Can property value be increased by an energy efficiency rating or sustainability standard? This is a central question for the real estate universe. From builders to bankers, the value of a more sustainable property is a highly controversial, but critical, point of debate.
A new report published by the Australian Property Institute and the Property Funds Association has purported the added value of “greener” buildings in the Australian property market. Researchers from the University of Western Sydney and Maashricht University teamed up with JLL and CBRE to conduct an economic analysis for the premiums collected by the average gross rent, value and vacancy rate of more energy-efficient buildings, as measured by a NABERS rating, and more sustainable buildings, as measured by the Green Star label.
The findings show that, in the Australian market, more sustainable buildings attain higher rents, occupancy rates, and overall value. Comparing a survey of 366 buildings, the researchers controlled for location and floor area to determine that a favorable NABERS rating delivers a premium of 9% on value, 1% on rents, and 6% on occupancy; the Green Star label, meanwhile, offers premiums of 12%, 5%, and 1%, respectively.
While Green Star is a certification (analogous to LEED in the U.S.), NABERS is a scaled rating system where all properties receive a score (from 1-5 with half-point increments). Less energy efficient buildings, it turns out, are discounted in all categories of value, rent, and occupancy. Buildings with 3.5 stars and below have lesser value than average buildings in the market.
This all said, disclosing energy performance of commercial buildings at time of sale is law in Australia. When the practice of revealing a building’s energy report card is not mandatory, do the increased savings of greener buildings play out? How do other property markets fare?
In the US, the results have identified value premiums for LEED and ENERGY STAR properties. Leading research* in the past few years has noted increased value (9-25%), rent (2-17%), and occupancy rates (3-18%) for more efficient or sustainable buildings, while controlling for other factors. A CBRE survey of its properties noted similar trends.
In Europe, few energy rating/certification schemes are finalized enough for robust economic modeling. However, the early adopters, namely Denmark and Holland, have noted increased value of rated properties. A recent report by Nils Kok and Maarten Jennen on Dutch Energy Performance Certificates (EPCs) in the residential market identified a 6.5% premium on rental prices for more energy-efficient properties.
Additional research is needed on other financial performance indicators, like capitalization rates (a valuation tool that reflects the projected return on a property) of more energy-efficient properties. While a recent study from UC-Berkeley has proven inconclusive, this remains a crucial proving ground for efficiency ratings. Hopefully, as rating and disclosure policies kick-off in markets across the US, EU, and Australia, there can be more robust research undertaken to look at these important financial indicators.
* Cited research includes: Pivo & Fisher 2010, Eicholtz et al 2010, Wiley et al 2010, and Fuerst & McAllister 2011.