Europe has a large public housing sector, about 15-20 percent of the housing stock, where very little is known about the financial outcomes of energy-efficiency investments in the building sector. In this slidedeck, Andrea Chegut and Rogier Holtermans present the financial outcomes of energy-efficiency investments in the public housing sector. The European Commission has big goals to reduce total energy consumption. To achieve that goal, regulatory nudges and financial investments are striving towards increasing the energy-efficiency of the housing sector. As part of that goal, the Building Energy Efficiency for Massive Market Uptake (BEEM-Up) Program, an EU 7thFramework Program project, delivers some first results on the engineering feasibility and financial performance of existing building retrofits that reduce primary energy demand in buildings by 75 percent. Academically this is also very interesting as to date, studies using measurement tools like Energy Performance Certificates document a positive impact from high energy-efficiency in buildings on their transaction or rental value in residential and commercial real estate markets. However, most of these studies focus on the private housing or commercial real estate markets. This webinar, shares the financial performance and feasibility of energy-efficiency for the public housing sector.

1. The Value of Energy-Efficiency in the Housing
Sector
Transforming Uncertainty around ‘Green’ into
Measurable Value, Costs and Risk in the Marketplace
Andrea Chegut and Rogier Holtermans
May 15, 2014
European Center for Corporate Engagement – Webinar Series

2. Carbon, Energy and Resource Costs within
Europe
Buildings are a large source of carbon emissions
• Europe’s buildings emit 36 percent of CO2 (ECF, 2014)
• Housing emits 630 billion kg of CO2 in 2010 (Eurostat, 2013; Bertoldi et al., 2012)
Energy is costly
• 27 percent of energy use in the EU-27 stems from the residential sector
• 2010 energy bill of €225 billion (Eurostat, 2013; Bertoldi et al., 2012; Carbon Trust,
2013)
• Electricty prices increase by 3.9 percent and gas prices by 7.4 percent per
year (Eurostat, 2014)
• Energy 10 percent of total housing costs
Real estate consumes resources (EPA, 2009)
• 30 percent of raw materials use
• 30 percent of waste output
• 12 percent of potable water consumption

3. Financial gains from existing buildings
Source: McKinsey, 200

4. Uncertainty around “green” and its value
Lack of measuring and pricing…slows diffusion
• Transparency requirements… energy labels
• Pricing energy-efficiency in buildings…
• Transforming R&D into real companies and commercially diffused
solutions…takes time
Disaggregate outcomes of energy-efficiency
• The intensive calculations and design ideas that go into a green
buildings are lost…engineers keep them
• Energy performance models and their role in operational risks are
missing…
• Lacking the bigger picture, disaggregated outcomes of property
owners
Financial performance is missing
• Investors will not move until they understand financial performance
• Green buildings are complex developments and
redevelopments…there is a learning curve

5. Regulatory nudges and R&D investment in
the EU
Framework
• Energy Performance of Buildings Directive 2003, 2010, 2012
– Minimum energy-efficiency requirements for new and existing buildings
– Certification of energy performance…EPC labels
• Energy Efficiency Plan 2011
Proving the concept…diffusing innovation
• EU 7th Framework Programs for energy-efficiency
– Targeted at the existing building stock to generate new technology for
retrofits
– At least 20 programs to execute R&D, investment in pilot projects and
financing for the housing sector
• Horizon 2020…€80 billion stimulus package
– 20% reduction in GHG emissions
– 20% of energy from renewable resources
– 20% increase in energy-efficiency

6. Building Energy-Efficiency for Massive Market Uptake
(BEEM-Up)
Product innovation
• Large scale retrofit
of building units
• Insulation innovation
• Passivhaus
standards in
Sweden
Three pilot sites (339
units)
• France: 87 dwellings
• Sweden: 144 dwellings
• The Netherlands: 80
apartments, 28 terrace
houses
Financial performance
• Lifecycle cost analysis
• Market transaction values
for energy-efficiency
• Building scale modeling
• Financial challenges and
opportunities for energy-
efficiency retrofits in
Europe
The Project
• 27 stakeholders in engineering,
construction and finance join forces
• Three SPC building owners
• Aim of energy-efficiency retrofits with a
75 percent reduction in primary energy
demand

7. Demonstration sites in the Netherlands, France
and Sweden
Source: BEEM-Up
SwedenFrancethe Netherlands
Building sites

8. Financial challenges and opportunities – BEEM –
Up Pilots
• Scale of the problem: size of the SPC stock is large (Wallbaum et al., 2014)
– Scaling the 75 percent reduction is viable in some housing cohorts…identifying
these is critical
• Energy efficient dwellings transact for more (Chegut, Eichholtz, Hotlermans, van
Marwijk, 2014)
– Academic evidence around the globe suggests a premium for energy-efficient
properties
– For Dutch social housing the same is also true
– We estimate that the most efficient homes trade for 12 percent more per square
meter than a matched sample of energy-inefficient homes
• Learning about the financial performance of energy-efficient social, public and
cooperative housing (Chegut, Eichholtz, Holtermans, Kok and Tausendschön, 2014)
– Life cycle cost analysis discloses each demonstration sites sensitivity to
institutional risks within the SPC housing sector
– Projected NPVs are zero or positive, but some scenarios expose the project to
higher downside risks
• Financing opportunities (Bastiaanssen and Zietara, 2014)
– Financing gap for 75 percent reduction in primary energy demand for the SPC

9. Scaling the building stock to a 75 percent
reduction

10. Social, public and cooperative housing in
Europe

11. Heterogeneous
building stock
Typology and
representative
energy model
Extrapolation to
country level
-75% primary
energy demand
Residential real estate market

12. Current situation (EIU, 2013)
• 40 percent of the building stock constructed before 1960 and is in
need of renovation
• New construction represents only about 1 percent of the building
stock
• Refurbishment rates are low at approximately 1 percent of the
building stock
Scaling up…building typology based on
• Construction period
• Building type: single-family housing, multi-family housing, apartment
blocks, terraced houses
European building stock
Applying the Swedish retrofit to Austria:
• Total building stock of more than 400 million m2
• 16 percent of which is multi-family housing with more than 63 million
m2
• Retrofit would reduce primary energy demand by 61 percent

13. The Residential Green Stock

14. Study Country Transaction
Type
Energy-Efficiency
Measurement
Findings Notes
BrounenandKok
(2011)
The
Netherlands
Sales EnergyPerformance
Certificates
+15%foraGtoAlabel
jump
Dwellingswithahigh quality energylabel,C andabove,trade
atapremium.
Cerinetal. (2012) Sweden Sales Electricityconsumption
persq.meter
+0.03%for -1%in
consumption
Onlythemostenergy-efficienthomesbenefitfrom aslight
transactionpremium.
Hyland etal.
(2012)
Ireland Salesand
rental
Building EnergyRatings +16.6%inprice,+4.6%in
rentforlabelGtoA
TheimpactofaBuildingEnergyRatingis strongerwhen
sellingconditionsare moredifficult
Feige etal.(2013) Switzerland Rental Sustainabilityfeatures -2.9%fora+0.1 inthe
energy-efficiencyrating
All sustainability features are positivelyrelatedtotherent
levelofhousingexcept for energy-efficiency.
Yoshidaand
Sugiura (2011)
Japan Sales TokyoGreenBuilding
Programcertification
-12% forcertified
buildings
Initiallygreenapartmentstradeatadiscount;slower
depreciationrateleadstoapricepremium.
Denget al.(2012) Singapore Sales GreenMarkcertification +4-6%for certified
buildings
Transactionpremium varies withthequalityofthelabel.
Most energy-efficientdwellingsreceive thehighest
premium.
Zhenget al.(2012) China Sales “Marketinggreenness”
(GoogleGreenIndex)
+17.7%forthemostgreen
dwelling
Propertiesmarketedas greensellata premium,theyresell
andre-rentatadiscount.
Dastrupetal.
(2012)
U.S. Sales Solar panels +3.5-4%forhomes witha
solar panel
Premium is higherinstreetswhere fewerhomes have solar
panels installed
KahnandKok
(2013)
U.S. Sales EnergyStar,GreenPoint,
LEEDcertification
+2-4%forcertified
buildings
Certificationmatters more inhotterclimatesandinareas
withhigherenergyprices.

15. The Value of Energy Efficiency in Dutch
Social Housing (Chegut, Eichholtz, Holtermans, van
Marwijk, 2014)
Measuring “green” in social housing
Energy Performance Certificates for Dutch Social Housing
Owners
Dutch Kadaster and National Brokerage Data (NVM)
Geocode
d
Transaction
characteristics
• Total trades: +44,000
• Labeled properties:
+15,000
• Non-labeled
properties:+29,000
Controlling for:
• Building
characteristics
• Location,
neighborhood
• Energy
characteristics
Samples:
• Labeled vs. non-labeled
• Between labels

16. Distribution of dwellings with high energy-
efficiency

18. • Standard real estate valuation framework relating
building characteristics to the transaction value (Rosen,
1974)
• Where:
– logPi = The natural logarithm of the transaction price per
square meter;
– Xi = Building characteristics such as size, age, thermal
quality, etc.;
– Gi = EPC variable indicating the energy-efficiency of the
home;
– α, β, and δ are estimated coefficients;
– ε is an error term.

20. Financing a 75 percent reduction in primary
energy demand

21. Where does energy-efficiency show up?
In the cash flows
• Increased rents – stemming from increased demand from tenants
• Increased transaction prices – stemming from increased demand in
the capital markets
• Decreased vacancy rates – higher occupancy rates in green
buildings
• Increased cash subsidies – from governments and agencies seeking
carbon reduction
In the operational expenditures
• The operating performance – decreased cost of energy
• However, also in potentially other dimensions – water and waste
• Capital improvement expenditures – changing the extent of
maintenance
In the Interest, Taxes, Depreciation (new areas where research is
moving)
• Financing the building investment– the risk as the building owner
and the risk from the bank

22. Split incentives between tenants and landlords

23. BEEM-Up EU 7th framework program
(Chegut, Eichholtz, Holtermans, Kok and Tausendshön, 2014)
Measuring green returns through 300 plus building retrofits
75 percent improvement in energy-efficiency
Projected values of the pilot sites
Across 37dimensions and simulated across 165,000 plus
scenarios
3 pilot
sites
• Projecting Future Cash Flows
• Future Energy Risks
• Future Changes in Subsidies
• Future Cash Flow Losses and Gains
• Within each country’s institutional

24. DCF procedure across many scenarios
Geltner, Miller, Clayton, Eichholtz, (2013) application to real
estate
• Mathematically, the DCF procedure can be written as follows where
V = value of the investment today.
• Where:
– CFt = Net cash flow generated by the property in period “t”;
– V = Property value at the end of period “t”;
– E0[r] = Expected average multi-period return (per period) as of
time “zero” (the present), also known as “going-in IRR”;
– T = The terminal period in the expected investment holding
period, such that CFT would include the re-sale value of the
property at that time, in addition to normal operating cash flow.

25. Source: Luwog
Net investment costs across 3 pilot sites
he Netherlands
France
Sweden

26. Cash flow projections across investment risks

27. Projecting the future value of “green”
Opportunities from energy-efficiency
• Resale energy-efficiency unit retrofits
• Upside sharing in energy savings
• Property taxes are deferred for the
property for about 5 years
• Maximum decreases in energy, waste
and water inefficiencies in operating
expenditures
• NPVs are 0/positive
• Less potential for downside risks to occur
Challenges from energy-efficiency
• No rent increase because of institutions
• Energy cost could stay constant
• No subsidies from governments despite
higher retrofit costs
• Capital market demand is not higher for
energy-efficiency
• NPVs are 0/positive, but these risks
expose you to higher downside losses

28. How do we get the BEEM-Up concept diffused across
Europe

29. Energy refurbishment for sustainable housing in
Europe
(Bastiaanssen and Zietara, 2014)
• Questionnaire and interviews of national SPC housing
associations
– Investigating the supply of capital for energy-efficiency
retrofits
– Actual and projected annual refurbishment rates by
housing associations
• Covering 60% of EU-27
• Supported by data from the BEEM-UP project
The survey reflects the best estimates by experts at the
time of the interview, it does not reflect the formal position
of participating experts, nor the organization they represent

30. € 84
billion
€ 181
billion
Investment required to reach EU 2020
targets for energy demand reductions
Expected investment from SPC housing sector Financial gap
Large gap in financing energy-efficiency

31. Investing in energy efficiency
Social, public and cooperative
housing institutions forecast
• 1,4% refurbishment rate per
annum
• Average reduction in primary
energy demand of 40%
• Investments up to €13,6 billion
per year
Policy ambition: 20% energy
reduction target by 2020
• 2% refurbishment rate per
annum
• Average reduction in primary
energy demand of 65%
• Requires an estimated
investment of €37,8 billion per
year

32. The economics dof “green” in Europe
Appraisals of ´green investments´
• Green investments not properly valued; asset-backed investments
limited
Training for housing professionals
• Financial engineering and retrofitting project management
Applied research
• Low-costs technologies for the improvement of energy efficiency
and renewable energies in housing, focus on prefabricated modules
European Housing Fund
• Facilitate low-cost, long-term financing of housing retrofits
Reduce threshold to access financing
• Many SPC entities invest in €10-25M range
Continue ELENA grants for technical support
• Current technical capacity limited in SPC companies
– ELENA successful in mobilizing major and more ambitious
renovations

33. Making a dent in “green” uncertainty
Europe aims to prove the concept of energy-efficiency
• Is investing another €80 billion in R&D
BEEM-Up project aims to combine stakeholders to achieve a 75
percent reduction in primary energy demand
• Challenges and opportunities are present
Today, we addressed some outcomes of the project from a
finance perspective
• There is a large building stock that can undertake these
retrofits
• The performance of these retrofitted homes to at least a 75
percent reduction transact for 12 percent more in the market
place
• Using this and other assumptions leads to on average zero or
positive NPV projects
Where do we go from here…
• Address the financing gap in the EU of at least €181 billion
• Reduce thresholds to access financing

34. Thank you
Andrea Chegut
a.chegut@maastrichtuniversity.nl
Rogier Holtermans
r.holtermans@maastrichtuniversity.nl
The European Center for Corporate Engagement - ECCE
Maastricht University, the Netherlands
This research is sponsored by the EU 7th Framework Program,
within the Building Energy Efficiency for Massive Market Uptake
(BEEM-Up) protocol for more information on project progress or
to visit the building sites:
…
http://www.beem-up.eu