Lack of supply of financing products Financing energy measures for households can be unattractive for private institutions. The small-scale size of investments leads to high transaction costs. The payback time for deep renovations is relatively long, which makes the business case unattractive. In most countries energy installations (like solar-PV) are considered as intrinsically part of the building. In case of a default the bank or mortgager has the first right to sell the house, including the installations. This increases the risk for the financer of energy measures, which in turn leads to a lack of large-scale supply of financing products.
F.3.2
Hurdles for attracting finance for real estate companies Real estate companies are defined as owners of buildings that let their buildings to households (residential; housing corporations; private rental companies) or businesses (non-residential).
Split incentive The return on investments is intangible. Real estate companies do not profit automatically from energy bill savings. The split incentive problem implies that a different party than the investor reaps the benefits from a sustainable energy investment. In the rental sector the tenant most often pays the energy bill. After an investment, the tenant reaps the benefits of a lower energy bill (and a more comfortable dwelling). In the residential sector, the landlord is not always allowed to increase the rent by the same amount as the energy savings. Recently, regulations have changed in some countries 69, but in practice energy efficiency costs are not always fully passed to the tenants. Moral institutions also play a role. Interest groups of residents fear an increase in housing costs for poor households and often advocate for a smaller rent increase than the energy savings. The split-incentive problem is less important in the non-residential sector (ENEA/FIRE, ÉMI, 2014).
Increase in asset value In the professional real estate sector investments in energy efficiency increase the ‘value’ of the building (Bozorgi, 2015). ‘Green’ buildings are more attractive, not only because of lower energy costs, but also benefits beyond cost savings – health and productivity – increase value. A higher asset value can increase revenues for owners. (Kok et al., 2011) show that energy efficient offices command higher rents than comparable energy inefficient buildings in the commercial property market. This implies that uncertainty about an increase in asset value is less a hurdle for real estate companies than for owner-occupiers and small-scale landlords.
Problem with fragmented ownership Energy efficiency investments in multi-apartment blocks can be problematic because usually a majority is required for renovation. In many cases even 70% of the households have to agree. Decision structures and voting rights differ per apartment block and country.
F.3.3
Hurdles for investors Investors can be institutional investors (pension funds; insurance companies) and banks. They seek for an optimal risk-return combination.
69
135
June 2016
Article 19 of the EED (2012/27/EU) states that Member States must evaluate and, if necessary, take appropriate measures to remove regulatory and no-regulatory barriers to energy efficiency including the split incentive problem.
7.E75 – Investment challenges of a transition to a low-carbon economy in Europe