A new report by the European Commission’s Joint Research Centre (JRC), shows that higher energy efficiency is becoming more important for how buildings are appraised and also clearly linked to lower payment default risks
The report evaluates existing literature that discuss the impact of energy efficiency improvements on the value of buildings, as well as the methodology that can be applied to quantify property value linked to energy performance. It also demonstrates the impact of energy efficiency on the payment default risk – the link between energy efficiency investment and ability of borrowers to repay their loans.
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, but energy performance is becoming increasingly important across all reviewed countries, according to the report.
Today, buildings account for 40% of Europe’s total energy consumption, and around 75% of the building stock is considered to be energy inefficient. According to the European Commission, the current 1% annual renovation rate it would take around a century to decarbonise the building stock to modern, low-carbon levels.
In November 2016, the European Commission launched the Smart Finance for Smart Buildings initiative. The aim was to unlock private financing for energy efficiency investments in buildings, of which an important objective initiative is to “de-risk” investments.
The main findings of the report include:
- Energy efficiency improvements seems to result in an increase of about 3–8% in the price of residential assets, and an increase of around 3–5% in residential rents compared to similar properties.
- For commercial buildings, the premium seems to be 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%.
- There are differences across regions and countries, as well as different property types (e.g. apartments vs. houses).
- A change over time is also seen, as labels and schemes become more well-known and understood. As higher energy performance is becoming the norm, higher values are associated with better performance.
Energy efficiency upgrades change the basic characteristics of the buildings affected and has therefore an impact on other value drivers, such as comfort, safety and maintenance. According to the report, the lower default risk linked to energy efficiency should also be considered and reflected in financial products.