Energy efficiency: the value of buildings and the payment default risk

Published by Build Up

Energy efficiency is "an energy source in its own right". By 2030 more energy will be saved than the amount of oil-based energy then, thus energy efficiency is expected to actually become the “first fuel”.

To realise the sustainable energy potential in buildings, a number of social, financial, technical barriers or administrative challenges need to be overcome. In this context, the European Commission launched the “Smart Finance for Smart Buildings” initiative in November 2016 to unlock private financing for energy efficiency investments in buildings. An important objective of this initiative is to “de-risk” investments. Fundamentals such as the lower probability of default in the case of energy saving loans or an increased value of assets due to higher energy performance need to be progressively recognised by banks and reflected in the pricing of their financing products.

 

This report by Joint Research Center supports “de-risking” activities by evaluating existing literature about the impact of energy efficiency improvements on the value of buildings by increasing its actual value and through the impact on operational costs. The specific impacts of labels and certificates to create “green premium” and “brown discount” are analysed.

 

The report also looks at the impact of energy efficiency on the payment default risk. The analysis shows that higher energy efficiency is clearly linked to lower default risk, which should be reflected in financial products.

 

As a rule of thumb an increase of 3-8% in the price of residential assets as a result of energy efficiency improvements, and an increase of around 3-5% in residential rents compared to similar properties can be observed. For commercial buildings, the premium seems to be higher, over 10%, and in some studies even over 20% of sales price increase compared to similar properties has been reported. Rental prices of commercial buildings have also been positively affected by 2-5%. Differences across regions and countries, as well as different property types (e.g. apartments vs. houses) are shown. A change over time is also seen, because the labels and schemes become more well-known and understood. It is shown that higher energy performance is becoming the norm, therefore higher values are associated with better performance in latter times.

 

Energy efficiency upgrades change the basic characteristics of the buildings affected and thus have an impact on other value drivers: comfort, safety, maintenance, etc. Not only the energy performance, but rather the connotated features can influence the value of a property. Current demand for housing and location are still the main drivers to a building’s appraisal value and for a tenant’s selection of housing, however energy performance is becoming increasingly important across all reviewed countries.

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