PROPERTY JOURNAL

Decarbonising Europe's building stock

As the need to decarbonise Europes building stock climbs the political agenda how can we identify the impact of energy efficiency on property value? A recent RICS insight paper examines this question

Author: Prof. Sarah Sayce and Prof. Sara Wilkinson

20 October 2019

Climate change is now widely acknowledged to require the urgent decarbonisation of all aspects of the economy, including buildings. The latest scientific findings indicate that an 80 per cent reduction in carbon by 2050 is not enough.

The UK target has therefore shifted to zero carbon by 2050; other European countries are moving in a similar direction, with the Netherlands and Germany in particular taking strong measures.

The challenge is primarily old builds: estimates suggest a mere three per cent of European residential stock is fully energy-efficient. This situation becomes increasingly apparent with the introduction of measures such as energy performance certificates (EPCs). These have informed the development of regulations on the energy efficiency of existing stock as well as new builds; for example, minimum standards for UK investment stock are now in place.

Although energy-efficient buildings reduce costs for occupants — and a business case for retrofitting is made on this basis — payback periods may render savings insufficient other than for long-term owner-occupiers. This is particularly the case for investor-owners who suffer from the so-called split incentive problem, where the landlord spends the money but the tenant gains the cost savings.

From occupier and owner-occupier perspectives, a stronger case may be made for energy-efficient buildings on the basis of health and well-being, as some popular retrofitting and energy-efficiency measures provide increased levels of comfort and feelings of security.

Earlier this year, RICS published an insight paper entitled Energy efficiency and residential values: a changing European landscape for valuers and other stakeholders. This looked at the impact of energy efficiency on the value of residential property in selected EU nations.

The paper, based primarily on EU-funded research, considers the valuer's role, and how — through their data collection and reporting processes — they can promote more energy-efficient housing. It reviews the context in which energy efficiency is climbing the European regulatory agenda, and the impact this has on value.

A review of the many large-scale quantitative studies conducted in Europe on value and energy efficiency found no single, firm relationship between the two qualities, as it varies between countries and study parameters, although there is a slight trend for positive relationships.

Most studies use hedonic pricing analysis and examine either capital or rental value in relation to EPCs. One large-scale study notes that energy-efficiency upgrades may result in higher values but that these may not outweigh the costs, whereas another study found a high return on investment. One study suggests that the small supply of energy-efficient stock leads to a skewing of demand and that, as new energy-efficient stock is developed, the premiums observed may fall. However, if legislation bites then inefficient stock may lose value.

There is limited qualitative research, but where it has been undertaken it reveals that individual property characteristics that have an impact on energy efficiency are more influential in terms of value than EPCs. But to date energy efficiency has not been a major factor in value.

The paper also examines as case studies a number of business-led initiatives aiming to change the market, including the work of social housing providers and the green mortgages movement, the latter encouraging retrofits and being designed to reduce credit risk.

Overall, the evidence reported in the insight paper points towards energy efficiency beginning to affect value, although it has a small impact compared with traditional factors. While column inches are often devoted to certification, specific visible characteristics such as good quality, climate-appropriate glazing may have greater important influence on value.

However, in the light of the rapidly changing policy environment, energy efficiency is likely to inform decisions by both owner-occupier and investor-owner more and more frequently, including those relating to lending and mortgages; this will in turn be reflected more clearly in reported property values.

Sarah Sayce FRICS is a professor of sustainable real estate at the University of Reading and emeritus professor at Kingston University s.l.sayce@reading.ac.uk

Sara Wilkinson FRICS is professor of sustainable property at the School of Built Environment, University of Technology Sydney, Australia sara.wilkinson@uts.edu.au

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