The Low-Carbon Rent Premium of Residential Buildings

Abstract

Based on 39,791 rental contracts from 2,438 residential properties 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 which relies on various parameters related to the sustainability and energy efficiency of a building as well as climate conditions of its location. After controlling for a building’s state, its macro and micro location, local rental market conditions and various property or apartment characteristics in an extensive hedonic framework, our results suggest that apartments in low-carbon buildings have higher net rents. This effect is mainly driven by lower ancillary costs of sustainable apartments in contrast to tenants’ higher preferences for environmentally-friendly living. We underline this result by sample splits across urban and rural areas, warm and cold locations, as well as regions with a high and low share of people supporting a Federal Act for the Reduction of Greenhouse Gas Emissions in Switzerland. Based on 432 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: CO2 Emissions, Energy Efficiency, Net Rents, Residential Buildings, Sustainability

JEL Classification: Q40, R11, R32