FV-79 | Swiss Investors’ Decision-Making in the Field of Energy Efficient Real Estate

Prof. P. Gantenbein, Prof. A. Kachi, F. Oeri, M. Melzig

Finanzmanagement

Research Topic 

  • A 3-5% rent premium (estimates of our 2019 FV project) for residential Minergie properties in Switzerland suggests that investors benefit from green building investments on the income side.
  • Yet, to evaluate investment profitability of green property comprehensively, also upfront investment and periodic costs of operating green buildings need to be taken into account.
  • We study investor’s decision-making based also on their profitability knowledge & perceptions.

The building sector accounts for 50% of energy consumption in Switzerland. Therefore, it is vital to analyse drivers for the supply of low-energy-consuming properties; e.g., buildings with Minergie labels2. Our 2019 WWZ-FV project has focused on a price-oriented driver; namely rent premiums linked to Minergie labels. Using data of 370,000 properties (12,500 are Minergie labelled), we found a 3-5% rent premium for residential real estate in Switzerland which is attributable to the label itself. Due to the (very) large dataset with a richer set of property features we compiled, our findings are novel and far more reliable than those of existing studies that attempted similar estimation. Yet, from property investors’ perspective, identifying opportunities for higher rental income from Minergie buildings is only one aspect of their investment decisions. For them, the real question is if investments in energy efficient buildings (incl. renovations & retrofits) pay off, i.e., if profitability of the investment is given. Thus, we must consider the extra building costs that arise from upgrading energy efficiency. Furthermore, investment decisions depend also on investors‘ knowledge or perceptions about profitability. 

Statement of the Problem 

  • Only few studies address profitability of green buildings; none of them deal with Switzerland.
  • Investor decision making and behavior around green buildings is largely unexplored. 

Despite the criticality of profitability for property investors, the only element linked to profitability considered in empirical literatures is the vacancy rate3. However, since the Swiss residential rental market exhibits close to 100% occupancy, the costs incurred by green building investments are more salient factors of profitability in our context. Despite the seeming conceptual clarity of integrating costs and assessing profitability, it is anything but trivial to integrate upfront investments (e.g., isolation, ventilation, solar PV, and non-fossil-fuel heating systems) as well as to calculate the annual (periodic) cost difference between operating a green versus a non-labelled property. Moreover, even if profitability can be measured and is known, there are other crucial empirical questions to be answered: (1) if investors are aware of these costs (knowledge/perceptions), and (2) if the investment decisions depend only on “economic benefits” or also on factors like “sustainability branding” achieved with labels. 

Objectives 
Hence, investigating the effect of both actual and investors’ perceived profitability on the respective decision-making regarding green buildings is a logical next step following from our previous rent premium analyses. In other words, to understand the supply-side of sustainable real estate, we draw on our latest findings on the market implications of eco labelling and now ask investors’ decision-oriented research questions

  • RQ1: What are best estimates for the upfront and periodic costs of operating green buildings? 
  • RQ2: How do the rent premiums for Minergie labels translate to investors’ effective profitability? 
  • RQ3: Do investors’ knowledge about rent premiums, costs, and profitability in the Swiss real estate market diverge from the actual measures? Which drives investment decisions? 

Investigating profitability and investor decisions in the context of green buildings and real estate development is a centerpiece of the current debate on the valuation of green buildings. To our knowledge, we use the most comprehensive dataset ever on Minergie labeled real estate rents. Profitability data based on income and costs furthermore will provide realistic benchmarks for studying investment behavior and the effect of (actual and perceived) premiums on investors’ willingness to pay for energy efficiency. These findings are relevant not only for investors (= vital supply-side actors in sustainable real estate), but also help us understand scientifically, if, ceteris paribus, there is a rent premium gained via the label itself, why not all investors and developers build, retrofit, and apply for a green building. certificate.

1Applicants are listed in alphabetical order and make equal contributions. 
2Minergie Schweiz (https://www.minergie.ch/) is a certificate granting agency for low energy consuming properties. 
3E.g., see Fuerst, F., & McAllister, P. (2009). An Investigation of the Effect of Eco-Labeling on Office Occupancy Rates. Journal of Sustainable Real Estate, 1(1), 49–64.; Wiley, J. A., Benefield, J. D., & Johnson, K. H. (2010). Green Design and the Market for Commercial Office Space. The Journal of Real Estate Finance and Economics, 41(2), 228–243.