Why surveyors haven't got a clue

Over the summer, I decided to spend time with 10 UK businesses that have a track record in commissioning quality architecture, in order to find out two things: Where is the impetus coming from? And what valuation methods are being used to ensure that design benefits are factored into investment decisions?

Traditional property valuation methods, as practised by surveyors for financial reporting purposes, are notoriously poor at reflecting design value. A market valuation of a building will tell investors what they might redeem from the ashes if the occupying business goes belly-up, but it fails to measure the value of the building to the business in operational terms. The main alternative to market valuation – "replacement cost" – provides information about tangible costs, but nothing about the intangible benefits that a well-designed building provides.

I first asked the companies why they invest in architecture (the outcomes are summarised in the graph below). "Employee satisfaction" and "functional quality" are regarded as the prime motivations. At the other end of the tangible–intangible spectrum, "disposability" and "book value" are of much less importance. This finding was one of the first signs that the traditional valuation methods used for speculative developments are not particularly useful when owner-occupiers are developing bespoke properties.

There are two main factors that determine corporate policy on architectural investment. First, most of the companies think design is important in the process of corporate change. The second factor is having a senior design champion in the company. If people as powerful as Selfridges' chief executive Vittorio Radice – who earlier this year appointed Future Systems to design a new store in Birmingham – or vacuum-cleaner entrepreneur James Dyson – whose Malmesbury factory was extended by Wilkinson Eyre Architects – view building design as important, then the investment is made.

Within the decision-making process, architectural value gets much the same treatment in most cases. So far as architectural value can be translated into financial benefits – greater book value, additional capacity or running-cost savings – it is accounted for within a cost-benefit analysis. And most of the companies also incorporated other, less tangible design benefits as "top-up" qualitative factors. These included potential increased sales, improved working conditions and contribution to change in corporate culture.

However, only three companies – BA, Lloyd's Register and Capital One – appeared to have made any attempt to attribute numerical values to these types of benefit.

BA's approach seems to have been the most robust. "On a project budget of £200m, we calculated a return, in savings, of £15m a year," a BA representative said. "This figure was generated on the basis of both tangible and intangible benefits. We looked at every issue – staff turnover, sick leave, productivity – and tried to put a numerical value on it."

BA's figures are confidential, but the intangible benefits they identified include improved staff morale due to the less hierarchical office set-up, more efficient use of space through more intelligent layouts, and productivity gains through new ways of working aided by the building.

Direct marketing company Capital One used a variety of approaches to help it value its new asset. One idea, modelled in the USA, was to equip staff in the existing building with smart cards that allowed the firm to monitor how buildings are used and how this affects work performance. For example, the ways that informal spaces, the canteen and the games room, are employed will all feed into subsequent building design. This approach echoes recent work by the Royal Academy of Engineers that has measured the real costs of buildings in respect of capital costs, lifetime maintenance costs and how the building is actually used. The vast majority of costs fall into the final category.

Most of the companies used a market valuation of the property as a starting-point for the "benefits" side of the investment equation. There was, however, widespread recognition that the traditional methods had little to do with the business realities of the investment decision.

"You have to remember that this is the blackest of all arts," said a representative of Capital One. "The market value was calculated on the basis of a rental value. We took the best rental value in Nottingham – £20/ft2 – and assessed our building on the basis of £15-16/ft2, but it's all a bit of sticking your finger in the air."

A spokesperson for Dyson Research and Appliances agreed. "The value is based on the costs of replacing the building with all the fixed assets within it. It understates the value, but what else can you do?"

Some companies, such as Boots The Chemists, have recognised the limitations of traditional methods and use a different way of reckoning the corporate value of their buildings, linked to their corporate financial management systems. For others, however, the distinction between valuations for accounting purposes and decision-making purposes was much more hazy. There was evidence that overreliance on traditional techniques had distorted decisions: all the costs of the architectural investment were factored in, but only some of the benefits.

The study findings represent a challenge to both the designer and the quantifier. Understandably, the architectural profession can be suspicious of attempts to reduce the creative process down to a set of financial estimates.

It's important to point out that the purpose of such an exercise is to justify corporate investment, not attempt to sum up the total economic, social and aesthetic value of a building. What my study seems to show is that if the architectural profession can learn to engage with the business world in the foreign language of "value added", "intellectual capital", "core competences" and the like, it is unlikely to undermine its own unique strengths, but rather create additional "space" in which those strengths can be deployed; in other words, more investment in architecture.

Turning to the quantifiers, I spent some time at the end of the research talking to senior representatives of the RICS about the findings that were emerging. There was general agreement that a "market valuation" model was insufficient in the case of most owner-occupied commissions. "Surveyors don't like to think outside the box," one of the representatives admitted. "The values that are recorded on many owner-occupied buildings have nothing to do with how the market operates. The market-valuation method has more to do with the tax considerations from which it was first conceived than it does with the impact of the buildings on business performance."

It may be that the close relationship between the surveying and accounting professions works quite well in respect of financial reporting requirements for fixed assets. But perhaps it has fettered surveyors in developing better ways of making decisions.

I explored three alternative methods – "contingent valuation", "analytic hierarchy modelling" and "fuzzy logic" (see box, left). Work has been done in all three fields, though none of it in the UK. Instead, it is organisations such as the American Real Estate Association and the Australian Property Council that appear to be leading the way.

In Australia, much effort has gone into developing a "design dividend". A series of urban design criteria has shown that better designed buildings and spaces perform better, both commercially and socially. Early in the new year, CABE will be publishing a more limited UK version, based on our own criteria.

The surveying profession recognises that some crucial ground may have been lost. "As a profession, we are facing a whole new set of intangibles, design value being only one," said a RICS representative. "Frankly, the surveying profession doesn't have a clue how to measure those values at present."

So what can we conclude? At present, although some companies recognise the value to their business of quality building design, little attempt is made to capture this value. The danger of this omission is that it can lead to bad decisions by only seeing the costs of quality design and not the benefits.

Architects and surveyors can work with the business community to ensure that design benefits do not get left off the table when decisions are made. With the Confederation of Construction Clients about to launch its new clients' charter next month, there is a unique opportunity to embed design factors into the procurement process. If we are successful, the result will be more corporate investment in quality buildings, with all the wider economic, social and environmental benefits that will ensue.