Green pay off in commercial real estate in Germany: assessing the role of Super Trophy status
| Pages | 104-124 |
| Published date | 05 February 2018 |
| DOI | https://doi.org/10.1108/JPIF-03-2017-0019 |
| Date | 05 February 2018 |
| Author | Christian Ott,Jonas Hahn |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Green pay off in commercial real
estate in Germany: assessing the
role of Super Trophy status
Christian Ott
IRE/BS Competence Center for Sustainable Real Estate,
University of Regensburg, Regensburg, Germany, and
Jonas Hahn
IRE/BS Department of Real Estate, University of Regensburg,
Regensburg, Germany
Abstract
Purpose –Based on a hedonic regression approach, the purpose of this paper is to relativize existing green
pay off evidence by incorporating Super Trophy as a so far underrepresented determinant. The authors
analyze a private panel database of 160 European office properties and confirm a significant green pay off;
the positive impact of excellent environmental certification results on market values and net rents is
significantly reduced when considering Super Trophy characteristics.
Design/methodology/approach –Based on a panel database of 160 European office properties, the survey
applies a hedonic regression approach including an extensive set of control factors as, for example, location
criteria, general property characteristics, climate adjustments, consumption data, refurbishment activities,
green leases, sustainable certification and energy performance certificate figures.
Findings –Even though our database still confirms a significant green pay off, the positive impact of
excellent environmental certification results on market values and net rents is significantly reduced when
controlling for Super Trophy characteristics.
Practical implications –Especially, the question how sustainability can be integrated into real estate
appraisal is of major interest. The paper at hand may help in two aspects: on the one hand, it provides further
insight with regard to the quantitative impact of Super Trophy Buildings on rents and market values.
On the other hand, a higher transparency in appraisals may result in structural specifications that help to
consolidate appraisals and empirical evidence on a “green pay off.”
Originality/value –The study investigates a niche segment –landmark properties. The empirical analysis
explicitly controls for potential Super Trophy status. It draws attention to the importance of a reasonable and
complete set of control variables to increase statistical validity of future studies in that field.
Keywords Commercial real estate, Energy efficiency, Portfolio management, Building certification,
Green premium, Super Trophy real estate
Paper type Research paper
1. Introduction
For the first time in history, the urgency of tackling the global warming issue was countered
with truly international consensus by the UN Climate Conference in Paris in December 2015.
An unprecedented contract engages both developed and developing countries to reduce
warming of global surface temperatures by maximum two degrees Celsius, on average,
until 2050, and also addresses greenhouse gas emissions to be reduced on a long-term basis.
In theory, the real estate sector has great potential to reduce the carbon footprint due to its
large number of employed workforce and its resource- and energy-intensive production,
maintenance and operation process. In practice, though, individual actions and market behavior
still frequently tend to contrast the “greater good”from the environmental perspective.
As a consequence of growing environmental awareness of investors, consumers and
state authorities, environmental certification schemes entered the game.
Countless empirical studies have shown that certified green buildings generate additional
value in terms of transaction prices and market values or rents. Rent outperformance in
Journal of Property Investment &
Finance
Vol. 36 No. 1, 2018
pp. 104-124
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-03-2017-0019
Received 7 March 2017
Revised 22 June 2017
Accepted 27 June 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
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JPIF
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certified buildings was identified to range between 5 and 30 percent. This translates
further into appraisal-based valueincreases of 10-30 percent basedon the respective evidence
from the literaturedetailed later in this work. Mostof these conclusions, though, arelimited to
specific submarkets, regions or specific aspects of sustainability, such as energy efficiency.
These limitationsof previous studies reduce thereliability of their conclusions.In this context,
the extensive “green pay off”finding of some surveys must be discussed. A subsequent
omitted variable bias –more specifically the negligence of value-relat ed control
variables –may result in an overestimation of premia for sustainable construction and
maintenance, or to put it simple, in overestimating the financial value of “being green.”
In this study, we apply a hedonic regression model to analyze the green pay off within a
portfolio of 160 European office buildings held by a German real estate investment firm
between 2011 and 2014. Our analysis extends findings of existing pay off studies as it
includes not only sustainability certificates, but also green leases, actual consumption data,
tenant satisfaction and refurbishments. In a second step, an additional factor will be
included in the regression framework, which had not been taken into account by similar
studies before –namely, the influence of “Super Trophy status”describing the ownership of
extraordinary landmark real estate in the portfolio.
The rest of this paper is organized as follows: Section 1 draws the bigger picture of
sustainability considerations in real estate in the light of social and ecological development,
but also economic behavior of market actors. Afterwards, Section 2 summarizes major
findings of the existing literature on the pay off of sustainable, commercial real estate on
property level. It further elaborates on a critical evaluation of existing results. Section 3
introduces a definition of “Super Trophy”real estate. Section 4 deals with the methodology
of the hedonic regression model and the undertaken empirical analysis identifying
sustainable value drivers on property level on the basis of our underlying data set.
After that, the regression results are illustrated together with an interpretation of the most
important regression coefficients. We conclude with a summary and practical implications
of this study.
2. Literature review
Several megatrends are about to shape the twenty-first century on a global scale and in the
light of global warming, extreme weather events and an intensifying fight for natural
resources. The economic and social consequences comprise distinct price variations on
commodity markets (Brown, 2008), the need for economic reorientation of entire regions due
to changing climate conditions and immense damages to infrastructure and real estate
through severe weather (Messervy et al., 2014). And while, in this context, “sustainability”
has become the central credo in politics, business making and society, return maximization
still comes first for capital market-oriented investors (ZIA Zentraler Immobilien Ausschuss
e.V. (ed.), 2015). However, in the light of increasing environmental pollution and
accompanying external economic effects, a deeper look reveals that both visions have to and
are to be achieved simultaneously (Slaper and Hall, 2011), and real estate has great potential
to achieve positive effects in both fields (Murray and Cotgrave, 2007; Nelson et al., 2010).
In that sense, sustainable real estate shall maintain long-term awareness of market
participants if “green”investments do not only result in lower reputational risks, but also in
an actual economic pay off.
Pay off schemes of green buildings have been discussed in several empirical studies.
More specifically, researchers aimed at putt ing a price tag to “green”property
characteristics like sustainability certification schemes, refurbishments, green leases,
consumption data or energy characteristic values. Despite differences in content and
methodology, most academic surveys empirically confirm a significant economic pay off for
sustainable properties.
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Green pay off
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