tipping, 2019). Zhang, Wu & Liu (2018) reported that such development practices require a combined effort of community and government dependent on the natural resources, which necessitates the role of government to promote the construction of green buildings by providing subsidies and providing incentives for green building construction.

In India, the green building and sustainable movement were adopted by the Confederation of Indian Industry (CII). The Confederation formed the Indian Green Building Council (IGBC) which is actively involved in the development and promotion of sustainable development projects in India, accepted Leadership in Energy and Environmental Design (LEED) as the benchmark for design and operation of green buildings (Pamu & Mahesh, 2019). In 2013, LEED-India was launched to create a large network of stakeholders which involves corporate nodal agencies, builders, developers and construction industry. In addition to this, the network also includes green building consultants (Abidoye, Junge, Lam, Oyedokun, & Tipping, 2019). Figure 1 mentioned in the appendix illustrates the growth of green buildings in India, over the years.

2.4.1.Benefits of green buildings

The importance of green buildings can generally be divided into three main elements such as environmental, economic and social. It requires less carbon, less water and less waste and provides occupants with a safe and efficient environment. According to Matisoff, Noonan & Flowers (2016), the term Triple Bottom Line would be defined as the combination of these three key elements in sustainable growth. Green buildings in Australia have developed a green environment with political, social and environmental benefits. In the meantime, financial calculation is incomplete if green metrics are overlooked to fulfil the criteria of Corporate Social Responsibility (Warren-Myers, 2018).

According to Balaban & Oliviria (2017) green building can also lead to lower operating expenses due to the reduction of energy costs, repair costs, maintenance costs and waste management. Research in green office buildings shows that in the first year of operation, green office buildings achieve higher occupancy rates, rental growth, and operating cost savings advantage relative to traditional buildings. Apart from that, green buildings' environmental and social benefits are generally known as intangible benefits, indirect benefits or social that cannot be identified or expressed economically (Yeh & Hsu, 2018). However, there is still a long way to go to public recognition of these intangible qualities. Research by Bockarjova, Botzen & Koetse (2020) also finds out that green building is good for health as it is better ventilated and best built to eliminate the use of chemicals in building materials which give off-gases. This function has provided an advantage in terms of marketability, where it often sells this value to occupants (Yalpir & Bayrak, 2017).

2.4.2.Green building criteria

While the criterion for green buildings differs according to the authors, 3 key features are common in most of the research of green buildings. According to the said key criteria, a building should be considered green if it is (1) modelled performance is verifiable by actual result, (2) features are independently verifiable, and (3) set of features are based on the principle of sustainability (Kibert, 2016).

Here, the first criteria, of performance verification suggests that the modelled performance of green or sustainable buildings, such as energy management system, low-flow fixtures, daylighting need to be verifiable though comparison with year-over-year utility bills (Zuo et al., 2017). The second criteria of features being independently verifiable is a part of due diligence in appraisal. That is, green buildings features must undergo a rigorous process of getting appraised by a third party which confirms comparable, reviews tax returns, operating statements, and compares line item expenses in similar expenses (Ciora, Maier & Anghel, 2016). Also, auditors must sign off on corporate accounting to ensure that financial condition of the company is fairly represented. The final criteria is fairly simple, and entails that green buildings should be based on commonly accepted green features in the market (Bulbulia, Wildman, Schjoedt, & Sosis, 2019).

In addition to this, Lee & Warren-Myers (2019) described the commonly accepted features of green buildings that are based on the sustainability principles, and suggested that it does not matter how green buildings are defined, they should be based on the key features that are normally accepted in the market which allows valuation professionals to assess their impact on market value. The most commonly used rating system which is prevalent in the local market is the Leadership in Energy and Environmental Design (LEED) as discussed in 2.4. Apart from this, different nations use different rating systems, such as in the UK, the Building Research Establishment Environmental Assessment Method (BREEAM) is used, while Japan utilizes the Comprehensive Assessment System for Building Environmental Efficiency (CASBEE). In these rating systems, the most commonly occurring classes for the features of green buildings are mentioned below.

  • Resource use efficiency: Materials, waste stream and water reduction;
  • Quality of the interior environment: Includes features like green cleaning, low VOC emitting materials and daylighting;
  • Energy efficiency: Decreased use of energy, especially the non-renewable one;
  • Site efficiency: Characteristics specific to a location such as the proximity to infill development and transit.


Furthermore, the part of due diligence in the valuation profession is verification by a third party. Among other things, real estate appraisers review historical tax returns and operating statements, confirm comparable and compare line item expenses to similar expenses in other buildings that are similar to the subject. In addition to this, the modelled performance of such buildings must be verifiable (Azis, Sipan, Sapri, Jalil & Mohammad, 2017). Most of the commercial appraisers know the inherent limitations of current valuation models. As actual results almost never are in accordance with the forecast and the outcomes are highly susceptible to tweaks in the assumptions of the model. In real estate appraisals, verification of modelled performance is conducted by supplementing Discounted Cash Flow (DCF) with sales comparison and green building features approach. Furthermore, the modelled performance of the features of green buildings such as energy management systems, low fixture needs and daylighting are verified through the comparison of yearly utility bills (Ciora, Maier & Anghel, 2016).[Office7] [a8] 

2.4.3.Rating Systems

A reasonable guide for appraisers to determine whether a property is green or not include the rating systems. The below-mentioned table shows the potential value impacts of green building features.


Green features

Value impacts





Resource use

  • Recycle, use fast renewables; renovate instead of building new
  • Low flow plumbing fixtures
  • Underfloor mechanical/HVAC
  • Triple waste streams which include recycling, compost and landfill


  • Increased tenant comfort because of diffuser control
  • Increased satisfaction leads to increased retention
  • Renovation can result in functional inefficiencies as compare to new build
  • Reduction in future TI cost; less energy usage due to more efficient HVAC
  • Reduced trash expense; increased cost of tenant/staff
  • Cost may increase or decrease
  • Reduction in sewer and water cost

Interior environment quality

  • Low VOC paint, furniture, carpet and ventilation
  • Daylighting
  • Green cleaning
  •  Reduced exposure to toxins
  • Less health-related liability
  • Green “halo” effect
  • Improved marketability can reduce turnover and vacancy
  • Improved light, maybe increased rent but decreased perimeter offices
  • The increased cost of green training and products
  • The increased cost of materials; might result in increased cost of HVAC operations and maintenance

Energy efficiency

  • On-site cogeneration
  • Building commissioning
  • Motion sensor lighting controls; high-efficiency HVAC/lighting; building mgmt. system
  • On-site renewable energy
  • Less exposure to price volatility and future energy price increases
  • Green “halo” effect; Less exposure to grid risks
  • Less exposure to grid risks
  • Reduced energy cost equals to Net Operating Income (NOI); reduction in insurance for green buildings
  • No transmission cost, which means less effective cost
  • Improved efficiency and reduction in energy cost
  • Improved systems lives and operating expenses
  • Increase in energy efficiency and government incentives


  • Alternatives to auto commuting, mass transit access; re-use of brownfield/infill sites
  •  CBD, transit-oriented assets are likely to reflect the reduced risk
  • Improve value because of low risk
  • Reduced risk over holding period
  • Increased cost for site
  • Density bonus can offset high site cost
  • Reduction in infrastructure cost because of incentives for infill sites
  • Reduction in on-site parking needs

Table 1: Potential Value Impacts of Green Building Features


The abovementioned criteria can be used to differentiate non-green buildings from green ones, but they do not facilitate the identification of buildings that are green among those that claim to be green. This means that rating systems are not able to differentiate between greenwashing and actual green practices. Greenwashing is an environmental or green claim which is unverifiable, inconsistent or unsubstantiated with the sustainability principle (Doan, Ghaffarianhoseini, Naismith, Zhang, Ghaffarianhoseini & Tookey, 2017). A property which claims to be sustainable or green, but does not pass any one of the tests is not sustainable or green (Bulbulia, Wildman, Schjoedt, & Sosis, 2019).

2.5.Sustainability Valuation

According to Illakoon & Lu (2019), research in property valuation seems to be limited to the normative proposals of the way sustainable characteristics are expected to affect the market value of the properties. These normative proposals are usually demonstrated through statistical models and case studies which have been used to highlight the relationship between market value and sustainability. However, the valuation profession seems to have remained comparatively unaware of the research suggesting a relationship between market value and sustainability and the implication of such a relationship for valuation practice as limited critical assessment and the positivist focus of the relationship between market value and sustainability has left valuation professionals uncertain of relatability, clarity and validity of presented information (Parmar, Mori, Poriya, Vanani, Chauha & Bhagat, 2018).

Halil, Nasir, Hassan & Shukur (2016) mentioned the rise of sustainability and green building has ushered in a formidable and new set of challenges for property appraisers. To date, most of the research addressing the value effects of sustainability and green building has been controlled by the analysis of large data set. However, this approach is not effective in the context of Indian real estate industry considering the low numbers of green properties. Another approach mentioned in the literature includes identification of the “business case” and “green premium” of the features that are possessed by green buildings. While such studies are useful for portfolio-level decisions and in developing policy regarding the investment, they lack the market sensitivity and specificity required to be useful in supporting yield rates in a typical appraisals assignment or adjustments to the comparable (Zuo et al., 2017).

Michl, Lorenz, Lutzkendorff & Sayce (2016) presented a model for sustainability evaluation which is widely recognised as one of the most influential models for integrating sustainability into the process of valuation in real estate. The said model allows for variations in the subject property over time along with variations within the specific market in terms of both, the context and building features.

Step 1- Assess market uptake of sustainability

Whether sustainability affects market value depends on how much sustainability the specific market values. It is important to get that part correct in order to avoid bringing an unwanted “brown” or “green” bias into the valuation process. The evaluator who sees green as nice in a market which is not yet evaluated adds prejudice to the cycle of valuation. Appraisers should use the same methods to determine any other business influence which determines the sustainability uptake of the market —use data and studies obtained from the business survey and examine the actions of key stakeholders where appropriate (Halil, Nasir, Hassan & Shukur, 2016).

There are three groups of relevant stakeholders: property owners (landlords), policymakers (government and non-governmental organizations, or NGOs), and end-users (tenants and owners-users).

Step 2 – Categorize the subject

The first step of the said model allows assessment of where the demand for the topic falls on the axis of sustainability (y-axis). The Sustainability Valuation Model provided subject matter categories in such a manner which allows the assessor to incorporate the sustainable nature of the sector of the subject property relative to the unique green-brown characteristics of the product. The prior description of what constitutes a green structure enables the topic to be oriented towards the brown-green axis (x-axis). In this manner, one can position the subject in one of the four quadrants where it belongs. Because both axes (NSO-SO and brown-green) are, in nature, continuums rather than absolute, a building might not fit flawlessly into either quadrant and over time, the location will have to be changed (Baum, Mackmin & Nunnington, 2017).

The said matrix [a9] is quite pertinent for this research as its purpose is to assess the effect of green or sustainable features on the valuation of the property. This matrix helps to determine whether the real estate market in a given region is sustainability-oriented or not. Being sustainability-oriented would mean that the existing policies in the country facilitate the development of sustainable buildings, which further means that sustainability-oriented markets provide an incentive to the development of such buildings which would reduce the cost and improve the value of the property. Figure 2 illustrates the matrix used to determine whether or not Indian markets provide such incentives to sustainable building practices.

Brown in a not sustainability-oriented (NSO) market – This quadrant includes the property which does not conform to the three previously stated requirements for sustainable buildings and for the appraisal of those building for which the assessor decides whether the demand is sustainability-oriented or not sustainability-oriented (NSO).

Brown in a SO market - This category refers to a possession that does not follow the three previously stated green building requirements but where the assessor decides that the demand is sustainability-oriented (SO).

Green in an NSO market – This category includes buildings which follow the abovementioned requirements for green building, but where the assessor decides the demand, is not sustainability-oriented. Furthermore, since the topic and the market vary in their orientation towards sustainability, particular attention should be given to the comparable. Also, even in a brown (NSO) market, comparable need to be altered according to the green features which add value.

Green in a SO market –Under this category, the property which confirms to the three previously stated green building requirements is included, and where the assessor decides the demand is also sustainability-oriented (SO).

Step 3 – Monitor overtime

The business focus of sustainability and the subject’s peer’s "greenness" can shift over time and require control, along with conventional business metrics such as supply and, occupancy, rental rates, demand and, net absorption. The significant difference related to sustainability is that the pace of adjustment is high, and can be completely unexpected (Huo & Yu, 2017).

2.6.Importance of Real Estate Valuation

Valuation analysis of green practices facilitates transparency and develops a better understanding of decision and views of stakeholders when evaluating properties (Mooya, 2016a). It also provides transaction managers, portfolio managers and asset manager a better picture of business ethics, stakeholder’s interests and information needed to invest in such practices. Importance of real estate valuation for relevant stakeholder is mentioned below (Mooya, 2016b).


Property valuation is important for customers as it provides the necessary information to determine the purchase price by comparing prices, taking depreciation into account while making a decision, insure their property or want to buy a new one (Saleh, Anuar, Al-Swidi & Omar, 2020). In addition to this, authors also mentioned that it also helps them to get loans from banks, as banks require property appraisal for mortgage purposes.


For builders, property valuation is necessary for endeavours like sales listing, property insurance, financing, investment analysis and taxation (Gou & Xie, 2017). Economic and social changes in the wake of globalization have a significant impact on the property value and financial risks associated with the same. Property valuation acts as a means to assess such changes in order to capitalise on opportunities while mitigating the impact of market threats.


Property valuation, in respect of sustainable strategies, also helps the government to determine the sustainability of the industry in order to guide its future policies and to determine tax rates and associated policies (Aziz, Sipan, Sapri, Jalil & Mohammad, 2017). Moreover, political decision-makers and public use real estate valuation in order to determine the capital costs for producing service and for real estate management (Kucharska-Stasiak & Olbinska, 2018).

While customers get an estimation on fair value property, buyers can use the property valuation to analyse the impact of market forces on their investment (Wu, 2016). In terms of public goods, real estate valuation is important as it facilitates decision making and real estate management.

Property valuation often relies on legal precedents, which may represent market transactions of a comparable nature to assess the value of designated land. A value most often does not have all market facts and a full description of all transactions available to them in the process to assess the value of the land. In this case, the value must be determined from the knowledge that they have in hand at the time. Thus, assessment procedures based on 5 main methods should be performed consistently and comprehensively, taking into account different factors that can contribute valuation rates on related properties. The low valuation of the property can lead to misallocation of money. Following that, through existing valuation methods green building that is becoming more and more common in the current environment of real estate development should be evaluated in greater detail. The green building valuation should take into account all the 'added value' gain and item produced from green features. The allocation of green buildings in the building industry has shown the ability to change the structure of valuation procedures (Marti, 2017). Therefore, in addition to the traditional approaches to the property valuation, valuation professionals need to take the opinions of the respective stakeholders into consideration while determining the value of a property.

2.7.Green Strategy Model

Sustainability can be described as an overarching conceptual structure defining a sustainable, stable and dynamic equilibrium between human and natural systems; a dream of the world in which everyone wishes to live in; a set of policies, beliefs and best practices that will preserve the diversity and biodiversity of the planet's ecosystems, promote economic prosperity and opportunity and establish a high quality of life for people (Lu, Chen, Peng & Liu, 2018). Sustainability's applicability to three aspects of life is fundamental in these definitions: economic or, environmental conservation and stewardship, financial concerns and society and individual human well-being, also called the triple sustainability bottom line.

With the increase of global outsourcing and industrial offshoring and the resulting environmental and social effects, customers and lobbyists are demanding that Western companies aggressively export sustainable practices to the markets to which they outsource. CSR and 3BL coverage establish a more influential role in the assessment of real estate decisions in India (Baum, Mackmin & Nunnington, 2017). 

Nonetheless, Abdullah, Mohd, Pin & Ahmed (2018) mentioned that in the business world, these are still fairly modern strategies and the implementation needs a new way of thinking about real estate to innovate and handle change for the company. Therefore, there are a range of real estate obstacles to be addressed, including cultural change, contractors and service providers, recognizing that CSR is not a fast-fixed approach, providing an integrated entire life cycle view, owner-occupier relationship, lease agreements, benchmarking and measuring, as well as training and foundation skills growth (Lu, Chen, Peng & Liu, 2018).

A framework for quantifying and reporting on CSR performance in both the non-financial and non-market environments, 3BL reports cover three main areas (Gou & Xie, 2017):

Economic: This measurement factors in elements other than income, operating expenses, wages and expenditures, along with facilities and services delivered for the public benefit, regional recruiting practices along with financial consequences, risks and opportunities.

Environmental: This metric measures the organization's use of resources, electricity, and water and the effect its actions have on biodiversity and protected areas and the environment in general (Matisoff, Noonan & Flowers, 2016). This also monitors the emission of greenhouse gases, ozone-depleting or other hazardous contaminants, as well as the processes used for producing waste and disposal.

Social: Includes metrics based on the labour force, measures focused on human rights, and effects on marketing and communications.

2.7.1.Green Features

In 2009, the Green Building Index (GBI) was one of the first projects in the green development programme (Shah & Hwang, 2018). This was developed as a industry recognised green rating tool in Malaysia for promoting sustainability in real estate development. Moreover, it was also developed to raise awareness among architects, planners, contractors, developers, engineers, designers and public regarding real estate related environmental issues (GBI, n.d.). Developments of green buildings have taken on growing significance in the construction industry, in line with government policy to encourage green technology. The Green Building Index refers to six parameters such as quality of the indoor environment (EQ), energy efficiency (EE), materials and services (MR), water efficiency (WE) and innovation. According to Aroul & Redriguez (2017), these Green Building Index (GBI) could explain the advantages of the green building into financial results. Besides that, metrics may be useful for green building assessment by calculating people's benefit.

Typically this calculation was achieved by evaluating green features that have a real effect on the value of the land. Specific elements of the efficiency of green buildings may also determine the financial performance of green buildings. The best strategy to value green building is therefore through its green features that could produce different benefits for the people (Aziz, Sipan, Sapri, Jalil & Mohammad, 2017). Energy efficiency is one of the green building's most recognized advantages, where energy usage could be increased by optimizing building orientation, mitigating solar heat gain through building envelope, sourcing natural lighting, implementing best practices in building services, and the use of renewable energy, and providing proper testing, commissioning and routine maintenance (Robinson, Simons, Lee & Kern, 2016). Green buildings need indoor environment quality (EQ) in order to achieve good performance in indoor air quality, thermal and visual comfort. This factor provides residents with cleaner air and more comfortable working environments. Green construction can reduce energy consumption by 36 per cent compared to traditional buildings and also lead to energy efficiency (Zhang, Wu & Liu, 2018). This also has a marketing benefit where this feature can be "sold" to occupants most easily. Improving indoor air quality and lighting will also support residents, which would lead to increased productivity.

Sustainable site management and planning allows the green building to establish well-designed transport, public facilities, landscaping and open spaces. Water Conservation on GBI-certified Green Building is compatible with content that can reduce water use, and can save the cost of building operation. Rainwater collection, recycling of water and water-saving fittings are some of the effective tools used to reduce energy usage. The invention also becomes one of the green building metrics representatives of GBI (Kauki, 2018). Usually, the product design will have longer lifecycles, as they would make different usage of resources or ecological footprints. Specific GBI measurements typically bring specific benefits to people based on green features associated with them.[Office10] [a11] 

2.8.Valuation of Green Building[Office12] [a13] 

Abdullah, Mohd & Ahman (2018) claimed that the valuation of non-green buildings is typically based on conventional models that depend on concrete evidence from sales or multiple property leases. [Office14] [a15] However, in the real estate industry, green building is fairly new and most of the buildings are still under construction, causing difficulties with conventional models or valuation methods as the database is small. This condition is a concern for the valuation professional, as they have to use their experience to recognize green building features that pose the benefit of green building and its effect on market value. As stated by Zhang, Li, Stepheson & Ashuri (2018), the green building valuation approach has considered a ranking star in line with its local environment, history and economic condition. In general, there are five methods for valuing the land, such as the method of comparison, method of expenditure, method of benefit, method of residual value and cost value method (Bockarjova, Botzen & Koetse, 2020).

However, Zhang, Wu & Liu (2018) indicated that the number of methods used to value green building would differ by region. The comparison approach is one of the most popular techniques for evaluating the green building. However, some problems have emerged, such as the difficulties in locating comparable properties and the fact that a building can have several green features, or only a few may be integrated. Additionally, a system not officially accredited as green can still have several green features (Madad, Gharagozlou, Majedi & Monaveri, 2019). This will have to be modified to take into account the variations between the subject and other green properties. Current comparable, valuation career needs to be evaluated in the sales verification process outside the usual factors.

According to Baum, Mackmin & Nannington (2017), the profit method often is an effective form of valuation to be used in the assessment of green construction. The DCF approach will capture the cash flow forecast changes in value. At the same time, it is well-suited for addressing green building financial elements. DCF approach typically takes into account all relevant aspects of comparable Green Building rental and sales data. The higher rent rate and low commercial green building vacancy rate would raise net operating income which will reflect the valuation. The leasing, operational costs and capitalization and discount item will be directly generated by green features using the income method. In the meantime, green building design and materials will minimize construction costs, repair, maintenance, and replacement costs of products that contribute to the valuation process and therefore raise net operating income.

On the other hand, the cost method is quite difficult to apply on Green Building valuation causes limited "climate cost" details. This approach also faces a problem in assessing cumulative depreciation. Frenh & Sloane (2018) stressed that the most commonly accepted model for determining investment in real estate is the DCF approach which is well suited to addressing the financial implications of sustainability. According to Halil, Nasir, Hassan & Shukur (2016) DCF approach the green building valuation is the most straightforward and clear. It's because this approach offered a conceptual structure and model that enables the consumer to combine quantitative and qualitative analysis to assess the financial performance of sustainable land. The DCF model enables the timing of cash inflows, such as potential rental growth and efficient retrofitting of capital expenditure (Jormalainen, 2020).




Abdullah, L., Mohd, T., Pin, S. F. C., & Ahmad, N. (2018, October). Green building valuation; from a valuers’ perspective. In AIP Conference Proceedings (Vol. 2020, No. 1, p. 020064). AIP Publishing LLC.

Abidoye, R. B., Junge, M., Lam, T. Y., Oyedokun, T. B., & Tipping, M. L. (2019). Property valuation methods in practice: evidence from Australia. Property Management.

Azis, S. S. A., Sipan, I., Sapri, M., Jalil, R. A., & Mohammad, I. S. (2017). The effect of green envelope components on green building value. Property Management.

Baum, A., Mackmin, D., & Nunnington, N. (2017). The income approach to property valuation. Routledge.

Ciora, C., Maier, G., & Anghel, I. (2016). Is the higher value of green buildings reflected in current valuation practices?. Accounting & Management Information Systems/Contabilitate si Informatica de Gestiune15(1).

Doan, D. T., Ghaffarianhoseini, A., Naismith, N., Zhang, T., Ghaffarianhoseini, A., & Tookey, J. (2017). A critical comparis

Evans, K. M., Lausberg, C., & How, J. S. S. (2019). Reducing the property appraisal bias with decision support systems: An experimental investigation in the South African property market. Journal of African Real Estate Research4(1), 108-138.

GBI. (n.d.). Green building index. Retrieved from https://www.greenbuildingindex.org/

Gou, Z., & Xie, X. (2017). Evolving green building: triple bottom line or regenerative design?. Journal of Cleaner Production153, 600-607.

Huo, X., & Yu, A. T. (2017). Analytical review of green building development studies. Journal of Green Building12(2), 130-148.

Jormalainen, A. (2020). Impact of Green Bonds on Firm's Valuation.

Kibert, C. J. (2016). Sustainable construction: green building design and delivery. John Wiley & Sons.

Kim, S., Lim, B. T., & Kim, J. (2017). Green features, symbolic values and rental premium: Systematic review and meta-analysis. Procedia Engineering180, 41-48.

Kucharska-Stasiak, E., & Olbinska, K. (2018). Reflecting Sustainability in Property Valuation-Defining the Problem. Real Estate Management and Valuation26(2), 60-70.

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