A value premium for energy efficient buildings?

The Green Premium?

It is anticipated that as new legislation surrounding energy in buildings establishes itself and becomes more widely understood by occupiers and investors that rental and capital values will experience a ‘green premium’. Additional demand will be generated by occupiers for buildings whose energy efficiency credentials are good and have a good Energy Performance Certificates (EPCs) rating. This in turn will lead to increased rental values and increased investor demand through yield compression.

In addition to immediate energy savings, tenants and occupiers taking on longer term lease obligations will be attracted that by occupying an energy efficient building they will also benefit from aspects that may be difficult to monetize. Such benefits include being protected from climbing energy prices and if renewables are involved a degree of self-sufficiency.

Green Property Funds

There is no global definition for low-energy buildings, but it generally indicates a building that has a better energy performance than the standard alternative/energy efficiency requirements by following a national building standards.

Low-energy buildings typically use high levels of insulation, energy efficient windows, low levels of air infiltration and heat recovery ventilation to lower heating and cooling energy. They may also use passive solar building design techniques or active solar technologies.

Ideally, the minimum performance requirements for a green building should take into account all types of energy use that is demand for space heating (cooling), water heating, air conditioning as well as consumption of electricity.

Energy Performance Certificates are a good way of comparing the efficiency of buildings within a country  and can be used to good effect when looking to occupy or  invest in buildings.

Do "green premiums" exist in commercial property?

Given that legislative requirements for energy rated buildings is in it’s infancy, no pan-EU studies have yet been concluded to provide early evidence of ‘green premiums’ however ongoing projects expects future green premiums could range from 5% to 15% of Capital Value in Europe.

The US Green Premium: Investment Study

A recent US study produced in association with the RICS, demonstrated that that tenants and investors are willing to pay a premium for energy efficient buildings. The financial performance of Low Carbon Buildings were compared to buildings in similar markets that were classed as normal.

During this research carried out it was demonstrated that a 10% decrease in energy consumption led to an increase in value of about 2% and increase in rent of about 20 basis points. Whilst this may not in itself seem staggering, as energy in building awareness increases and occupiers become savvier this trend is likely to develop.

US methods of energy grading

In the USA, there are two major programs that encourage the development of energy-efficient and sustainable buildings through systems of ratings.

Energy Star - The government backed, Energy Star program began in 1992 as a voluntary labeling program designed to identify and promote energy-efficient products in order to reduce greenhouse gas emissions. The Energy Star label was extended to non-domestic buildings in 1995. Non-residential buildings can receive an Energy Star certification if the site energy use, the source energy use, and the greenhouse gas emissions of the building, as certified by a professional engineer, achieve certain specified benchmark levels. The benchmark is chosen so that the label is awarded to the top quarter of all comparable buildings, ranked in terms of energy efficiency.

More information on Energy Star can be found through the US Energy Star website.

LEED - The requirements for certification of LEED buildings are more complex and wider reaching than the Energy Star rating. Additional points in the certification process are awarded for factors such as brownfield redevelopment and the availability of bicycle storage and changing rooms.

More information on the LEED program can be found through the US Green Building Council website here.

US Findings

In recent research carried out in the US, it was found that having a relatively efficient building was important.

“The results clearly indicate the importance of a green label in affecting the market rents and values of commercial space. The results suggest that an otherwise equal commercial building with an environmental certification will rent for about 3% more per sq ft; the difference in effective rent is estimated to be about six percent per square foot. The increment to the selling price may be as much as 16 percent.”

The results also show that the type of label matters.

“We find consistent and statistically significant effects in the marketplace for the Energy Star labeled buildings. We find no significant market effects associated with the LEED label. Energy Star concentrates on energy use, while the LEED label is much broader in scope. Our results suggest that tenants and investors are willing to pay more for an energy-efficient building, but not for a building advertised as “sustainable” in a broader sense. “

In terms of the way rent varied between buildings that achieved an energy label, although varying the aggregate premium for the whole sample was around 3% per square foot. When looking at rents adjusted for building occupancy levels, the premium was even higher; above 6% per sq ft. The researchers concluded that the positive impact on the selling prices of green buildings was around 16%.

Through further investigation it was discovered what was the driver in this premium. Green buildings (with a LEED or Energy Star label) that improved energy efficiency by 10% showed an additional 0.2% increase in effective rents over and above the 6% premium for a labeled building.

Alternatively, a $1 saving in energy costs from increased thermal efficiency yields a return of approximately $18 in the increased valuation of an Energy-Star certified building.