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Do tenants pay energy efficiency rent premiums?

Jeremy Gabe (Department of Property, University of Auckland Business School, Auckland, New Zealand)
Michael Rehm (Department of Property, University of Auckland Business School, Auckland, New Zealand)

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 1 July 2014

2393

Abstract

Purpose

Using a unique data set, the purpose of this paper is to test the hypothesis that tenants pay increased accommodation costs for space in energy efficient office property.

Design/methodology/approach

The authors obtain lease contracts for office space in central Sydney, Australia. Empirical data on annual gross face rent and contract terms from each lease are combined with building characteristics and measured energy performance at the time of lease. Hedonic regression isolates the effect of energy performance on gross face rent.

Findings

No significant price differentials emerged as a function of energy performance, leading to a conclusion that tenants are not willing to pay for energy efficiency. Six factors – tenancy floor level, submarket location, proximity to transit, market fixed effects, building quality specification and, surprisingly, outgoings liability – consistently explain over 85 per cent of gross face rent prices in Sydney.

Research limitations/implications

Rent premiums from an asset owner's perspective could emerge as a result of occupancy premiums, market timing or agent bias combined with statistically insignificant rental price differentials.

Practical implications

Tenants are likely indifferent to energy costs because the paper demonstrates that energy efficiency lacks financial salience and legal obligation in Sydney. This means that split incentives between owner and tenant are not a substantial barrier to energy efficiency investment in this market.

Originality/value

This study is the first to thoroughly examine energy efficiency rent price premiums at the tenancy scale in response to disclosure of measured performance. It also presents evidence against the common assumption that rent premiums at the asset scale reflect tenant willingness to pay for energy efficiency.

Keywords

Acknowledgements

The authors thank RP Data Ltd. for assisting with the data gathering associated with this research. In addition, comments received during the 2013 American Real Estate Society Meeting were helpful to the outcome of this research, particularly those of discussant Dustin Read. Jeremy Gabe is supported by the University of Auckland Doctoral Scholarship.

Citation

Gabe, J. and Rehm, M. (2014), "Do tenants pay energy efficiency rent premiums?", Journal of Property Investment & Finance, Vol. 32 No. 4, pp. 333-351. https://doi.org/10.1108/JPIF-09-2013-0058

Publisher

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Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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