Real estate valuation systems have rapidly converged in countries towards rules that are already common on how to deal with the different aspects of property that affect its value, the legal conditions, the conditions of the transaction, the situation of use of the house … and other requirements without forgetting the technical standards that guarantee the quality of the Real estate valuation.
It is assumed that all the components that ‘adorn’ a property, affect its value (and its price), and this is reason enough for them to be taken into account in the Real estate valuation and appraisal process.
The sharing of international Real estate valuation systems recognizes this, and the evidence of researchers that this relationship exists and its quantification, have resulted in a set of rules embraced by most countries, and included in ‘good practices’.
With this set of rules, it is guaranteed as much as possible that the values are adjusted to what the property contains, while the existence of common rules gives transparency to the market and favors investment processes, national and international. The underlying issue is to identify which of the characteristics are those that affect the final price and to what extent.
Real estate valuation and energy efficiency
Recently, researchers of real estate price behavior have shown interest in the effects that design and energy efficiency have on home prices and rents, both in residential and non-residential buildings (such as offices).
If energy efficiency is a feature that adorns a property, then its price should reflect it as a response to how much the plaintiffs appreciate that particularity.
The idea is that if energy efficiency is a feature that adorns a property, then its price should reflect it as a response to how much the plaintiffs appreciate that particularity.
As in other goods, prices reveal tastes and expectations,so to identify how much the price increases when a property is ‘green’ is to discover the ceiling of what should be the opportunity cost of investing in it so that it becomes energy sustainable.
The initial interest was focused on the office market, so Adelaide Property Valuation that different already famous works (such as those of Kok et al, 2011, Eichholtz et al, 2013, Fuerst and McAllister, 2011, Deng et al, 2012, among others) calculated the different price that these buildings had according to their energy rating.
The results of these works were very significant, since they showed that the most efficient units were more expensive in the market due to that efficiency (that is, controlling the exercise by the rest of the factors that would affect prices) and estimated what is known as the ‘premium green’ in the price of a property.
The premium Green is the difference in the sale or rental price of a real estate asset that is produced exclusively associated with its level of energy efficiency, so that the one that consumes the least and emits, the higher price reaches in the market.
The ‘green’ aspects are not yet included in the Real estate valuation techniques, neither in any country, and it is, possibly, due to the lack of general evidence that exists.
This initiative extended to the analysis of the existence of Green Premium in the housing markets and the literature shows evidence about its existence in different countries.
For example, Brounen and Kok (2011), for the Netherlands, calculated that the extra price was between 10%, 5.5% and 2.2% in the three highest levels of certification (levels A, B and C) level D between 2008 and 2009.
Fuerst et al (2015) found similar results for the UK, with a Green Premium ratio of 5.5% for A+B certified households and 1.8% for C, compared to D-rated homes, and discounts of 0.7% and 0.9% for E- and F-rated homes, respectively, or between 18.5% and 4% for A+B and C relative to D level (Fuerst et al 2016).
In California. Kok and Kahn (2014) estimated between 2% and 4% in the premium Green of housing; in Singapore, Zheng et al (2012) and Deng, Li and Quigley (2012) also offer high-performance estimates for high-energy residential buildings.
In the case of Spain, there are few works that estimate this impact, among which, the RENTALCAL project (Taltavull et al, 2016) has calculated that, for the province of Alicante, the average Green Premium is between 3% and 6%.
This relationship is key because, if the impact of energy efficiency on prices can be assessed, the market incentive that acts on owners or tenants will have been captured and, therefore, their preferences that could encourage the transformation of homes towards energy efficiency would be revealed.
This would contribute to achieving the energy policy targets of a 40% reduction in consumption by 2050.
Another question is to understand why the premium Green is produced. Being a reflection of the characteristic ‘energy efficiency’ of the real estate property in the price, its mere existence implies that the plaintiffs value this particularity.
It is important that investors and agents in the real estate market become aware of the need to take the necessary steps to increase the energy efficiency of buildings, as a market attraction.
It is not well known if this increase in price is consubstantial with the improvement in quality that the house has after the intervention of energy insulation (which would be, therefore, equivalent to the amount of investment made that results in an increase in its quality), or if it is the capitalization in the price of the lower energy cost that is assumed by the fact of having an efficient home (that is, the lower payment for services results in a higher price of housing).
In any case, either because of the greater appreciation of the applicants, or because of the higher cost of the facilities, this characteristic should be ‘valued’ by the experts and, therefore, be taken into account in the calculation of the real estate valuation.
International experts do not agree on the specific techniques for including the ‘greem premium’ in the Real estate valuation.
Energy efficiency and the impact on rental price
It seems that there is agreement that the Green Premium affects rents: if a home is energy efficient, the energy consumption costs for heating and cooling will be lower than those that an inefficient home would have, so those will be more valued and will determine a higher rent (which is the payment of the cost of using the house).
However, the ‘green’ aspects are not yet included in the Real estate valuation techniques, neither in any country, and it is, possibly, due to the lack of general evidence that it exists.
There are many barriers to the recognition and Real estate valuation of the premium Green in the market. The first is the lack of statistical information that does not allow to clearly contrast its value in the different climatic areas, urban centers, types of housing, etc.
The second is the agreement on the channel by which energy efficiency affects property prices. To clarify these aspects, and raise awareness of the need for research, within its lines of work H2020 research, has twice convened projects aimed at receiving proposals for the integration of energy efficiency in real estate valuation standards.
The first was in 2015, with the identifier EE-05-2015 of the H2020 energy projects, which recognized the need for the Real estate valuation of the long-term impact that investments in energy efficiency and the effective integration of renewable energies could have on buildings and their efficiency, as a challenge to be achieved, and the definition of solutions was requested to eliminate barriers to investment in efficiency and coordinate actions with owners.
In that proposal it was specified (in addition to others) as an objective to be achieved, the development of real estate valuation techniques that would serve to develop a method that would allow to include energy efficiency in the estimation of the value.
The second, from 2016, was classified within work program 10 (‘Secure, Clean and Efficient Energy’), in the call EE-24-2016-2017: Making the energy efficiency market investible.
In this proposal, the gaze was turned to investors and the Real estate valuation of the conditions that could encourage them for the energy renovation of their buildings was requested.
One of them is the return on investment, and this has to do with the value that the buildings / homes would have before and after the energy renovation.
Since Real estate valuations with the investment objective are made by certified appraisal technicians or experts in the real estate market, this call expressly requested, as a fundamental objective, the ‘Collection, processing and dissemination of large-scale data on the real financial performance of investments in energy efficiency, in order to create a history of energy efficiency in different sectors (buildings, industry, transport, etc.) (and the) Integrating the green value of buildings into property valuation through the collection of market data and actions targeting key players in the sale or lease process (e.g. real estate agents, property appraisers, notaries, etc.).
The clarification of this value has relevant effects, in the eyes, since it reduces the uncertainty of investment in energy efficiency, achieves greater attraction of capital (institutional and private) to invest, allows the standardization of the elements associated with insurance and generalizes the knowledge in the market of the benefits of having energy-efficient buildings, in addition to the large-scale reduction of electricity consumption and greenhouse gas emissions.
It is important to advance in the estimation of the Green Premium and its internalization within the Real estate valuation systems, although experts are still working on these projects and in a short time it will be seen if useful integration techniques and formulas have been found for its application in the appraisal processes.
It is also important that investors and agents in the real estate market become aware of the need to take the necessary steps to increase the energy efficiency of buildings, as a market attraction.