FV-71 | Energy Efficiency Labeling of Residential Buildings in Switzerland: An Analysis of Rent Premium and its Determinants

Prof. Dr. Pascal Gantenbein, Prof. Aya Kachi, Andrea Blum, Fintan Oeri

Finanzmanagement | Political Economics of Energy Policy

Research Topic
• The building sector consumes most energy, and the problem applies beyond Switzerland.
• Yet there is no systematic knowledge on what motivates the supply of energy efficient buildings.
• We estimate residential rent premiums tied to Minergie certificates for energy efficient buildings.

With an estimated 50% the building sector accounts for the largest share of energy consumption in Switzerland (about 40% in the US)1 . As part of sustainability goals, both scientific and policy communities have so far strived (1) to develop energyefficient building technologies (supply of technologies), and (2) to change the energy consumption behavior of residents and tenants (reduction of demand). But supply of technologies does not come to fruition, unless suppliers employ new technologies. And reduction of demand has limited impact, unless tenants can live in energy-efficient infrastructures. In fact, we currently lack a comprehensive understanding of what it takes to increase the supply of low-energy-consuming properties. Therefore, it is worth investigating the market- and property conditions under which investors are willing to pay for energy efficiency in buildings.

Statement of the Problem
• Though focused on the commercial sector in the US, existing studies find positive premiums.
• Existing study on Swiss cases (1) suffer from major data limitations, (2) focus only on the oldest Minergie label, and (3) do not consider rent spillovers from Minergie to non-Minergie properties

Investments in energy efficiency are only interesting for investors if there is a financial incentive such as a rent premium. Existing rent premium analyses are concentrated in the commercial sector and the US market. Though some controlled for more detailed building characteristics than others, Miller et al. (2008), Eichholtz et al. (2010), and Fuerst et al. (2009) all found about 3 to 9% rent premium for certified green buildings. Reichhardt et al. (2012) added overtime trends of rent premiums. The only large-scale residential rent study in the US is Kahn and Kok (2013) with 1.6 million single-family house cases and estimates a 2.1% premium. In the Swiss context, Salvi et al. (2008, 2010) showing a 6% residential rent premium are the only
studies coming close to our research interest. Yet, the studies are non-peer-reviewed private market analyses, and the sample size is limited to 150,000 and the ZH area. Beyond these data limitations, we identified two important issues to be tackled in rent premium analyses. First, Salvi et al. (2010) shows decreasing premiums of the traditional Minergie label over time. As building standards (both due to regulations and social norms) increase regardless of green certificates, the result may not be surprising. By controlling for buildings’ actual energy  performance and by exploiting newer data that include stricter Minergie subcategories, we shall reassess the overtime trend of rent premiums. Second, the real estate literature has shown
that rents are geographically autocorrelated (e.g. McCord et al. 2014). Therefore, we can deduce that, all else equal, the occurrence of a newly Minergie-certified building can have a positive spillover effect on the rents of proximate buildings that are not certified. The existence and degree of this (perhaps unwanted) spillover has never been estimated.

With the new comprehensive dataset (ca. N=800,000) on asking rent prices and detailed building characteristics that we construct (see Section 7 & 8 for more details), the following 3 related research questions (RQ’s) can be answered in the Swiss residential market context:

• RQ1: What is the direction and extent of rent premiums associated with Minergie labels? Does the label generate its own premium, on top of the actual  energy performance premium?
• RQ2: What is the intertemporal trend of Minergie-associated rent premiums? Given that buildings’ energy performance generally improves over time, do a newer and stricter Minergie sub-labels gain more premiums, compared to the older, original Minergie label?
• RQ3: Given that rents are spatially autocorrelated, does a new Minergie label obtained by a building generate positive spillover effects on rents of proximate buildings that are not certified?

Bedeutung, Nutzen und Neuigkeitsgehalt des beantragten Projekts
• Data and findings are novel, and highly relevant on the scientific, societal & practice level.

The novelty of our research findings is threefold. First, we will create and employ new and large data to analyze rent premiums in Switzerland, controlling for a rich set of building characteristics. Second, this is the first study to shed light on subcategories of energy labels, accounting for the fact that an old label may become obsolete as building standards improve over time. Third, this is the first to assess spillover effects of a building’s Minergie label on the rent of other non-Minergie buildings in the area (hence potential ‘freeriding’ by investors). Our findings’ scientific relevance is high and manifold. We contribute to the current debate on the valuation of green buildings, by using unique and comprehensive data. Moreover, our estimated rent premiums (induced by energy labeling) will provide realistic benchmarks for future behavioral studies that assess the effect of (actual and perceived) premiums on investors’ willingness to pay for energy efficiency. These findings have a direct societal relevance, too. After all, existing research and policy initiatives to develop energy efficient building technologies would not come into fruition until we understand the conditions, under which market actors agree to supply such properties. Our studies identify market drivers for the supply of energy efficiency in buildings. Finally, the findings also serve as objective, evidence-based market analyses with extremely high-quality data for the current and potential real estate investors.