ERES 2012, 15.06.2012

1. ERES 2012, 15.06.2012 On the sustainability of the Swiss residential real estate sector -Regression analysis on rents and returns AnnikaFeige ETH Zurich: Institute of Construction and Infrastructure Management Chair of Sustainable Construction Dipl.-Ing., Doctoral Student and Scientific Assistant Markus Gaebel, MRICS CCRS: Centre for Corporate Responsibility and Sustainability at the University of Zurich Image: www.birdlife.ch/d/pm03_05_27.html (27.10.06)

2. Outline • Introduction • Current Research • Case Study • Research Question • Methodology • Results/ Findings • Model 1: Rental Price • Model 2: Returns • Critical Review

3. Introduction Overview of studies for impact of green buildings or energy labels Source: Adapted and extended from Hedder (2010), An Investigation of the Environmental Disclosure of REITs

4. Current Research Switzerland Findings • Salvi et al. (2008) MINERGIE-premiums on transaction prices: • Single family homes: + 7% • Condominiums: +3.5% • Salvi et al. (2010) MINERGIE-premiums on rents: • Condominiums: +6% Problem • The vast majority of studies use hedonic analysis to attempt to isolate the effect on price of environmental and/or energy certificates • However, the omitted variable problem is pervasive in such studies. No studies have complete coverage of all the price determining variables • A central concern is that an eco-certificate is positively correlated with an unobserved variable e.g. quality of location, specification, construction, design etc. and that the effect of the unobserved variable is being mis-attributed to the eco-certificate

5. The Swiss Case of Real Estate Sustainability

6. Research Questions • Do sustainability criteria impact rents and returns in the Swiss residential market? • If so, does regression analysis provide explanatory power for price effects of building and rental units, which have been measured according to a list of sustainability criteria? • What is the magnitude of measurable impact for 2009 rents and returns?

7. Data and Methodology • The chosen log-linear hedonic model has the following form: lnRi= αi+ βxi + ɛi • Cross sectional data from five institutional portfolio owners in Switzerland is used. • Focus is on 332 residential properties and more than 9 000 rental units, which have been measured according to a list of 36 sustainability criteria. • The reference year for all data included is 2009. • Due to missing data for some variables, the sample is reduced to about 2 500 rental units for rental prices and 209 buildings for returns. • Two different regression analysis have been carried out: • Hedonic regression analysis on rental prices (level of rental units) • Regression Analysis on yields (property level)

8. Sustainability Rating

9. Hedonic Model - Rents

10. Hedonic Model - Rent

11. Influencing Factors - Rent

12. Findings Rent • In general, sustainability of residential buildings positively affect their rental prices. • Sustainable building characteristics, especially those which enhance the water efficiency, the health and comfort level and the building’s safety and security have significant positive price effects. • Conversely, some sustainability characteristics have no significant effect on the rental price or and even have an apparent negative influence. • The finding of a negative association with energy efficiency rating and price is at first sight surprising. • In Switzerland owners tend to be responsible for payment of energy costs to energy providers and can recover them from tenants effectively ‘bundling’ of energy costs and rent into a single charge. Owners appear to be charging higher levels of ‘rent’ for energy inefficient buildings.

13. Hedonic Model – Cap Rates (net yield)

14. Hedonic Model – Cap Rates (net yield)

15. Findings – property level (cap rates) • No real findings due to lack of robustness of model • Problems can be: • Omitted variable problem ( i.e. building quality, operational costs, capex etc. ) • Loss of information on property level (Lease start etc.) • Valuation of buildings may add too much noise (Cap rate/Net yield: Net rent p.a./ Property value*100) • Misspecification of proxy for sustainability (coding and weighting of sustainability criteria: ESI) • etc.

16. Critical Review & Future Research • Building quality has not been evaluated and considered in the regression analysis. • Price effects of various sustainability attributes are likely to be dynamic and variable between assets and markets. • Ultimately, they are a function of a specific set of supply and demand conditions. A major area of future research is to obtain time series on financial, sustainability and asset attributes • Analysis of dynamic price effects in sufficiently large data sets • Assess whether there are significant differences in price effects between markets and assets.

17. Summary • 270 Swiss properties (2 500 residential units) have been included in the analysis • All buildings were evaluated according to a defined list of sustainability criteria • The developed hedonic model is stable and shows expected results for “standard” building criteria like age, square metres, etc. • Not all sustainability characteristics have a positive effect on prices and returns • Return model on property level: not robust and therefore no findings on neither «standard» building criteria (exc. for ageclasses) nor sustainability criteria Annika Feige Chair of Sustainable Construction ETH Zurich www.ibi.ethz.ch/nb afeige@ethz.ch Markus Gaebel Center for Corporate Responsibility and Sustainability University of Zurich www.ccrs.uzh.ch markus.gaebel@ccrs.uzh.ch

18. Back Up Annika Feige Chair of Sustainable Construction ETH Zurich www.ibi.ethz.ch/nb afeige@ethz.ch Markus Gaebel Center for Corporate Responsibility and Sustainability University of Zurich www.ccrs.uzh.ch markus.gaebel@ccrs.uzh.ch

19. Descriptive Analysis - Rents

20. Descriptive Analysis – Property Level