Triple value for your money
By Dirk Brounen
Last thursday, the Dutch research institution SCP published yet another study on the reasons why Dutch homeowners have been reluctant to invest in green retrofits. Although policy ambitions are vast and abundant, very little progress is made on convincing homeowners to invest their savings in insulating their homes. According to SCP, a lot of this is due to the uncertainty regarding the value effects of these sustainable investments. In other words, what is the value for money in green retrofits? In the next 500 words, I will provide you with three answers to this question.
In 2017 a small Pan-European research collective has been asked by the European Commission to develop the CRREM project – the Carbon Risk Real Estate Monitor. In this project, we developed a tool with which property owners can easily benchmark the energy intensity of their dwelling to the most relevant energy policies in their market. Policy pathways that that are assembled for each market and segment, and which all converge to the 2050 target of the Paris Climate Treaty. A simple tool, which tells property owners where they stand today, and what they face tomorrow. The latter may well sound a little grim, but there is good news. In the case of real estate, one can improve the energy efficiency during the lifetime by undertaking a deep retrofit. A retrofit, which comes at a cost, but will also yield benefits. To shed some light on these benefits, CRREM has developed the diagram below.
In this chart, we plot the energy costs of future property use from the year 2000 onwards. There are two lines. The status quo, in which no actions are taken and costs will simply increase over time. Alternatively, we also include the opportunity to invest in a 2021 retrofit, which results in a net zero energy consumptions afterwards. Obviously, such a retrofit comes at a price, hence the line jumps before it flattens. These costs are serious and certain, but what about the value uptake of the property?
Well, let’s start with the obvious, which is the savings in energy costs over the lifetime of the property. This is the A-area, which marks the gap between the initial costs and the new flattened curve. Knowing now that you will face lower costs should result in an immediate premium. This premium is increased by the B-area, which is the collective of indirect benefits. Benefits that have been identified in the literature and range from enhanced asset liquidity to reputational gains. This B-value reduces over time, as this competitive advantage of the retrofitted property decreases when the number of sustainable alternatives increases. Finally, there is yet another source of value uptake – the C-area. This is the value of standard shielding. Doing nothing will turn your asset into a laggard in the market, and at some point in time your property will no longer be aligned with the stricter policy regulations that will be introduced. Regulations that will deteriorate the value of your asset, partly because of direct measures such as a ban on renting or simple tax penalties, partly because of the preferences of the market that will prefer more sustainable alternative over yours. Investing in a deep retrofit will put your property back into the game, and will shield it from future consequences. A shield that becomes more valuable once policy measures are tightened.
See: Brounen, D., Groh, A.M. and Haran, M. (2020), "The value effects of green retrofits", Journal of European Real Estate Research, Vol. 13 No. 3, pp. 301-319. https://doi.org/10.1108/JERER-...