The recent energy efficiency directive will tighten the requirements concerning energy efficiency and provide large companies to perform energy audits every four years. This obligation alone will incur considerable expense to companies, let alone investments that must be made in order to improve energy efficiency. On the other hand, the decisions made by government will simultaneously increase energy costs in the form of taxes, which will make improving energy efficiency even more tempting. The changes in legislation will nonetheless raise the concern of deteriorating competitiveness in business life.
What is the realistic repayment period?
Traditionally energy efficiency investments have been reviewed on the basis of repayment periods. The direct repayment period criterion of 3-5 years that was defined a long time ago is still widely used, however, in many companies even shorter repayment periods are required. This criterion requires a yield of 20-30 %, which is a hard goal even for industrial investments. At the same time, the normal required net rate of return in real estate varies between 6-10%, depending on the location. Energy efficiency investments should always be reviewed on the basis of a market value calculation based on the net yield instead of direct repayment period, so they could be equated with the required rate of return on other investments.
Cash flow based as well as statistical evaluations* indicate that improving energy efficiency by 20% can raise the value of real estate by as much as 5-7 %, according to both domestic and international surveys. According to my own experience, an improvement of 5-10% can often be achieved without actual investments, and 10-20% with relatively small investments, depending on the condition of the real estate as well as the level of maintenance.
Environmental classifications raise the value
According to international surveys, environmental classifications LEED and Breeam are even more significant real estate value raisers than mere energy efficiency improvements. Energy efficiency is a part of environmental classification systems, however, they consider the environmental impacts of a building’s entire life cycle more extensively. The effect of these classifications on the value increase of real estate has been estimated to be as much as 7-15 %. Has the increase in value been noticeable in Finland? At least with the market declining, an environmental classification seems to provide one verification of the condition and usability of real estate and thus secure a successful sale.
All in all, the facts show it: with correct measures, investing in energy efficiency raises the value of real estate.
*The impact of energy labels and accessibility on office rents, Kok & Jennen, Maastricht University 2011
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