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Blogs 24 may 2024

Residual to returns – Unlocking value from circular buildings

At this year’s Footprint+ Conference we were delighted to be joined by members of the Madaster Network and Footprint+ delegates to discuss the financial value of circularity for asset owners. The group included investors, architects, engineers, contractors, and valuation specialists. It’s a vital topic to address head-on, and one that we will certainly revisit. The group had plenty to say on where the value sits, how to unlock it and what we as an industry must do to bring circularity into play for institutional investors.

“Understanding exactly what can be recovered, its estimated life cycle, and the predicted future market value of those components help create a more accurate valuation.”

Simon Joe Portal, Drees & Sommer UK

Simon Joe Portal from Madaster Pioneer Drees & Sommer kicked off the presentations, sharing success stories from Europe. The Venlo City Hall building opened a discussion around up-front investment vs. future-pay-back. The building was designed with circularity at its heart – all materials were carefully selected for their demount-ability and reusability, and material passports detailed material production and origin. Recent calculations showed that the deconstruction savings were of similar value to the incremental investment that were needed to enable the circular design. The project also highlighted other benefits, most notably positive environmental impact and positive outcomes for the building occupiers, thereby increasing value for investors.

“Offsetting is likely to get more expensive, raw material costs are predicted to go up and reputational risks must be considered.”

Hulisi Mustafa, Overbury and Morgan Lovell

Hulusi Mustafa from Overbury and Morgan Lovell, also a Madaster Pioneer, raised the importance of considering embodied carbon and its associated costs, particularly in respect of net zero. Offsetting is likely to get more expensive, raw material costs are predicted to go up and reputational risks must be considered. Designing for re-use is an important area which demands our attention now, with the benefits expected to increase over time.

“Valuers don’t currently integrate material value into their models – its not yet clear ro the market how this should be priced.”

Sam Carson, CBRE

Sam Carson from CBRE explained that Commercial property valuations are a simulation of a transaction at a point in time based on multiple factors and the prevailing market conditions. Valuers don’t currently integrate material value into these models – it’s not yet clear to the market how this should be priced. He explained that the potential for future value is more likely to be taken into account in the overall investment strategy..

There was interest in the idea of incorporating circular approaches into valuations and future business models – particularly in the case of stranded assets – but noted the industry had work to do to standardise valuation methodologies and convey a clear monetary figure to the markets, specifically the residual material value. Individual commodity prices for each raw material are a useful benchmark for material valuations, but they are only one data point and they likely underplay the value of materials already made into components. Understanding exactly what can be recovered, its estimated life cycle, and the predicted future market value of those components help create a more accurate valuation. Material and building passports are a key tool to consolidate and communicate this information.

When it comes to uncovering the financial value from circular projects, four key opportunity areas emerged from the conversation:   

Transparency: If there is more transparency around what is in a building then it is easier to value more accurately. Ultimately this could be built into demolition contractor pricing, leading to cheaper contracts.

Detachability: A building or fit out that allows for easy maintenance, simple de/re-construction and straight-forward material recovery can offer cost savings for repair and reconfiguration.

Partnerships: There is opportunity for developers and design teams to work more closely with supply chains to create circular models, which can enable new commercial agreements such as up-front discounts or buy-back schemes guarantying future value.

Standardisation: There is currently no industry standard for residual value, which remains a barrier from a valuation perspective. You can also find further insight on standardisation of metrics in our ‘Risk & Reward’ Madaster Network roundtable.

In summary

Through the discussion many ways that circularity can impact financial value emerged. Examples were shared on how the capital costs of development projects were reduced due to construction partnerships and the exchange of second hand materials. More sustainable buildings in general, of which circularity is one aspect, are seen as desirable by occupiers and therefore have the potential to return a higher rate. Although not currently considers, there is potential for the residual value of materials to be included in the valuation and investment decisions.

This roundtable was hosted by Madaster and attended by members of the Madaster Network Footprint+ delegates The Madaster platform enables you to create and manage material passports effortlessly and unlock environmental and financial insights about your assets including assessing residual value and whole life carbon.

If you would like to find out more about how Madaster can help deliver enhanced value for your buildings, please get in touch.  

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