Does Green Make Cents?

I’ve just been updating my table of empirical studies on the relationship between the environmental performance of real estate assets and their prices (anything to get away from marking). I’m up to about 40 now.  There’s lots of methodological and data challenges in trying to isolate the specific effect of one attribute on the price – especially if you haven’t got good data on every attribute.  Some attributes can be related and high quality environmental attributes may just reflect  general high quality.  Anyway, there’s a couple of papers that have come out of the US and Finland quite recently that focus on the residential sector.  The first is

Bond, S.A. and Devine, A., 2016. Certification Matters: Is Green Talk Cheap Talk?. The Journal of Real Estate Finance and Economics, 52(2), pp.117-140.

They investigate the asking rents of multi-family homes in major US cities. The sample includes 97 LEED certified buildings with 26,744 units and 197 carefully selected comparables with 57,115 units.  It’s interesting that, of the 197 comps, approximately 30% marketed themselves as green but were non-certified.    This suggests that green features are becoming increasingly important to housing consumers.  Again, using very careful and sophisticated econometric procedures and incorporating lots of controls for differences in quality etc. they estimate that rents are 7%-10% higher in LEED certified buildings. Interestingly, they find evidence of a lower but significant green premium in non-certified buildings that market themselves as green.

The other paper is on energy ratings in Finland.

Fuerst, F., Oikarinen, E. and Harjunen, O., 2015. Green Clientele Effects in the Housing Market. Available at SSRN.

The data looks a bit old now. It’s for 6203 sales over 2009 to 2011 in Helsinki. I’m surprised that there were so many EPC A (23) – but it is a Nordic country. EPC B (102) rated observations is also small. Combined, the three high-tier group (ABC) comprised only 631 observations.  Similar to the UK, the biggest group by far was EPC D – 44%.  Again with a lot of careful controls for differences (age, size, location, amenities etc.) between the various apartments, they estimate a price premium of approximately 1.5% for ABC buildings.  Interestingly, they find that the effect is not explained by lower energy costs,  They attribute it as willingness-to-pay for greener product because of ecological awareness.  Whilst there’s a plausible story here (lower operating expenses, eco-consumers, better indoor environmental quality etc.), I’d still be nervous of the size of the effect in the US.  The possibility that a developer who gets their building LEED certified will make their buildings superior in other ways that haven’t been taken into account in the econometric model… still niggles.

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