Green performs better: energy efficiency and financial return on buildings

Purpose – The purpose of this paper is to investigate the effect of energy consumption on the financial performance of German residential buildings in a large panel framework. The authors provide evidence that energy efficiency in the residential sector is a relevant factor affecting both tenant investment decisions and consequently the performance of investor portfolios. Design/methodology/approach – Based on the IPD Database and information from the German statistical office, the authors create portfolios of buildings across several energy consumption levels in order to describe the energy pricing mechanism in the context of total return and rent price. Furthermore, the authors apply conditional and unconditional regressions over the period of 2008 and 2010, to accurately quantify the energy price premium in the German residential market. Findings – The descriptive portfolio results show that energy‐efficient buildings yield an up to 3.15 percent higher return and 0.76 €/m 2 higher rent than inefficient buildings. Furthermore, the regression results indicate that a one percent decline in energy consumption affects the total return of buildings positively by +0.015 percent. The hedonic results additionally show that one percent energy conservation boosts rent prices by +0.08 percent and market value by +0.45 percent, ceteris paribus . Originality/value – Overall, the study presents an alternative methodology for describing and estimating hedonic datasets and offers some initial empirical evidence on the energy price premium in German residential markets. The paper contributes to prior European studies regarding the use and implications of energy performance certificates and confirms their significant impact on residential housing performance variables.