ABSTRACT
In recent years, mandatory government-led environmental rating systems have gained traction in several countries. At the same time, there has been a proliferation of voluntary eco-labels, such as BREEAM in the UK, Green Star in Australia and LEED in the US. The very existence of the voluntary labels is indicative of a market-led environmental agenda. Any voluntary initiatives that exceed regulatory requirements and national building codes could potentially create 'green value', which should, at least hypothetically, be capitalised into prices and rents. The existence of a green premium would also reflect consumer willingness to pay, which studies have found to be primarily related to increased energy-efficiency; therefore, a premium may also indicate the ability to successfully and credibly convey a property’s energy efficiency. Amongst the issues that may hinder energy-efficient investment include those that stem from principle-agent problems and a vicious ‘circle of blame’. Finding evidence for a green premium and analysing its dynamics within a transaction-setting may be able to provide a clearer understanding of the incentives available to stakeholders. Evidence-based policy depends on reliable and robust analytical results, particularly in innovative areas such as green real estate finance. However, the growing body of literature on the green premium is disjointed and at least partly inconclusive. The general incentives and disincentives of energy efficiency and broader sustainability are now widely researched but the empirical studies are often limited in terms of geography and time periods analysed. Hardly any studies have tried to consolidate the burgeoning green premium literature and place the individual studies in a larger context. This chapter attempts to achieve this objective via a meta-analysis of green premium studies in a real estate context and illustrates the implications arising from the green premium consensus on property investment using a simple DCF model.
