The Low-Carbon Rent Premium of Residential Buildings

Abstract

Based on 92,600 rental contracts in the Swiss real estate market, we study how a property’s CO2 emissions affect net rental values. We use a novel measure of operational carbon emissions that relies on various parameters related to the sustainability and energy efficiency of a building as well as the climate conditions of its location. In an extensive hedonic framework, our results suggest that apartments in low-carbon buildings have higher net rents. Sub-analysis of urban and rural areas as well as warm and cold locations show that lower ancillary costs of sustainable apartments are one driver of this low-carbon rent premium. Another driving factor is tenants’ higher preferences for environmentally friendly living as shown by sample spits across regions with high and low support of the Swiss Federal Act for the Reduction of Greenhouse Gas Emissions. In light of Europe’s energy crisis, we further document a slight increase in our main effect. Based on 611 residential building transactions, we also show that low-carbon buildings have lower capitalization rates, which translate into higher market values due to lower risk premiums.

Keywords: Apartment Net Rents, CO2 Emissions, Capitalization Rates, Energy Efficiency, Sustainability, Residential Buildings

JEL Classification: Q40, R11, R32