The Low-Carbon Rent Premium of Residential Buildings

Based on 92,600 rental contracts in the Swiss real estate market, we study how a property’s CO2 emissions are related to net rental values (gross rent without ancillary costs). We use a novel measure of operational carbon emissions that relies on various parameters that capture the sustainability and energy efficiency of a building as well as the climate conditions of its location. In an extensive hedonic framework, our results suggest that apartments in low-carbon buildings have higher net rents. A sub-analysis of urban and rural areas, as well as warm and cold locations, shows that lower ancillary costs of sustainable apartments are correlated with this low-carbon rent premium. Tenants’ higher preferences for environmentally friendly living do so as well, as shown by sample splits across regions with high and low support of the Swiss Federal Act for the Reduction of Greenhouse Gas Emissions. We further document that Europe’s energy crisis causally increases our main effect. Shifting the focus to 611 residential building transactions reveals that low-carbon buildings have lower capitalization rates due to lower risk premiums. Together with higher rental income, these lower capitalization rates translate into higher market values of residential buildings.