Energy Capitalization in the Dutch Rental Market

Using a large dataset on the Dutch rental market, we investigate whether dwellings with high energy efficiency are rented out at a premium. Given the importance of the buildings sector in the energy-related greenhouse gas emissions, improving energy efficiency is a key contribution to mitigating climate change. The energy performance in the residential rental sector is of particular interest since the incentives to undertake efficiency improving investments are distorted. While the landlord has to bear the costs, the tenant benefits from reduced utility expenses. This “split incentives” problem has been put forward to explain discrepancies between energy performances in the rental dwelling stock compared to the owner-occupied dwelling stock. A solution for the landlord to recoup energy related investments is to raise the rent such that the tenant’s overall living expenses remain constant. We employ a hedonic regression approach to assess whether energy efficiency is implicitly priced on top of standard dwelling attributes. The dataset contains observations on rental rates charged in the Netherlands between 2012 and 2015 as well as information on location, age, size, type and general condition of the dwelling. Moreover, energy labels and a continuous measure of energy performance are assigned to each dwelling. This allows us to estimate the rent elasticity with respect to energy performance. Our findings indicate a positive rent premium for dwellings with high energy efficiency, but no discount on dwelling rents with poor energy performance. This result implies that tenants are willing and able to pay for improved energy efficiency. Thus, the split costs and benefits of energy related investments should not hinder landlords from improving energy efficiency of their homes.