10 fac­tors that influ­ence the val­ue of sus­tain­able prop­er­ties

Switzer­land wants to become cli­mate neu­tral by 2050. Real estate must, and can, make a deci­sive con­tri­bu­tion to achiev­ing this goal — after all, the Swiss build­ing stock is cur­rent­ly respon­si­ble for over a quar­ter of the coun­try’s CO₂ emis­sions. But what does this mean for the mar­ket val­ue of a prop­er­ty? What cri­te­ria deter­mines whether it is eco­nom­i­cal­ly worth­while for own­ers to imple­ment struc­tur­al mea­sures to make prop­er­ties more sus­tain­able?

Does sus­tain­abil­i­ty lead to high­er or low­er mar­ket val­ues?

We know that cli­mate-friend­ly mea­sures entail costs — and high­er costs lead to a low­er mar­ket val­ue. For own­ers, there­fore, invest­ments in the sus­tain­abil­i­ty of their real estate can only pay off finan­cial­ly if the mea­sures tak­en suc­ceed in increas­ing income or reduc­ing dis­count­ing to such an extent that they result in a high­er mar­ket val­ue, despite the costs.

In many cas­es, cli­mate-friend­ly mea­sures can be imple­ment­ed in a val­ue-neu­tral man­ner. This is shown by two stud­ies con­duct­ed by Wüest Part­ner on res­i­den­tial invest­ment prop­er­ties owned by insti­tu­tion­al investors. Both stud­ies are pre­sent­ed in more detail in the fol­low­ing blog arti­cles, where they can also be down­loaded in full:

Ener­gy refur­bish­ments: 3 win­ners

The effect of sus­tain­abil­i­ty on real estate val­ues

The cost-effec­tive­ness of cli­mate pro­tec­tion mea­sures varies from prop­er­ty to prop­er­ty. Below, we have list­ed the ten fac­tors that influ­ence the mar­ket val­ue of prop­er­ties, in an analy­sis grid show­ing the effects of cli­mate-friend­ly mea­sures. Sev­en of these fac­tors increase val­ue and three decrease it. The fol­low­ing table shows an overview of these fac­tors, along with indi­vid­ual expla­na­tions for each of them.

The fol­low­ing fac­tors have a pos­i­tive effect on the mar­ket val­ue:

The fol­low­ing fac­tors have a neg­a­tive effect on the mar­ket val­ue:

1. Expect­ed return

Sus­tain­ably oper­at­ed prop­er­ties are attrac­tive to many investors. This was shown by a sur­vey of 237 Swiss real estate investors con­duct­ed by Wüest Part­ner on behalf of Senn Resources AG at the begin­ning of 2021. The results of this sur­vey con­firm that investors have a high­er will­ing­ness to pay for ener­gy-effi­cient build­ings. (The blog arti­cle “Investor sur­vey on the val­ue rel­e­vance of sus­tain­abil­i­ty” presents the results of this sur­vey in detail).

These sur­vey results were con­firmed in an empir­i­cal study in which Wüest Part­ner ana­lyzed 432 mul­ti­fam­i­ly hous­ing trans­ac­tions com­plet­ed between 2017 and 2021. Accord­ing to this, slight­ly low­er expect­ed returns tend to be observed for mul­ti­fam­i­ly build­ings with low CO₂ emis­sions than for prop­er­ties with high CO₂ emis­sions. A low­er­ing of the expect­ed return and thus of the dis­count rate increas­es the mar­ket val­ue of an invest­ment prop­er­ty. (A detailed expla­na­tion of the influ­ence of expect­ed returns on the mar­ket val­ue of real estate can be found in the afore­men­tioned study “The effect of sus­tain­abil­i­ty on real estate val­ues”).

2. Yields

Mul­ti-fam­i­ly hous­es heat­ed by CO₂ can be oper­at­ed sig­nif­i­cant­ly cheap­er. On one hand, there is no CO₂ tax, and on the oth­er hand, the elec­tric­i­ty bill is cheap­er than the heat­ing oil bill, espe­cial­ly in the cur­rent state of the glob­al econ­o­my. Accord­ing to the afore­men­tioned study “The effect of sus­tain­abil­i­ty on real estate val­ues”, switch­ing to a heat pump reduces ancil­lary costs by an aver­age of 33 francs per apart­ment, per month. These cal­cu­la­tions were based on data from the peri­od between 2015 and 2020 and do not take into account the cur­rent sharp increas­es in prices for heat­ing oil and gas. At today’s prices, the reduc­tion would be sig­nif­i­cant­ly greater.

Saved ancil­lary costs lead to a high­er earn­ings poten­tial for new leas­es (com­pared with the study “Ener­gy refur­bish­ments: 3 win­ners”). This is because the will­ing­ness of new ten­ants to pay is based on the gross rent, (the sum of net rent and ancil­lary costs). With low­er ancil­lary costs, own­ers can increase the net rent, thus increas­ing their income.

3. Ten­ant pref­er­ence

The impor­tance of sus­tain­able man­age­ment is con­tin­u­ous­ly increas­ing. Many com­pa­nies are get­ting seri­ous about cli­mate pro­tec­tion, which is increas­ing­ly form­ing part of their busi­ness mod­el. A steadi­ly grow­ing share of demand is there­fore focused on com­mer­cial spaces that meet sus­tain­abil­i­ty require­ments. In many cas­es, this is accom­pa­nied by a greater will­ing­ness to pay on the part of ten­ants. 

When it comes to rental apart­ments though, there is still lit­tle empir­i­cal evi­dence that ten­ants’ will­ing­ness to pay is sig­nif­i­cant­ly increased by increased sus­tain­abil­i­ty. How­ev­er, Wüest Part­ner expects the num­ber of  peo­ple will­ing to pay a high­er rent for sus­tain­able hous­ing to increase over time.

4. Sub­si­dies

Gov­ern­ment sub­si­dies reduce the net invest­ment costs for ren­o­va­tion, ben­e­fit­ting both exist­ing ten­ants and own­ers. Exist­ing ten­ants ben­e­fit by being charged a low­er amount com­pared to a ren­o­va­tion car­ried out with­out sub­si­dies. From the own­ers’ per­spec­tive, this reduc­tion in net income is more than com­pen­sat­ed for, as the net invest­ment is low­er. 

The sub­si­dies for cer­tain ener­gy-effi­cient ren­o­va­tions can be sig­nif­i­cant in dif­fer­ent can­tons or cities. How­ev­er, region­al dif­fer­ences in the amount and con­di­tions for the sub­si­dies are very large.

5. Oper­at­ing and main­te­nance costs

Many struc­tur­al mea­sures that pro­mote the sus­tain­abil­i­ty of build­ings lead to low­er oper­at­ing and main­te­nance costs. For exam­ple, a heat pump requires less main­te­nance than an oil heat­ing sys­tem. If these costs are reduced, the expens­es that are paid by the ten­ants via ancil­lary costs are low­ered, as too are the costs cov­ered by the own­ers.

6. Build­ing com­po­nents

A mod­ern, sus­tain­able con­struc­tion method also pays atten­tion to the reusabil­i­ty and longevi­ty of the build­ing com­po­nents. This increas­es the val­ue of these com­po­nents and at the same time reduces the costs of future ren­o­va­tions.

7. Elim­i­na­tion of oil tanks

WWhen an oil heat­ing sys­tem is removed, the space pre­vi­ous­ly occu­pied by the oil tank is freed up. In an aver­age apart­ment build­ing, a few addi­tion­al square feet could be rent­ed as a result. The aver­age mar­ket rent per square meter of base­ment space is about 60 francs per year.

8. Struc­tur­al mea­sures to increase sus­tain­abil­i­ty

Where costs are con­cerned„ the actu­al struc­tur­al mea­sures aimed at increas­ing the sus­tain­abil­i­ty of build­ings usu­al­ly have the great­est impact. The fact that they have the effect of reduc­ing the mar­ket val­ue is because they can­not be passed on in their entire­ty to ten­ants for legal rea­sons. This means that rental income does not increase to the same extent as amor­ti­za­tion costs. In gen­er­al, exist­ing ten­ants pay rents that are low­er than the mar­ket rent, the longer they have lived in the apart­ment. After an ener­gy-effi­cient refur­bish­ment, the rent is there­fore often far below the attain­able mar­ket rent of the now mod­ern­ized apart­ments. 

It should be not­ed, how­ev­er, that this fac­tor, which reduces the mar­ket val­ue, can have the oppo­site effect over time: After a change of ten­ants, own­ers have the pos­si­bil­i­ty to adjust the rent to the mar­ket lev­el. Since gross rent is a crit­i­cal fac­tor from the ten­an­t’s point of view and giv­en that ancil­lary costs fall sharply after an ener­gy-effi­cient refur­bish­ment, ten­ants in a refur­bished prop­er­ty accept a net rent that is high­er than in a prop­er­ty in which they have to pay high­er ancil­lary costs. There­fore, after a ren­o­va­tion and a sub­se­quent change of ten­ants, own­ers can in many cas­es increase the net rent, which is an impor­tant fac­tor for them, by an amount that is high­er than the amor­ti­za­tion costs of the invest­ments made. There­fore, if after a cer­tain time many or all ten­ants have changed, the val­ue-reduc­ing effect of struc­tur­al mea­sures can end up hav­ing a val­ue-increas­ing effect. (This effect is described in detail in the study “Ener­getic refur­bish­ments: 3 win­ners”).

9. Accom­pa­ny­ing struc­tur­al mea­sures

An ener­getic refur­bish­ment can be car­ried out with dif­fer­ent depths of inter­ven­tion. When replac­ing an oil or gas heat­ing sys­tem with a heat pump, addi­tion­al struc­tur­al mea­sures are often nec­es­sary. This could involve insu­la­tion mea­sures (build­ing enve­lope, win­dows, base­ment ceil­ing), for exam­ple, or it may be that exist­ing radi­a­tors have to be replaced by under­floor heat­ing. In addi­tion to this, depend­ing on the loca­tion (e.g. geol­o­gy or the pro­tec­tion of his­tor­i­cal mon­u­ments), the instal­la­tion of a heat pump may incur very dif­fer­ent costs. In many cas­es, alter­na­tive solu­tions to heat pumps must be sought (such as dis­trict heat­ing).

Addi­tion­al insu­la­tion mea­sures usu­al­ly have a cost-increas­ing effect, even if there are two oppo­site effects on the invest­ment costs: Just as insu­la­tion mea­sures increase costs, the heat­ing sys­tem can pos­si­bly be dimin­ished with bet­ter insu­la­tion, which low­ers the costs for the new heat­ing sys­tem. 

10. Cer­tifi­cates (GEAK, Min­ergie)

Many investors have their build­ings cer­ti­fied, which incurs costs that are usu­al­ly in the four-dig­it range. In many cas­es, cer­ti­fi­ca­tion also forms the basis for sub­se­quent ener­gy refur­bish­ment. This is often the case, for exam­ple, with the build­ing cer­tifi­cate at the can­ton­al lev­el (GEAK Plus), which is fre­quent­ly a manda­to­ry con­di­tion for apply­ing for sub­si­dies.

With a cer­tifi­cate, own­ers can also increase the attrac­tive­ness of their prop­er­ties. For cer­tain com­pa­nies, where sus­tain­able man­age­ment is part of the busi­ness mod­el, a cer­tifi­cate can even be a pre­req­ui­site for enter­ing into a lease (see point 3).

Con­clu­sion

Major invest­ments are need­ed in order to achieve the fed­er­al gov­ern­men­t’s cli­mate tar­gets. Often, the pub­lic debate focus­es on costs. Indeed, the need for invest­ment is increas­ing, how­ev­er, stud­ies show that in many cas­es, addi­tion­al invest­ments are off­set by high­er rental income and a greater will­ing­ness to pay on the part of investors. It should be not­ed, how­ev­er, that the cost-effec­tive­ness of cli­mate pro­tec­tion mea­sures can vary sig­nif­i­cant­ly from prop­er­ty to prop­er­ty. Each prop­er­ty rep­re­sents an indi­vid­ual case and must be ana­lyzed indi­vid­u­al­ly, for exam­ple by apply­ing these 10 cri­te­ria to a prop­er­ty that is to be ener­gy-saved.

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