The green premium is no longer in doubt

03 / 11 / 22 - 5 minute read

The facts are clear. Energy-efficient buildings command a premium. A study by PATRIZIA across 27 cities in Germany and the UK shows that, on average, energy-efficient assets have approximately a 3% rental premium over inefficient assets.

For decades, humanity has been in a state of imbalance with the natural world. Quite simply, we have been consuming the planet’s resources at a faster rate than they can be replenished. As a result, the ecological deficit increases yearly to the detriment of the next generation.

At the very latest, this situation was formally recognised by the Brundtland Report to the United Nations in 1987. The report acknowledged the deficit, made explicit the responsibility of each generation to ensure the welfare of subsequent generations and proposed a pathway towards making economic growth ‘subservient’ to the environment.

The report lays a cornerstone for what we now understand as sustainability and sustainable development, which grows more pressing by the day. For the clock is now ticking ever louder when it comes to reducing carbon emissions and averting the worst consequences of climate change.

The importance of the real estate industry’s contribution to this agenda is difficult to overstate. After all, it cannot be repeated often enough that the built environment is responsible for almost 40% of global carbon emissions, according to the World Green Building Council. To be fair, the real estate industry has come a long way in the last two decades – but it cannot afford to rest on its laurels.

The path to the present

LEED and BREEAM have been brought forward to measure energy usage and celebrate steps towards greater efficiency at a building level. The most influential programme has been the introduction of energy performance certificates (EPCs) in 2007, which quantify the intensity of energy use and point towards potential savings.

Other schemes, such as GRESB, aim to measure performance at a company level. Starting this year, however, sustainable development has – finally – been embedded into European regulations, which demand concrete action plans from market players on how they will adapt their activities to decrease emissions. This represents the most extensive scheme for leading Europe towards becoming a climate-neutral continent.

To put it mildly, the new regime isn’t easy for real estate companies, but there is now a substantial body of academic literature that can guide market actions. After all, EPCs have been around for long enough for the collective data that they have produced to be used extensively, not least to measure the relationship between energy consumption and the value of residential real estate.

That research now makes it clear that more efficient homes can command a higher rent premium, something which had been in doubt for some years. The results vary from country to country and market to market. Still, it can now be demonstrated that, on average, an energy-efficient real estate asset can command approximately a 3% rental premium over an inefficient asset. Multiply that across a portfolio and it is a premium well worth having.

"So, it can now be demonstrated with some confidence that consumers are willing to pay more for more energy-efficient homes; something that is already prompting landlord investment in green retrofit measures, not least insulation."

Dr Marcelo Cajias

A fresh perspective

And yet, you can never have enough evidence. With that in mind, PATRIZIA decided to conduct a large-scale study looking at the relative green premium in 27 markets in Germany and the UK to estimate the comparative benefit of a residential retrofit. To isolate the rental impact of a retrofit, all other characteristics of apartments were fixed, including attributes such as the number of rooms and bedrooms, as well as the presence or absence of balconies.

The results were stark. In the top seven German markets, apartments with an EPC rating of A+ or A achieve, on average, around 3% higher rents than apartments with an EPC D rating, while holding all other factors fixed. On average, apartments with an energy consumption worse than D have a rent discount of -1%.

In the case of London, our results confirm the positive willingness to pay for energy efficiency. So, when considering two otherwise identical assets with an EPC of A and D, tenants will pay about a 2% higher rent for the more efficient property. An even more pronounced effect can be observed in the secondary markets.

Our research also indicates that there is a marked difference between neighbourhoods. The effect differs slightly between Germany and the UK. Still, in both countries, we found that the willingness to pay for more energy-efficient homes is contingent on the relative wealth of the renter, with wealthier households in more affluent areas more likely to be willing to pay a green premium.

This is all, of course, to be expected. Tenants benefit from green retrofits through lower energy consumption and heating costs. 

The impact of energy cost inflation

All that could change, however. Our study was conducted before the ferocity of energy price inflation in Germany and the UK became apparent, or at least before it started making daily headlines. Few people can now be unaware of quite how much powering their homes currently costs them – and will soon cost them. So it can be expected that the willingness to pay a green premium will increase.

So, it can now be demonstrated with some confidence that consumers are willing to pay more for more energy-efficient homes, something that is already prompting landlord investment in green retrofit measures, not least insulation. And it can be expected that the spiralling energy costs across Europe started by Russia’s aggression in Ukraine will only hasten the trend.

Further regulations, on top of this year’s European steps forward, are expected in the UK and the EU. But the plain fact of the matter is that regulation or no regulation, the evidence now shows that greener homes financially benefit both tenants and landlords. Most importantly of all, such sustainable investments benefit the planet.