10 factors that influence the value of sustainable properties
August 8, 2022
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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:
| Factor | Conditions for positive effectBedingung für positive Wirkung | Frequency of effect | Value-enhancing effect | |||
| 1 | expected return | decreases | almost always | very large | ||
| 2 | income | increases when ancillary costs decrease | almost always | large | ||
| 3 | tenant preference | higher willingness to pay on the part of tenants | partial | medium | ||
| 4 | subsidies | depends on measure and location | often | medium | ||
| 5 | operating and maintenance costs | costs covered by owner decrease | partly | small | ||
| 6 | components | if reusable | rare | small | ||
| 7 | elimination of oil tank | leasable secondary use space becomes vacant | partial | small |
The following factors have a negative effect on the market value:
| Factor | Conditions for positive effect | Frequency of effect | Value-enhancing effect | ||
| 8 | structural measures to increase sustainability | can only be passed on to tenants in part | almost always | large (can change after tenant changes) | |
| 9 | accompanying construction measures | only partially transferable to co-workers | partially | very large | |
| 10 | certificates (GEAK, Minergie) | Costs | often | very small (can positively influence willingness to pay) |
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.