# RECORD 784bd147866d1ec15bbfa3c42d3c2fc6a9ac3192 # TITLE: The economic value of sustainability. Real estate market and energy performance of homes # YEAR: 2023.0 VENUE: Valori e Valutazioni DOI: 10.48264/vvsiev-20233402 # AUTHORS: Ezio Micelli; Giulia Gilberto; Eleonora Righetto; G. Tafuri # PAGES: 28 CANDIDATE TABLE PAGES (1-based): [6, 7, 8] # ABSTRACT: The energy transition and decarbonisation require a major transformation of the housing stock. Responsible for around 40% of fossil fuel consumption and 30% of CO2 emissions, the built heritage must be upgraded in terms of energy performance. The issue is particularly sensitive for Italy, where seven out of ten homes are in the worst energy classes according to the classification introduced by the EU. The research aimed at investigating whether, and to what extent, energy-efficient homes command a premium price on the market compared to less efficient homes. The study focused on three medium-sized cities in northern Italy and developed three hedonic models based on more than 900 ask prices. The results confirm the stratification of the market in terms of energy efficiency levels. Estimates converge in absolute and relative terms between different cities. Particularly significant is the average gap found between properties in the highest efficiency class (Class A) and those in the lowest efficiency class (Class G), with values of around thirty percentage points, while the gap is around fourteen percentage points if we consider properties in Class D compared to Class G. The conclusions are in line with European studies on the subject, but show a trend towards an increasing gap between the market values of properties with different energy performance classes. La transizione energetica e la decarbonizzazione impongono un’importante trasformazione del patrimonio abitativo. Responsabile di circa il 40% dei consumi di combustibili fossili e del 30% delle emissioni di CO2, il patrimonio costruito deve essere riqualificato sotto il profilo delle performance energetiche. Il tema è particolarmente delicato per l’Italia, dove sette abitazioni su dieci appartengono alle classi energetiche meno performanti secondo la classificazione introdotta dall’UE. La ricerca si è proposta di indagare se, e in quale misura, le abitazioni energeticamente performanti riscontrino sul mercato un premium price rispetto alle abitazioni meno efficienti. L’indagine si concentra su tre città medie del Nord Italia e ha sviluppato tre modelli edonici sulla base di oltre 900 prezzi d’offerta. I risultati confermano la stratificazione del mercato rispetto ai livelli di efficienza energetica. Le stime risultano convergenti in termini assoluti e relativi tra le diverse città. Particolarmente significativo è lo scarto medio rilevato tra immobili appartenenti alla classe di massima efficienza (class ===== PAGE 1 (score 5, numeric-paren 0, table-words 0, var-words 5) ===== rivista valori e valutazioni n. 34 - 2023 3 Ezio Micelli*, Giulia Giliberto**, Key words: housing market, sustainable buildings, Eleonora Righetto***, Greta Tafuri**** energy transition, energy performance, hedonic prices The economic value of sustainability. Real estate market and energy performance of homes 1. INTRODUCTION The energy transformation of the housing stock is one of the greatest challenges facing the international community. Building stock accounts for 40% of energy consumption and 36% of greenhouse gas emissions in Europe (European Commission, 2020). The energy transformation of the built heritage involves important actions in terms of energy savings and energy production from renewable sources. The challenge is to meet the carbon neutrality targets introduced by the European Green Deal.1 The housing market is therefore faced with an unavoidable challenge in the broader process of decarbonising cities.2 The relationship between energy efficiency and property values is problematic. On the one hand, it can The energy transition and decarbonisation require a major transformation of the housing stock. Responsible for around 40% of fossil fuel consumption and 30% of CO2 emissions, the built heritage must be upgraded in terms of energy performance. The issue is particularly sensitive for Italy, where seven out of ten homes are in the worst energy classes according to the classification introduced by the EU. The research aimed at investigating whether, and to what extent, energy-efficient homes command a premium price on the market compared to less efficient homes. The study focused on three medium-sized cities in northern Italy and developed three hedonic models based on more than 900 ask prices. The results confirm the stratification of the market in terms of energy efficiency levels. Estimates converge in absolute and relative terms between different cities. Particularly significant is the average gap found between properties in the highest efficiency class (Class A) and those in the lowest efficiency class (Class G), with values of around thirty percentage points, while the gap is around fourteen percentage points if we consider properties in Class D compared to Class G. The conclusions are in line with European studies on the subject, but show a trend towards an increasing gap between the market values of properties with different energy performance classes. Abstract 1 Communication of the Commission of the European Parliament and Council to the European Economic and Social Committee and to the Committee of Regions COM (2019) 640 final. 2 Directive 2010/31/EU, 2010 of the European Parliament and of the Council on the energy performance of buildings. ===== PAGE 6 (score 31, numeric-paren 0, table-words 9, var-words 8) ===== analyses are given in the appendix (Tables A, B and C). The sample analysis shows the preponderance of homes belonging to the lowest energy efficiency classes. In particular, the percentages of the least energy-efficient homes (E, F and G) reach percentages of 79.1%, 79.2% and 66.5% for Padua, Mestre and Bergamo, respectively (Fig. 1). The characteristics of the sample are consistent with the national building stock data, which show a building stock percentage for these three classes, amounting to 70.3%. The descriptive statistics show a homogeneous picture in terms of typological characteristics and state of maintenance. In fact, the majority are multi-family buildings in a good state of maintenance, despite the low energy efficiency highlighted (Tables 2, 3 and 4). The average unit value is € 2,034.85/sqm for the city of Padua, 1,905.43/sqm for Bergamo and 1,767.02 €/sqm for Mestre (Fig. 2). 4. METHODS AND ANALYSIS. THE HEDONIC MODELS FOR THE THREE CITIES The regression model used to estimate hedonic prices uses the natural logarithm of the unit’s market value as the unknown variable. The known variables are the locational, typological and technological characteristics of the housing unit. Formally, the model employed is as follows (Fuerst et al., 2016) Eq. (1): (1) where – Pi is the natural logarithm of the price of a home expressed in €/sqm; – β0 is the model’s constant; – βi is the marginal price of the characteristic; – Xi is the numerical value of the variables studied, including the EPC; – ei represents the random error. The regression models for Padua and Mestre show an R2 of 51.9% and 52.2% and an adjusted and corrected R2 of 51.3% and 51.2%, respectively. On the other hand, the model for the city of Bergamo shows lower values, with an R2 of 35.9% and an adjusted R2 of 34.8%. The reliability of the models was tested using the F- statistic, whose p-value is less than 0.05 in all three cities (less than 0.001 for Padua, 0.034 for Mestre and 0.024 for Bergamo). The results of the variance analysis (ANOVA) are presented in Table 5. journal valori e valutazioni No. 34 - 2023 8 Table 2 - Padua: descriptive statistics Variable n mean s.d. min max Unit value [€/sqm] 354 2,034.85 805.45 790 6,341 Zone (OMI) 354 1.72 0.89 1 3 Proximity to local transport infrastructure 354 1.99 0.85 1 3 Energy class 354 10.25 2.36 1 12 Type 354 0.94 0.23 0 1 No. of bathrooms 354 1.85 0.68 1 3 Gross floor area [sqm] 354 143.35 67.75 26 450 Maintenance status 337 2.67 0.76 1 4 Table 3 - Mestre: descriptive statistics Variable n mean s.d. min max Unit value [€/sqm] 254 1,767.02 538.95 950 5,376 Zone (OMI) 254 1.59 0.81 1 3 Proximity to local transport infrastructure 254 1.84 0.81 1 3 Energy class 254 10.21 2.75 1 12 Type 254 0.99 0.11 0 1 No. of bathrooms 252 1.37 0.50 1 3 Gross floor area [sqm] 254 96.40 28.34 38 205 Maintenance status 246 2.50 0.70 1 4 Table 4 - Bergamo: descriptive statistics Variable n mean s.d. min max Unit value [€/sqm] 293 1,905.43 714.89 665 4,793 Zone (OMI) 293 1.83 0.92 1 3 Proximity to local transport infrastructure 293 2.17 0.74 1 3 Energy class 293 9.85 2.41 1 12 Type 293 0.97 0.16 0 1 No. of bathrooms 293 1.44 0.58 1 3 Gross floor area [sqm] 293 108.86 45.85 35 300 Maintenance status 291 2,41 0.80 1 4           ===== PAGE 7 (score 30, numeric-paren 0, table-words 6, var-words 11) ===== The economic value of sustainability. Real estate market and energy performance of homes The hedonic prices of the characteristics all have a p- value of less than 0.05, so their reliability can be considered significant. Table 6 highlights the model values and reports the implied marginal prices of the identified characteristics. It reports the Variance Inflation Factor (VIF), which provides a measure of multicollinearity between the independent variables. The factor allows the detection of any interaction effects present in the model (Bottero et al., 2018). In the three cases considered, a VIF close to one indicates that the variables are weakly correlated and therefore independent. For two of the three cities studied, the locational characteristics condition the articulation of the values. For Padua and Bergamo, the traditional centre- periphery articulation marks the decline in property values. The case of Mestre is a significant exception, in that the market does not distinguish the traditional hierarchy between the centre and the periphery. Proximity to urban public transport infrastructure is a positional advantage that the models reported in two out of three cases, Padua and Mestre. One city is an exception: in Bergamo, no significant relationship was found between proximity to public transport infrastructure and residential market values. Property types that are adequately equipped record higher values, as indicated by the positive sign for the variable of the number of bathrooms in the cases of Mestre and Bergamo. As maintenance features increase, the unit value of the property also increases in all cities. Finally, in line with the law of diminishing marginal utility, the larger the gross floor area of the property, the lower the unit value. The EPC energy rating is a critical element of value creation in all three urban markets. The model confirms the empirical research cited above on the relevance of superior energy efficiency for value creation. The developed hedonic prices show similar and comparable magnitudes, confirming the robustness of the models. The models development the building energy performance variable in an ordinal form. To reach more robust conclusions regarding the contribution to the value of this intrinsic characteristic of the home, a second model considered energy class membership in the form of multiple dummy variables. The development of models based on variables of the latter type makes the estimation methodology more robust on account of the two alternative classifications of the variable sought and its weight in value creation. journal valori e valutazioni No. 34 - 2023 9 Table 5 - Variance analysis of the three models City Sum of squares df Quadra- tic mean F p value Padua Regression 25.118 5 5.024 75.223 <0.001 Residual 23.240 348 0.067 Total 48.358 353 Mestre Regression 9.141 5 1.828 54.111 <0.001 Residual 8.379 248 0.034 Total 17,521 253 Bergamo Regression 13.959 5 2.792 2.200 <0.001 Residual 24.883 287 0.087 Total 38.842 292 Table 6 - Regression models Padua Mestre Bergamo Predictors Xi βi p value VIF βi p value VIF βi p value VIF Costant 9.190 <0.001 - 8.233 <0.001 - 7.970 <0.001 - Zone (OMI) -0.244 <0.001 1.141 - - - -0.061 0.002 1.015 Proximity to local transport infrastructure -0.115 <0.001 1.047 -0.032 0.034 1.122 - - - Energy class (EPC) -0.049 <0.001 1.667 -0.039 <0.001 1.537 -0.043 <0.001 1.767 Type - - - - - - - - - No. of bathrooms - - - 0.161 <0.001 1.667 0.275 <0.001 1.834 Gross floor area -0.001 <0.001 1.073 -0.003 <0.001 1.530 -0.002 <0.001 1.757 Maintenance status -0.114 <0.001 1.682 -0.097 <0.001 1.462 -0.066 0.024 1.789 R2 Padua: 0.519; R2 Mestre: 0.522; R2 Bergamo: 0.359 ===== PAGE 8 (score 26, numeric-paren 0, table-words 7, var-words 8) ===== Following the buyer’s heuristic (Kahneman & Egan, 2011), the homes were grouped into three domains. The first includes homes belonging to the efficient classes (EPC A and B). The second includes the intermediate classes (EPC C and D), while the last includes the lowest energy-efficient classes (EPC E, F and G). Membership of each class determines a different hedonic price according to a scheme that is no longer constrained, as before, by the ordinal nature of the variable. Increasing energy class corresponds to increasing statistically significant hedonic prices (p-value always <0.05): the patterns shown in Table 7 confirm the results of the patterns previously described in Table 6. 5. DISCUSSION. VALUE DEVIATIONS AND COMPARISON WITH THE LITERATURE The analysis shows that there are significant differences in value according to the energy quality of the properties, confirming the theoretical premises outlined in the first section and the empirical research developed nationally and internationally. The economic advantage associated with lower operating costs is capitalised in the market value. Added to this is the prospect of marketing the property without constraints and limitations, a characteristic associated with properties of superior energy efficiency. The difference in value between the energy classes deserves further study to compare the results with other researches carried out in Italy and internationally. Starting from the models for the three cities, the unit value is calculated for a property in Classes A, D and G. In the second step, the gap between the identified prices is evaluated in relative and absolute terms. The market value of a home with the most common characteristics in the sample in Padua is 2,347 €/sqm for energy Class G, 2,719 €/sqm for Class D and 3,150 €/sqm for Class A. The values of homes with the most common characteristics in Mestre are 1,533 €/sqm for a home in Class G, 1,723 €/sqm for a home in Class D and 1,937 €/sqm if the home is classified in Class A. The values of homes in Bergamo are 1,408 €/sqm, 1,602 €/sqm and 1,823 €/sqm for EPC energy performance Classes G, D and A, respectively (Fig. 3). The absolute difference between a property in Class G and a property in Class D is 372 €/sqm, 190 €/sqm and 194 €/sqm for the cities of Padua, Mestre and Bergamo, respectively. The absolute differences correspond to very similar percentage increases: 15.84% for Padua, 12.41% for Mestre and 13.77% for Bergamo (Fig. 4). On the other hand, if we consider the gap between the least energy-efficient Class G and the most energy- journal valori e valutazioni No. 34 - 2023 10 Table 7 - Regression models with dummy variables for energy characteristics Regression models Padua Mestre Bergamo F: 57,018 p value: <0,001 R2: 0,509 F: 50,478 p value: <0,001 R2: 0,513 F: 25,365 p value: <0,001 R2: 0,349 Predictors Xi βi p value βi p value βi p value Costant 8.675 <0.001 7.708 <0.001 7.502 <0.001 Zone (OMI) -0.235 <0.001 - - -0.061 0.002 Proximity to local transport infrastructure -0.119 <0.001 - - - - High energy efficiency (Classes A and B) 0.316 <0.001 0.317 <0.001 0.231 <0.001 Medium energy efficiency (Classes C and D) 0.179 <0.001 0.179 <0.001 0.111 0.024 Type - - - - - - Number of bathrooms - - 0.172 <0.001 0.286 <0.001 Gross floor area -0.001 <0.001 -0.003 <0.001 -0.002 0.002 Maintenance status -0.131 <0.001 -0.103 <0.001 -0.082 0.006 Figure 3 - Unit values of homes in Padua, Mestre and Bergamo according to energy class. ===== PAGE 9 (score 6, numeric-paren 0, table-words 0, var-words 5) ===== The economic value of sustainability. Real estate market and energy performance of homes efficient Class A (conservatively the first subclass A), the hedonic prices in absolute value are 802 €/sqm for Padua, 404 €/sqmfor Mestre and 414 €/sqm for Bergamo. In percentage terms, the deviations are 34.18%, 26.36% and 29.43%, respectively for the three locations (Fig. 4). In the three cities, the shift from Class D to Class A shows a significant convergence in percentages, between 12.4% and 15.8%. There is a more pronounced convergence in the premium price between the values of Class G and those of Class A, but this convergence is around thirty percentage points. The results converge even when the energy variable is reported as a dummy variable. The value gaps highlighted in Figure 5 show the increasing value of the properties compared to the less efficient classes. More specifically, the gap between inefficient classes E, F and G and moderately-efficient properties classes C and D is 19.60% for the cities of Padua and Mestre and 11.74% for Bergamo. The results also converge for the value gap between the least energy-efficient properties and those in the highest classes (A and B), with percentages of 37.16% for Padua, 37.30% for Mestre and 25.99% for Bergamo. The results of the survey are in line with the academic research on the subject. In particular, the estimated premium prices are in line with the results of empirical studies on the Dutch (Brounen & Kok, 2011), Welsh (Fuerst et al., 2016) and Irish (Hyland et al., 2013) housing markets. The three studies report an average premium of 14% for properties in energy class A compared to D. Compared to the Italian studies, the research highlights empirical evidence that is consistent with some studies and contradictory with others. Manganelli et al. (2019) found similar results to those of this study. In the study of the Bari housing market, the analysis of values is carried out for both central and suburban areas. In the former case, the spread between Class A and Class G homes is 29.41%, while in suburban areas it rises to 41.2%. Less consistent, however, are the values obtained in studies carried out in other cities. Dell’Anna et al. (2019) and Bisello et al. (2020) studied the markets of Turin and Bolzano. In both cases, the value deviation is estimated in relation to Class G, the minimum energy class. In Turin, the value deviation from Class A is 6.33%, analogous to the 6.3% found for the city of Bolzano. The difference between the deviations found can be attributed to two factors. The first is related to the dynamism of the property markets considered. Turin is a metropolitan city and Bolzano, despite being a medium-sized city, has a very active market with values of absolute importance in the country. As pointed out by Eichholtz et al. (2010), value gaps increase where the real estate market is characterised by less active trading and values. In addition, recent EU positions may have had an effect by further widening the gap of the property values. In other segments of the real estate market, a similar trend of value divergence seems to be confirmed. In the tertiary market, JLL (2023) finds value gaps of more than twenty percentage points between green and traditional buildings, exceeding previous international (Eichholtz et al., 2010) and national (Mangialardo et al., 2019) estimates. Thus, even in segments other than residential, the trend appears to be one of increasing market polarisation between different levels of energy performance. 6. CONCLUSIONS The energy transition and decarbonisation require a major transformation of the housing stock. The issue journal valori e valutazioni No. 34 - 2023 11 Figure 5 - Change in value between properties with different energy performance in the cities of Padua, Mestre and Ber- gamo (energy classification measured with dummy variables). Figure 4 - Change in value between properties in energy classes G and D and between properties in energy classes G and A in the cities of Padua, Mestre and Bergamo.