Abstract
PurposeContrary to the traditional technology project perspective, real estate investors see building-specific renewable energy (on-site energy) investments as part of the property and as something affecting the property’s ability to produce a (net) cash flow. This paper aims to show the value-influencing mechanism of on-site energy production from a professional property investors’ perspective.Design/methodology/approachThe value-influencing mechanism is presented with a case study of a prime logistics property located in the Helsinki metropolitan area, Finland. The case study results are compared with the results of a survey answered by over 70 property valuation professionals in the Finnish real estate market.FindingsCurrent valuation practice supports the presented value-creation mechanism based on the capitalisation of the savings generated by a building’s own energy production. Valuation professionals see benefits beyond decreased operating expenses such as enhanced image and better saleability. However, valuers acted more conservatively than expected when transferring these additional benefits to the cash flows of the case property.Practical implicationsBecause the savings in operating expenses can be capitalised into the property value, property investors should consider on-site energy production when the return of on-site energy exceeds the return of the property. This enhances the profitability of on-site energy, especially in urban areas with low initial yields.Originality/valueThis is the first research paper to open the value-influencing mechanism of on-site energy production from a professional property investors’ perspective in commercial properties and to confirm it from a market study.
Highlights
Transitioning to renewable energy systems is one of the most efficient ways to fight climate change
On-site energy production will most likely increase the value of the property through the capitalisation of decreased operating expenses, as the International Valuation Standards (IVS) (2019) suggest
The empirical part of the research is based on a commercial property case study and a survey targeted at property valuation professionals in the Finnish real estate market
Summary
Transitioning to renewable energy systems is one of the most efficient ways to fight climate change. On-site energy production hedges property owners against rising electricity prices and helps avoid both energy transfer fees and taxes In addition to these direct savings in operating expenses, it can enhance the green reputation of the building. Increased sustainability may appeal to potential tenants and enhance other cash flow parameters (e.g. rents, rental growth rate, occupancy ratio, depreciation and yield) of the property and, the value of the building, as discussed in more detail . This perspective is suitable for professionally managed investment properties, the value of which is based on their ability to generate income for their owners
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