ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel ERES 2012, On the sustainability of the Swiss residential real estate sector - Regression analysis on rents and returns Image: ( ) Annika Feige 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

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel Outline Introduction Current Research Case Study Research Question Methodology Results/ Findings –Model 1: Rental Price –Model 2: Returns Critical Review 2

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel Introduction 3 Overview of studies for impact of green buildings or energy labels Author(s)NSample Sources and measures Performance variablesResult Miller, Spivey, Florence (2008) 223Class-A Buildings, CoStar: LEED or EnergyStar Sales Price, Rent, Occupancy Higher rents, sales price and occupancy of certified buildings but only significance at 85% level Eichholtz, Kok, Quigley (2008) 199Property Sales, USA, CoStar: LEED and EnergyStar Sales Price, RentHigher rents and sales price for green buildings Eichholtz, Kok, Quigley (2009) 744 1'943 Rated Building Sales, Rent Buildings, USA, CoStar: LEED and EnergyStar Sales Price, RentFindings of 2008: higher rent and sales price for green buildings, also in crisis period Fuerst, McAllister (2009) 626 1'282 Buildings LEED and EnergyStar Buildings, USA CoStar: LEED and EnergyStar Sales Price, RentRent premium of 6% for LEED and EnergyStar certified buildings; 35% sales premium for LEED buildings and 31% premium for EnergyStar buildings Yoshida and Sugiura (2011) 34,862 1,154 Condominium Sales in Buildings, Japan Tokyo Green Building Program Sales PriceCondominiums in eco-labelled developments in Tokyo sell at a discount of 5.5% compared to condominiums in non-labelled developments Reichhard et al. (2011) 7,140 1, Buildings of which Energy Star, LEED, USA, LEED, Energy StarRent, Occupancy Rate Energy Star labelling leads on average to a rent premium of 2.5%, whereas LEED certification leads to a slightly higher rent premium of 2.9% Source: Adapted and extended from Hedder (2010), An Investigation of the Environmental Disclosure of REITs

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel Current Research Switzerland 4 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

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel The Swiss Case of Real Estate Sustainability 5 Label/ Rating/ Standard Energy- Label Sustain- ability rating Energy- Standard Green building label Green building label Green building label Sustain- ability rating Sustain- ability rating Public/ Private Private: Minergie Association (inlc. Public) Public foundation: CCRS at Uni Zurich Public: regional Energy- directors Private: Swiss Adoption of DGNB Public (Federal initiative) Private: Credite Suisse Private: Wüest & Partner Private: Private Bank Sarasin NameMINERGIE Economic Sustain- ability Indicator GEAKSGNISNBCH Green Property W&P Sus Rating Sarasin Sustain- ability Evalutaion Residential22366 Approx. 450 XXXXX Non- Residential 1994 Approx. 150 XXXXXX Total Nr. of Buildings Approx. 600

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel Research Questions 1.Do sustainability criteria impact rents and returns in the Swiss residential market? 2.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? 3.What is the magnitude of measurable impact for 2009 rents and returns? 6

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel Data and Methodology The chosen log-linear hedonic model has the following form: ln R i = α i + βx i + ɛ i Cross sectional data from five institutional portfolio owners in Switzerland is used. Focus is on 332 residential properties and more than rental units, which have been measured according to a list of 36 sustainability criteria. The reference year for all data included is Due to missing data for some variables, the sample is reduced to about rental units for rental prices and 209 buildings for returns. Two different regression analysis have been carried out: 1.Hedonic regression analysis on rental prices (level of rental units) 2.Regression Analysis on yields (property level) 7

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel8 First LevelSecond LevelThird Level Sustainability featuresSub-indicatorsIndicators 1. Flexibility 1.Flexibility of use 2.Adaptability to users 36 Indicators 2. Energy and Water Efficiency 3.Energy 4.Water 3. Accessibility and Mobility 5.Public Transport 6.Non-motorized vehicles 7.Accessibility 4. Safety and Security 8.Location regarding natural hazards 9. Building safety and security measures 5. Health and Comfort10. Health and Comfort Sustainability Rating

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel Hedonic Model - Rents 9 Dependent Variable: Effective Rent per m (log)Coefficient (Constant)1.97*** Lease Start0.20*** Number of Floors (log)-0.15*** Square metre unit (log)-0.36*** Number of Rooms within Unit (log)0.08*** Floor Level of Unit (log)0.05*** Location Rating 1Omitted Location Rating *** Location Rating *** Location Rating *** Location Rating *** Location Rating *** Omitted *** *** *** *** *** < *** N=2453 R 2 = 0.70 * significant at 10% Level ** significant at 5% Level *** significant at 1% Level

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel10 Dependent Variable: Effective Rent per m (log)Coefficient (Constant)1.97*** Flexibility Flexibility of use0.05*** Adaptability to users-0.04*** Energy and Water Efficiency Energy efficiency-0.29*** Water efficiency0.12*** Accessibility and Mobility Public transport Non-motorised vehicles-0.03*** Accessibility0.08*** Safety and Security Location regarding natural hazards0.01** Building safety and security measures0.07*** Health and Comfort0.12*** N=2453 R 2 = 0.70 * significant at 10% Level ** significant at 5% Level *** significant at 1% Level Hedonic Model - Rent

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel Influencing Factors - Rent 11 CriteriaResultInterpretation Lease Start Significant positiveOlder rental contracts obtain lower rents Number of Floors Significant negativeWith a rising number of floors the rent decreases Square metre unit Significant negativeThe bigger the unit is, the lower is the m 2 rental price Number of Rooms within Unit Significant positiveThe more rooms the higher the rental price Floor Level of Unit Significant positiveBuilding units on higher floors achieve higher rents Location Significant negativeWith better location, the rental price increases AgeSignificant negativeNewer buildings achieve higher rents Flexibility of use Significant positiveFlexibility of use has a positive effect on rental prices Adaptability to users Significant negativeUser adaptability has a negative effect on rental prices Energy efficiency Significant negativeEnergy efficiency has a negative effect on rental prices Water efficiency Significant positiveWith better efficiency the rental price rises Public transport Not significantBetter public transport has no significant effect Non-motorised vehicles Significant negativeMore bicycle space decreases the rental price Accessibility Significant positiveBetter accessibility increases the rental price Safety and Security Significant positiveWith a higher rating the rental price increases Health and Comfort Significant positiveprice increases with improved health & comfort rating

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel 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. 12 Findings Rent

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel Hedonic Model – Cap Rates (net yield) 13 Dependent Variable: Net Yield per m (log) [value weighted]Coefficient (Constant)-2.84*** Location Rating Location Rating 1Omitted Location Rating Location Rating Location Rating Location Rating Location Rating Location Rating Age class Omitted ** ** * ** ** < *** N=247 R 2 = 0.26 * significant at 10% Level ** significant at 5% Level *** significant at 1% Level

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel14 Dependent Variable: Net Yield per m (log) [value weighted]Coefficient (Constant)-2.84*** Flexibility Flexibility of use Adaptability to users Energy and Water Efficiency Energy efficiency 0.02 Water efficiency-0.05 Accessibility and Mobility Public transport Non-motorised vehicles Accessibility 0.02 Safety and Security Location regarding natural hazards-0.01 Building safety and security measures -0.12*** Health and Comfort-0.01 N=247 R 2 = 0.26 * significant at 10% Level ** significant at 5% Level *** significant at 1% Level Hedonic Model – Cap Rates (net yield)

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel 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. 15

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel 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. 16

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel 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 17 Annika Feige Chair of Sustainable Construction ETH Zurich Markus Gaebel Center for Corporate Responsibility and Sustainability University of Zurich

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel Back Up 18 Annika Feige Chair of Sustainable Construction ETH Zurich Markus Gaebel Center for Corporate Responsibility and Sustainability University of Zurich

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel Descriptive Analysis - Rents 19 NMeanMedianMinMax Location factor total Year constructed Number of Units within the building Number of Floors Total space (square metres) Elevator (yes, no) Parking spaces (yes, no) Flexibility Energy and Water Efficiency Accessibility and Mobility Safety and Security Health and Comfort Number of floors Size of unit (square metres) Number of rooms per unit Floor level unit Balcony (yes, no) Lease Start (year) Effective Rent per Unit and m 2 in 2009 (Swiss Francs) Value (Swiss Francs)

ETH Zürich - Annika Feige, CCRS at the University of Zurich - Markus Gaebel Descriptive Analysis – Property Level residential properties Total value (2009) was CHF 2.7bn Average Age1965 Rent/ sqmCHF 20 Vacancy rate3% Net yield5.2%