Turun kauppakorkeakoulu Turku School of Economics

HOW IMPORTANT IS BUILDING ENERGY EFFICIENCY IN MARKETS WITH COLD WINTERS? PRICING AND

LIQUIDITY EVIDENCE FROM FINLAND

Franz Fuerst

University of Cambridge, Department of Land Economy

Elias Oikarinen

University of Turku, School of Economics

elias.oikarinen@utu.fi

European Real Estate Society ConferenceBucharest, June 2014

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Turun kauppakorkeakoulu Turku School of Economics

Background

• Buildings are estimated to be responsible for 20% of greenhouse gas emissions

• There is growing awareness of the role of real estate in reducing the greenhouse emissions

• Do energy efficiency ratings create desired incentives?

• Do they include ’independent’ pricing information in the real estate market?

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Turun kauppakorkeakoulu Turku School of Economics

Previous literature on the theme

• The seminal studies (e.g. Miller et al., 2008; Fuerst and McAllister, 2011; Eichholtz et al., 2011, Reichardt, Fuerst and Zietz, 2012) provide first valuable insights but are characterised by important limitations:

• Typically focus on specific sectors, in specific countries and over specific timeframes – results not readily generalisable (the majority of studies use data from the US office market)

• Rely on a very small number of data sources (notably from the CoStar Group)

• Academic studies regarding the residential sector are quite scarce despite its obvious importance for both the general economy and sustainable development

• The existing evidence of the residential market points to a significant green premium (e.g. Banfi et al., 2005; Fuerst et al., 2012; Zheng and Kahn, 2008; Kok and Kahn, 2012)

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Turun kauppakorkeakoulu Turku School of Economics

The aim of the study

• To provide more information on the influence of energy efficiency (EE) ratings on the value and liquidity of housing

• Main questions & hypotheses:

• Do EE ratings include ‘independent’ information w.r.t. housing prices?

• H1: The high tier ratings induce a price premium, but no difference between the other ratings (‘clientele effect’)

• H2: EE ratings affect housing values and liquidity even when catering for the observed maintenance costs that include the energy costs, i.e., ratings have an ‘independent’ impact on housing prices

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Turun kauppakorkeakoulu Turku School of Economics

The contributions of the study

• First study using data for a market located in cold climate

• We cater for the maintenance costs that include energy costs

• First article investigating the liquidity effect

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Turun kauppakorkeakoulu Turku School of Economics

Empirical data

• Transaction level data for apartments in Helsinki from 2007Q4 to 2012Q2

• Transaction price and date, time-on-the-market, detailed unit level characteristics capturing the key housing price determinants

• Maintenance costs including general building level energy costs

• Source: Kiinteistömaailma (private real estate agent, app. 25% market share)

• 5943 observations that include the energy rating

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Turun kauppakorkeakoulu Turku School of Economics

Empirical methodology

• Baseline analysis: hedonic (OLS) regression models

• Robustness analysis: Quantile regressions

• Potential complication: Until 2013, the rating was based on the actual energy consumption that is dependent on the habits and number of people living in the building, not only on the building characteristic

• Fortunately, the energy rating is not largely dependent on the number of people staying in the building

• Our main aim is to study whether the ratings contain independent pricing information and information regarding the liquidity of apartments. For this purpose, the before-mentioned complication should not cause major problems

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Turun kauppakorkeakoulu Turku School of Economics

Baseline results

• The A-B rated sell at a notable premium, but the pricing effect between the other ratings is small• The inclusion of maintenance costs does not influence the

parameter estimates for EE ratings

• There is no ’liquidity effect’• Holds regardless of the inclusion of maintenance costs

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Dependent: ln price per sqm

No maint. Costs Maint. costs includedA-B 0.087** 0.081**C 0.026 0.026E -0.019** -0.020**F -0.009 -0.011G 0.006 0.003

R2 0.791 0.792

Turun kauppakorkeakoulu Turku School of Economics

Conclusions

• We find a significant price premium for the high-rated (A-B) apartments even when catering for the maintenance costs• ’Clientele effect’: There is a small share of ’enviromentally aware’

buyers that aim to buy the highest rated units (increases demand and thereby prices for these units); Willingness to ’live green’ & Expected fast growth of energy prices

• The liquidity of apartments is not dependent on the energy efficiency rating

• Implications:• EE ratings contain valuable pricing information that can be useful

for e.g. developers, investors, and real estate agents

• High EE rating is financially rewarded – incentives to construct above average EE buildings

• Gives incentives to adopt EE certicates / ratings (they do matter!)

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