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Research Article

The Low-Carbon Rent Premium of

Residential Buildings
Angelika Brändle , Roland Füss , Jörg Schläpfer & Alois Weigand 
Received 16 Apr 2024, Accepted 02 Apr 2025, Published online: 19 May 2025

 Cite this article  https://doi.org/10.1080/08965803.2025.2496023

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Abstract

Based on 92,600 rental contracts in the Swiss real estate market, we study how a
property’s CO2 emissions are related to net rental values (gross rent without ancillary
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costs). We use a novel measure of operational carbon emissions that relies on various
parameters that capture
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“Accept all”, yousustainability and
agree to the storing energyonefficiency
of cookies your of a building as well as
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the climate conditions of its location. In an extensive hedonic framework, our results
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suggest that apartments in low-carbon buildings have higher net rents. A sub-analysis of
 Article contents  Related research

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11/14/25, 1:55 PM Full article: The Low-Carbon Rent Premium of Residential Buildings

urban and rural areas, as well as warm and cold locations, shows that lower ancillary
costs of sustainable apartments are correlated with this low-carbon rent premium.
Tenants’ higher preferences for environmentally friendly living do so as well, as shown
by sample splits across regions with high and low support of the Swiss Federal Act for
the Reduction of Greenhouse Gas Emissions. We further document that Europe’s energy
crisis causally increases our main effect. Shifting the focus to 611 residential building
transactions reveals that low-carbon buildings have lower capitalization rates due to
lower risk premiums. Together with higher rental income, these lower capitalization
rates translate into higher market values of residential buildings.

Keywords:

Apartment Net Rents Capitalization Rates CO2 Emissions Energy Efficiency Residential Buildings

Sustainable Real Estate

Jel Classification:

Q40 R11 R32

1. Introduction

In Switzerland, the operation of the residential building stock accounts for 15.4% of the
country’s overall CO2 emissions in 2022 (Federal Ministry for the Environment, 2024).
Therefore, real estate must make a significant effort to achieve the net-zero target and
to operate carbon-neutrally in the future.1 These sustainability pursuits and the
Weenergy
increasing use cookies
costs of recent years incentivize landlords to make investments in a
building’sByenergy efficiency.
clicking “Accept Inagree
all”, you the context of residential
to the storing buildings, these developments
of cookies on your
device for functional, analytics, and advertising purposes.
may create a negative correlation between apartment net rents (gross rents without
ancillary costs2) and the property’s operationalSee
carbon emissions. Figure 1 illustrates this
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11/14/25, 1:55 PM Full article: The Low-Carbon Rent Premium of Residential Buildings

relationship by showing average net rents in Switzerland, which tend to be higher in

cantons where residential buildings emit less CO2 on average.

Figure 1. An apartment’s average net rent and carbon emissions in Switzerland. This
figure depicts the relationship between an apartment’s average net rent and its carbon
emissions across all 26 Swiss cantons. Net rents are expressed in CHF/m2 /year, and CO2
emissions are quantified in kg/m /year. A solid line illustrates a negative correlation of
2

−0.15 between both characteristics on the cantonal level. Equally weighted averages
across Switzerland (all cantons) are shown by dashed lines.

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In this Swiss context, we investigate two main hypotheses in this research paper. Firstly,
we assume that net rents in low-carbon properties are higher due to tenants’ higher
willingness-to-pay. Secondly, we hypothesize that this willingness-to-pay for sustainable
apartments is associated with savings in ancillary costs and preferences for
environmentally friendly living. In addition to our two main research questions, we
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analyze whether and how the low-carbon rent premium is causally affected by Europe’s
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energy crisis in 2021/22. Thereby, we assume that due to the spike in fossil fuel prices
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and due to the fear of oil and gas shortages, the low-carbon rent premium will increase
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significantly in the Swiss rental market. We also take a look at the transaction market,

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11/14/25, 1:55 PM Full article: The Low-Carbon Rent Premium of Residential Buildings

where we test whether residential buildings that can be operated with lower CO2
emissions have lower capitalization rates and, thus, higher market values.

To test our hypotheses empirically, we use a novel operational CO2 indicator on the
property level developed by the independent real estate consultancy Wüest Partner AG.
More specifically, this estimation refers to carbon emissions caused by the operation of
real estate, i.e., during heat generation and by its electricity consumption. We merge this
information on CO2 emissions with an extensive dataset of 92,600 rental contracts in
Switzerland. In doing so, we also obtain a very detailed set of control variables on the
apartment, property, and municipal level for our hedonic framework. Most importantly,
we account for the possibility that properties with higher net rents and low CO2
emissions have a better building quality by including controls for a building’s age,
annualized future renovation costs, as well as an appraiser’s assessment of the
building’s condition. Sustainable properties may also be located in specific locations or
neighborhoods, which significantly impact market rents. Therefore, we add controls for
the quality of the building’s macro and micro location, as well as local rental market
elasticities. In addition, we control for a dwelling’s green building certificate to
disentangle its signaling effects from the relationship between a property’s carbon
emission and its net rents.

Our results suggest that apartment net rents in residential buildings are, on average,
2
0.19% higher if operational carbon emissions are 1 kg/m /year lower. In the context of
an average-sized residential building installing a low-carbon heat pump instead of a
fossil heating system, this effect accumulates to 4.18% or an absolute increase in
apartment net rents of CHF 45,240 on property level per year, while 114 tons of CO2
emissions are saved. From the tenants’ point of view, this higher willingness-to-pay,
firstly, is correlated with ancillary cost savings when living in a low-carbon property.
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More specifically, a large part of the above difference is offset by the ancillary cost
savings, which amount
By clicking “Accept to
all”,CHF 29 per
you agree apartment
to the and per
storing of cookies month in buildings with a heat
on your
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pump. Secondly, we point out that a higher willingness-to-pay for low-carbon housing
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also goes in hand with a tenant’s higher preference for living in an environmentally

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11/14/25, 1:55 PM Full article: The Low-Carbon Rent Premium of Residential Buildings

friendly apartment. Sample splits across urban and rural regions, warm and cold
locations, as well as areas with a high or low share of people supporting a Federal Act for
the Reduction of Greenhouse Gas Emissions confirm these results. In light of Europe’s
energy crisis in 2021/22, we further document a causal increase in our low-carbon rent
premium by carrying out simple difference-in-difference regressions that stress our
results in times of increasing fossil fuel prices and rising concerns about resource
scarcity. Moreover, based on capitalization rates from 611 residential building
transactions, we suggest that replacing a fossil heating system with a heat pump
decreases a building’s capitalization rate by −0.0594 percentage points, which reflects a
lower risk premium. In this example, the market value of a residential building increases
by 2.10%. An intuitively small effect, however, as the low-carbon cap rate and rent
premium go hand in hand, both effects are additive and result in an overall increase in
the market value of 6.28% when a residential building becomes virtually carbon-neutral.

Our findings have interesting implications for policymakers, real estate professionals,
and the academic debate on sustainable real estate. For policymakers, relying on
people’s sustainable behavior is not a stand-alone mechanism to achieve climate goals.
Market intervention mechanisms like CO2 taxes are one key instrument to induce the
transition toward a more sustainable residential real estate market. In this regard,
policies must carefully consider the potential impact on low-income households and the
need to avoid the low-carbon rent premium disproportionately affecting those in
affordable rental apartments. Policymakers must also evaluate incentives for
sustainable housing, considering that higher market values of low-carbon buildings
compensate investors for reducing carbon emissions. For real estate professionals, our
results on the low-carbon cap rate premium signalize that valuation models need to
account for the lower risk premium associated with lower-carbon residential properties.
In addition,
Weour
useresults
cookiesmay give an indication that acquiring brown residential buildings
and reducing their carbon emissions can generate a significant investment impact. In the
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academicdevice
debate, our approach
for functional, analytics, provides a more
and advertising accurate and nuanced understanding
purposes.

of the relationship between CO2 emissions andSee

residential rents as well as prices
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compared to binary variables like green certificates.

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To the best of our knowledge, this is one of the first studies that analyzes how lower
operational CO2 emissions affect net rental values. In doing so, we provide a precise
quantification of the low-carbon rent premium in the Swiss context, allowing for
comparisons with other markets. We also show further evidence of carbon emissions on
residential building capitalization rates and, thus, transaction prices. In this context,
McCord et al. (2024) take a similar direction and provide evidence of a rental premium of
0.2% for a one-point improvement in energy efficiency measured in European Energy
Performance Certification scores. Cajias and Piazolo (2013) use detailed data on the
energy consumption of residential buildings to document a premium in rental prices as
well as market values for energy-efficient buildings in Germany. More specifically, the
authors show that one percent energy conservation boosts rent prices by 0.08% and
market values by 0.45%. Other studies on the residential real estate market mainly focus
on the impact of energy labels or certificates3 on rental as well as transaction prices.
Among others, Hyland et al. (2013) find that A-rated properties experience rental rates
(sales prices) that are 1.8% (9%) higher in comparison to D-rated properties. However,
most of these studies only document premiums in transaction prices as a consequence
of unavailable data on rental contracts (Brounen & Kok, 2011; Fuerst et al., 2015; Jensen
et al., 2016; Kahn & Kok, 2014; Yoshida & Sugiura, 2015; Zheng et al., 2012). In contrast,
rent premiums of certified properties are widely documented in the commercial real
estate market. For example, Brolinson et al. (2023) find 3.6% higher rents for commercial
office buildings associated with an energy efficiency certification. Eichholtz et al. (2010,
2013) document that certified green office buildings in the U.S. command 3% higher
rents and 16% higher selling prices compared to otherwise identical buildings. Reichardt
et al. (2012) show a rent premium of 2.5–2.9% for energy-efficient commercial buildings
in the U.S. as well. Similar findings on green-labeled commercial properties for the
Netherlands and the U.K. are mentioned in the work of Kok et al. (2011) and Chegut
We use
et al. (2014), cookies Further studies on energy-efficient buildings in the U.S. include
respectively.
Wiley et al. (2010),“Accept
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you agree (2011)
to the storing and Das
of cookies et al. (2011). Additionally and
on your
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similarly to Kempf and Syz (2022), our study is among the first to analyze drivers of a
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tenant’s willingness-to-pay for low-carbon apartments by looking into incentives for

saving ancillary costs and preferences for sustainable living.

The remainder of the paper is organized as follows: The next section derives our
hypotheses based on a theoretical model and the existing literature. Section 3 describes
the institutional setting as well as the data, in particular the measure of operational CO2
emissions. Section 4 introduces the methodology before discussing our empirical results
step-by-step. Section 5 concludes.

2. Theoretical Foundation and Hypotheses

By adapting the theoretical model of Whitehead (1995) and extending the variation
function of McConnell (1990), let us assume that tenants spend their expected income I
over their lifetime on housing services 𝑧𝑖 in terms of rents and the consumption of a
bundle of other consumer goods 𝑐𝑖 . The set of housing attributes includes common
property characteristics 𝑧𝑖 , such as age, size, micro and macro location, and
environmental attributes 𝑧𝑒, such as a heating pump or building insulation, which lower
an apartment’s operational CO2 emissions. We normalize the price of other
consumption goods to 1 to treat it as a numeraire good c. The hedonic rental price
function consists of housing and sustainable attributes 𝑝𝑖 ∗ 𝑧𝑖 + 𝑝𝑒 ∗ 𝑧𝑒, where 𝑝𝑒 > 𝑝𝑖 .
Thus, a tenant’s budget constraint is given by the following equation:

𝐼 = 𝑐 + 𝑝𝑖 ∗ 𝑧 𝑖 + 𝑝𝑒 ∗ 𝑧 𝑒 .
(1)

Given this budget constraint, a tenant maximizes the utility function 𝑢(𝑐, 𝑧𝑖 , 𝑧𝑒). The
expenditure function
We use 𝑚(𝑝, 𝑧𝑖 , 𝑧𝑒, 𝑢) is determined by the tenant’s consumption problem:
cookies
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device for functional, analytics, andmin𝑐
advertising
+ 𝑝′ ∗purposes.
𝑧 + 𝑝′ ∗ 𝑧
𝑖 𝑖 𝑒 𝑒
s.t.𝑢 = 𝑢(𝑐,See
𝑧𝑖 , our
𝑧𝑒)privacy
. policy
(2) Based on the expenditure function, we derive the minimum amount of rent that a

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11/14/25, 1:55 PM Full article: The Low-Carbon Rent Premium of Residential Buildings

tenant must spend to remain on a pre-defined utility level. This function increases in p
and u but decreases in z (decreasing marginal utility). The willingness-to-pay for a low-
carbon apartment is the maximum amount of money a tenant would give up in order to
live in an environmentally friendly apartment, i.e., going from 𝑧𝑒 to 𝑧𝑒∗ :

WTP𝑒 = 𝑚(𝑝𝑖 , 𝑝𝑒, 𝑧𝑖 , 𝑧𝑒, 𝑢) − 𝑚(𝑝𝑖 , 𝑝𝑒, 𝑧𝑖 , 𝑧𝑒∗ , 𝑢) .

(3)

WTP𝑒 ( · ) indicates the willingness-to-pay valuation function and 𝑧𝑒∗ stands for a CO2 low-
carbon apartment. The tenant’s expenditure on a fixed level of utility decreases with an
increasing energy efficiency of a building (𝑧𝑒 to 𝑧𝑒∗ ) and, thus, the WTP𝑒 ≥ 0. This leads
us to our first and key testable hypothesis:

Hypothesis 1:

Low-carbon rent premium:

Net rents in low-carbon properties are higher due to tenants’ higher willingness-to-pay.

Tenant’s higher willingness-to-pay for low-carbon housing can be driven by ancillary cost
savings and preferences for sustainable living. In this context, previous studies on
properties with energy-efficiency certificates provide first insights into what is really
driving the willingness-to-pay for lower carbon emissions. Eichholtz et al. (2010, 2013)
document that premiums in rents and asset values of sustainable buildings mainly stem
from efficient energy use. These findings indicate that the increment to market value is
more than a “green” labeling effect but provides additional occupier benefits, lower
holding costs, and a lower risk premium (Fuerst & McAllister, 2011). Furthermore, the
rental choice between green and conventional floor space affects firms’ sustainability,
which is particularly important for companies in specific sectors like the oil or banking
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industry (Eichholtz et al., 2016). The results emphasize the economic benefits and
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institutional pressure
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for functional, “ecological”
analytics, responsiveness
and advertising purposes. of firms. Similarly, households
might be willing to pay a higher net rent to signal environmental responsibility. For
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instance, Kahn and Vaughn (2009) argue that environmental ideology leads to a higher

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willingness-to-pay to reduce carbon emissions in the Californian housing market.4 In

contrast, Brounen et al. (2012) show low “energy literacy” and energy consumption
awareness among Dutch households, which is reflected in low adaption rates for semi-
mandatory energy certificates (Brounen & Kok, 2011).5

Despite the evidence being rare, we follow the findings of Kempf and Syz (2022) who
decompose the willingness-to-pay for sustainable housing in Switzerland into multiple
components (energy savings, increased comfort, and enhanced conservation of value).
We do the same and hypothesize that higher willingness-to-pay for low-carbon housing
is not defined by a single driver but rather by a mix of ancillary cost savings and
preferences for sustainability. Hence, our second hypothesis is the following:

Hypothesis 2:

Ancillary cost savings and preferences for sustainability.

Tenants’ willingness-to-pay for sustainable apartments is simultaneously driven by

savings in ancillary costs and by preferences for environmentally friendly housing.

3. Institutional Setting and Data

3.1. Swiss Residential Rental Market

Switzerland’s housing stock comprised approximately 4.5 million dwellings (apartments

or houses), with about 2.6 million of these being rental units (roughly 60%). The Swiss
rental market is dominated by private landlords, who own about 57% of rental
properties. Institutional investors own roughly 22% of rental properties, while housing
cooperatives
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public entities account for the remaining 21% (Swiss Federal Statistical
Office, 2024).
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With its rental rate being one of the highest in Europe,6 the Swiss rental market is heavily
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regulated, with strong tenant protection laws in place that govern the relationship

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between landlords and tenants. This highly regulated nature of the market also has an
increasing focus on sustainability. In recent years, the introduction of non-mandatory
building energy certificates has provided a standardized way to assess and communicate
a building’s energy performance. At the same time, the Swiss Federal Council increased
its efforts to quantify and reduce the carbon emissions of the residential housing stock.
In this regard, tenants became more aware of housing-related carbon footprints.

While federal laws provide an overarching framework, the Swiss rental market can have
significant regional differences. Cantons may have additional regulations, and market
conditions can vary considerably between urban, suburban, and rural areas as well as
tourist regions. Economic factors and population density primarily drive these regional
variations, which follow the country’s topography. Dense municipalities with a large
housing stock can usually be found in the North and West, while mountainous and large
municipalities in the South and East exhibit fewer rental dwellings. Figure 2 shows the
distribution of the rental housing stock (Panel A) and compares it to the number of
observations in our dataset of Swiss rental contracts (Panel B, described in Section 3.2).

Figure 2. Dispersion in the Swiss Rental Housing Stock. This map depicts the regional
dispersion of the rental housing stock in Switzerland (Panel A) and our dataset on Swiss
rental contracts (Panel B) across municipalities. The solid shapes indicate 2,172
communes within Switzerland. The degree of coloring depends on the number of
observations in each municipality. Blue shades indicate lakes and rivers. Panel A: Swiss
Rental Housing Stock. Panel B: Swiss Rental Contract Dataset.

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Display full size

The strict tenancy law also provides a clear framework for rental contracts in the Swiss
residential market. On a monthly basis, a Swiss tenant pays the gross monthly rent to
the landlord, which may be decomposed into the apartment’s net rent and ancillary
costs. Net rent has to be paid for the direct use of rental property, while ancillary costs in
Swiss rental properties are additional or indirect charges related to this usage. Ancillary
costs encompass various utilities and services, including heating and hot water
consumption,7 water usage, common area electricity, waste disposal fees, and building
maintenance services.
We use cookiesThe charges also cover common area maintenance such as
caretaker services, garden maintenance, elevator maintenance, stairwell cleaning, snow
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removal,device
and security services.
for functional, analytics,These costs are
and advertising typically distributed
purposes. among tenants using
a predetermined allocation key based on factors
Seelike apartment
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occupants. In most cases, ancillary costs also include a 3–5% administrative fee. Under
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Swiss law, all ancillary costs must be explicitly listed in the rental agreement, and certain
expenses cannot be charged as ancillary costs (i.e., renovation costs, property taxes,
insurance premiums, or general administrative costs). Tenants have legal rights
regarding these charges, including a five-year period to dispute charges and the ability
to claim overcharged amounts for up to ten years. Apartment-level electricity costs or
TV/internet fees are billed to the tenants by the respective providers individually and not
by the landlord.

Overall, the high rental rate, the strong tenancy law, high market regulation, the regional
variation, as well as the ambitious climate goals make the Swiss rental market an
excellent laboratory for analyzing the impact of CO2 emissions on rental prices.

3.2. Data

To conduct our analysis, we use an extensive dataset of 92,600 Swiss rental contracts in
2,653 residential buildings owned by 111 institutional investors, including pension funds,
insurance companies, banks, family offices, and real estate funds, among others.8
Overall, our sample includes 16.2% of all rental dwellings held by institutional investors
in Switzerland and 3.6% of all rental dwellings in the country. Hence, we consider our
dataset to be representative of the investment activity of institutional investors, who
tend to invest more in urban and suburban areas, but also own a small share of
buildings in rural regions. This is visible in Panel B of Figure 2, where we observe rental
contracts across the whole of Switzerland but concentrated in specific municipalities.
These communities are more likely to be found in more densely populated areas and
not in rural regions in which private landlords dominate.

Table 1 presents the list of main variables and essential controls in the dataset on Swiss
rental contracts as well as their descriptive statistics for the sample period April 2015 to
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October 2023. This list includes each variable’s unit and its granularity (apartment level,
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propertydevice
level,fororfunctional,
municipality level).
analytics, In Tablepurposes.
and advertising 2, we provide the main variables’ pairwise
correlation coefficients to indicate the strength of their linear relationship.
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Table 1. Descriptive statistics –rental contracts.

Display Table 
Table 2. Correlation matrix – rental contracts.

Download CSV Display Table 

3.2.1. Apartment Net Rents

All Swiss properties or Swiss rental agreements in this sample for which we observe
apartment net rents meet the following criteria: (1) A dwelling has at least two residential
units. (2) The property is equipped with gas or oil-fired heating or with a heat pump
(shares of 92.5 and 7.5%, respectively).9 (3) The apartment size is between 20 and 340 m2
with a monthly net rent of at least CHF 500 and at most CHF 5,000. (4) The apartment is
unfurnished. (5) A rental contract needs to be signed between January 2015 and October
2023 and has to be valid at the end of the sample period.10 Hence, these selection rules
for residential buildings and rental agreements ensure that only real and current leases
are included in the final dataset. All agreements are close to current market rents and
reflect tenants’ willingness to pay. Older rental contracts would distort the results in our
study as these agreements are strongly influenced by the Swiss tenancy law and, thus,
deviate more from current rents over time. Furthermore, our cleaning criteria ensure
that each apartment is only observed once.

WeEmissions
3.2.2. CO use cookies
2
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device for functional, analytics, and advertising purposes.
Our analysis focuses on CO2 emissions caused by operating residential real estate, i.e.
when a dwelling is heated, and by its electricitySee
consumption
our privacy policy (in accordance with the

Greenhouse Gas Protocol (Scope 2) and the Carbon Risk Real Estate Monitor’s whole-
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building approach).11 The carbon emissions of our dataset’s properties are estimated by
the CO2 calculator of the independent real estate consultancy Wüest Partner AG. This
calculation defines CO2 emissions as the product of a building’s final energy
consumption and the emission factor (see description in Appendix A). In short, the CO2
modeling is calibrated against a dataset on 50,000 energy performance certifications
and determines the dwelling’s CO2 emissions based on mandatory parameters and
optional inputs. The mandatory variables include a property’s exact geo-coordinates (to
model climate conditions), year of construction of the property, number of heated
floors, utilization schedules with floor space details, the energy reference area, and
energy sources of heat generation. Optional inputs include the year and type of energy
renovations (such as heat generation, external walls, windows, roof, and basement
ceiling), window properties, shading factors, ventilation types, and heat recovery
efficiency, among others. Regarding precision in comparison with actual carbon
emissions based on actual energy demand for heating, hot water, and electricity (Scope
2), the CO2 modeling has a mean relative deviation of 18% (40%) in the calibration
sample of 148 buildings if all mandatory and optional (only mandatory) input variables
are available. Based on the availability of input variables in our dataset on Swiss rental
contracts, we expect a maximum mean relative deviation of 25% in the CO2 modeling for
our 2,653 residential buildings.

In our dataset on Swiss rental contracts, an average dwelling emits CO2 of 21

2
kg/m /year. This number is mainly driven by buildings with oil and gas-fired heating
2
systems that emit 25 kg/m /year of CO2 on average, while dwellings with a heat pump
have an average of 3 kg/m /year of CO2.12 Hence, in contrast to the Paris Climate
2

Agreement, we do not consider dwellings with a heat pump to be carbon-neutral. Heat

pumps generate a higher electricity demand, which is taken into account when
calculating
Weause
dwelling’s
cookiescarbon emissions.13
3.2.3. Building Quality
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To isolate the effect of CO2 emissions on apartment net rents, a variety of controls for a
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building’s quality are essential. Therefore, our dataset includes three indicators. (1)

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Condition: During the appraisal process, a property’s condition is assessed on a discrete

scale from 1.0 (in need of renewal) to 5.0 (as new) in tenths of a point. Based on a
standardized assessment process and an on-site inspection, this measure facilitates the
comparison of buildings in terms of materialization and condition. (2) Age of a Dwelling:
A building’s age serves as another control for a building’s quality due to obsolescence
and depreciation over time. (3) Renovation Costs: This variable refers to the renovation
schedule considered in the appraisal process and is given by the annualized cash flow of
the future repair costs per square meter.14

Obviously, all three indicators of a property’s quality show significant correlations with a
building’s CO2 emissions (Table 2). These relationships may bias the results of the effect
of carbon emissions on apartment rents. Therefore, in one of our estimation models, we
take all three controls as sub-indicators and aggregate them into a quality index. More
specifically, this new index captures the quality of a building without taking sustainability
into account. The challenge of constructing the index using three sub-indicators is that
their means and variances are not identical. Sub-indicators with a high mean value and
high variance characterize the overall index more than sub-indicators with a low mean
value and a small variance. Accordingly, we standardize the distributions of all sub-
indicators to a range of 1.0 (poor) to 6.0 (very good). Computing an unweighted average
of all three adjusted sub-indicators yields the quality index in a final step.15
3.2.4. Property and Apartment Characteristics

To further control for a variety of property and apartment attributes, we account for a
property’s standard, usability, and number of rental units. The discrete score for the
standard and the usability of a dwelling are assessed by an appraiser. Both variables’
scales start at 1.0 (very bad) and end at 5.0 (excellent). Additional hedonics in our
dataset are an apartment’s size, number of rooms, as well as the floor on which the
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apartment is located. With respect to the apartment size, we also control for nonlinearity
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by adding a quadratic
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for functional, for the
analytics, andsize variable.
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To describe the location quality of rental contracts, we distinguish between the macro
and micro location of individual properties. The micro location is based on a model-
based proposal, which can be overruled based on an appraiser’s subjective assessment
on a discrete scale from 1.0 (very bad) to 5.0 (excellent) in tenths of a point. The rating
takes a dwelling’s immediate surroundings or neighborhood into account, which are
graded on its terrain, infrastructure, recreational opportunities, noise emissions, and
population density. A building’s macro location reflects a building’s geographical location
within the country. Based on economic and socio-demographic data as well as
information on connectivity and infrastructure, a model-based score is given from 0.0
(D-location) to 4.0 (A-location) at the municipality level. Together with cantonal
indicators, the variables on a property’s macro and micro location can also capture
spatial differences in the adoption of heating systems, which mainly persist in the
comparison of urban/suburban versus rural municipalities.
3.2.6. Green Building Certificates

To account for the signaling effect of green building certificates, i.e., energy certificates
signal lower energy costs and, thus, lower ancillary costs, we use the information on
Swiss Minergie labels on the property level.16 Based on this sustainable building
standard, rental observations are grouped into three categories: Firstly, buildings
without certification or missing information have a score of 0 (reference category).
Secondly, buildings with a basic certification (Minergie) score 1. Thirdly, properties with a
higher level certificate (Minergie-P and Minergie-A) score 2 in our dataset.

3.2.7. Local Rental Elasticities

The effect of operational CO2 emissions on apartment net rents must be separated from
the influence of “loose” and “tight” rental market conditions. To proxy for local rental
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dataset includes rental offer rates as an additional control. Rental
offer rates
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offer in relation to the existing apartment stock.
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3.2.8. Municipal Characteristics
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Municipal attributes are the final component of the dataset on Swiss rental contracts.
Each rental contract can be linked to one of 2,172 Swiss municipalities and one of 26
Swiss Cantons. Moreover, urban, sub-urban, as well as rural classifiers are available in
each commune. Most importantly, we collect voting results on the revised Federal Act on
the Reduction of Greenhouse Gas Emissions (CO2 Act) on the municipality level. In this
nationwide referendum on June 13th, 2021, Swiss citizens said no to a law to curb the
nation’s greenhouse gas emission even further by 2030 (59.70% voter turnout).17 Lastly,
the average amount of yearly heating degree days (between 1981 and 2010) is available
for each municipality and serves as an indicator of local climate conditions. To obtain
this measure, on each heating day (average outside temperature of less than 12 °C), it is
recorded by how much the outside air temperature deviates from the targeted inside air
temperature of 20 °C. The yearly heating degree days are the sum of the differences
between the outside air temperature and the targeted inside air temperature for all
heating days.

4. Methodology and Results

4.1. The Low-Carbon Rent Premium

We test our main hypotheses in a low-carbon rent premium model, which is based on
the concept of hedonic regressions developed by Rosen (1974). In line with Malpezzi
(2002), this log-linear regression model with heteroskedastic disturbances is specified as
follows:

ln(𝑅𝑖 ) = 𝛽0 + 𝛽1 CO2 Emissions + 𝛹 𝑖 𝑋 𝑖 + 𝜖with𝜖 ∼ 𝑁 ( 0, 𝜎 2 ) .

(4)

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The model aims to estimate the effect of CO2 emissions on apartments’ net rents 𝑅𝑖
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while controlling for differences in building quality, location attributes, local rental
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market conditions, as well as property and apartment characteristics. In Equation (4), the
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set of control variables is denoted by the vector 𝑋 𝑖 and allows the comparison of two

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identical properties, which only differ in terms of their carbon emissions. 𝛽0 ,𝛽1 , and 𝛹
pick up (vectors of) coefficients. Consequently, CO2 emissions are not a direct function of
some control variables in the low-carbon rent premium model. 𝜖 denotes the error term.

Table 3 presents linear regression results from estimating different versions of Equation
(4). These different specifications confirm our first hypothesis, i.e., lower CO2 emissions
have a positive effect on rental income: the lower carbon emissions, the higher net
rents. This is shown by carefully isolating the effect of CO2 emissions on net rental
values from the influence of a building’s quality. To do so, we alternately include a
property’s condition, age, or future renovation costs in Models (1) to (3), include all three
measures in Model (4), and use these variables’ aggregated index in Model (5).

Table 3. Regression results – low-carbon rent premium model.

Display Table 
As apartment net rents are log-transformed, the estimated coefficients of CO2 emissions
2
varying from −0.0011 to −0.0033 indicate that if carbon emissions are 1 kg/m /year
lower, the net rent is 0.11–0.33% higher. 18 All effects are statistically significant at
common significance levels (10, 5, and 1%). However, Models (2) and (3) show relatively
high estimates as these specifications fail to account for a building’s quality by only
including one control variable (age or renovation costs). A building’s condition seems to
be the key variable in controlling for a building’s quality in Model (1). Models (4) and (5)
are even more successful in doing so and yield coefficients of similar as well as smaller
sizes. Furthermore, the models’ adjusted 𝑅2 shows that Model (4) has a slightly higher
explanatory power than Model (5), as during the aggregation process of the quality
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index, variation is lost. Therefore, we consider Model (4) as our reference specification.19
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On an apartment level, the result of Model (4) is economically significant. If a heat pump
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is installed instead of oil or gas-fired heating, CO2 emissions are cut by 22 kg/m /year on

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average. At the same time, rents are around 4.18% higher (0.19% * 22). The average net
rent in the dataset on Swiss rental contracts is CHF 1,400 per month. Hence, with a heat
pump, the monthly net rent would be, on average, CHF 58 higher than with a fossil
heating system. Taking this interpretation to a property level, investors generate a CHF
3,770 higher monthly rental income per average-sized low-carbon building (with 65
apartments) compared to an identical building with oil or gas-fired heating. Aggregated
to a yearly level, the low-carbon rental premium accumulates to CHF 45,240 for an
2
investor of a low-carbon residential dwelling while saving 114 tons of CO2 (22 kg/m /year
* 65 apartments * 80 m2 ).

One strong assumption in our low-carbon rent premium model is the linearity of the
negative relationship between apartment net rents and carbon emissions. To investigate
this further, we categorize apartments according to their CO2 emissions and re-estimate
our low-carbon rent premium model.20Figure 3 illustrates these estimated coefficients,
which must be compared to the base category of virtually carbon-neutral apartments
2
(CO2 emissions ≤ 5 kg/m /year). The figure shows that the negative effect of carbon
emissions on net rents increases linearly until the fifth category (CO2 emissions
2
> 25kg/m /year) and remains the same in the last category. This may indicate a
diminishing linear effect once a residential building exceeds a certain threshold of
carbon emissions.

Figure 3. CO2 categories - low-carbon rent premium model. This figure shows estimated
regression coefficients for six categories of rental apartments’ CO2 emissions compared
to the base category of virtually carbon-neutral apartments (x<5kg/m2 /year). Coefficients
are estimated in an adapted version of the low-carbon rent premium model, where
categories are included as binary variables and replace the main explanatory variable
CO2 emissions. The number of observations in this regression is again 92,600 with an
2
adjusted
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0.7836. Spikes indicate 90% confidence intervals around the estimated
coefficients, which are indicated by black dots.
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Display full size

The low-carbon premium in net rents and the corresponding higher willingness-to-pay
may be traced back to two possible reasons.21 Firstly, residential buildings with a heat
pump have lower ancillary costs than dwellings with oil or gas-fired heating systems.
More precisely, heating costs amount to CHF 29 per m2 /year on average, while the
average costs of fossil heating are CHF 34 per m2 /year. This difference of CHF 5
translates to CHF 33 higher ancillary costs per month for an average-sized 80 m2
apartment. As a consequence, higher net rents do not necessarily lead to higher housing
costs for tenants as the CHF 58 per month higher rent for a low-carbon apartment is
partially offset by the average savings in ancillary costs (ancillary cost savings are passed
through to tenants). Secondly, higher net rents of apartments with lower CO2 emissions
may go in hand with preferences for environmentally friendly apartments.

4.2. Ancillary
We use Cost Savings vs. Preferences for Sustainability
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and advertising low-carbon rent premium, we perform
three different sample split regressions for our low-carbon rent premium model in
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Equation (4). Firstly, we divide our sample into an urban and rural sub-sample

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(neglecting sub-urban observations). This sample split allows for the assessment of the
influence of ancillary costs as buildings in more densely populated locations are heated
in a more efficient and cost-saving way due to a denser building structure than in rural
areas. Secondly, we divide our rental contracts based on climate conditions to account
for different levels of heating costs. To do so, we sort rental contracts based on
municipalities’ heating degree days and consider values larger (smaller) than the upper
(lower) quartile as our Cold (Warm) sub-sample. Thirdly, we perform a similar sample
split based on municipal voting results on the revised Federal Act on the Reduction of
Greenhouse Gas Emissions (CO2 Act) to account for varying preferences for sustainable
housing within the population. Table 4 lists all sample-split regression results.22 In all
sample-split regressions, we control for quality by including all three measures of a
building’s quality individually according to Model (4) of Table 3 in Section 4.1.

Table 4. Sample split regression results – low-carbon rent premium model.

Display Table 
Firstly, the estimated coefficients of CO2 emissions in Models (1) and (2) indicate that the
rural low-carbon rent premium of −0.0042 is significantly higher than in urban areas at a
1% level (Table B.1 of the Appendix for equality tests of coefficients). Based on the urban
sub-sample, this main coefficient of interest amounts to −0.0020. Secondly, in cold
regions (Model (4)), the significant coefficient of CO2 emissions on net rental values is
equal to −0.0033, while in warm regions (Model (3)), the estimate is just slightly negative
with −0.0005.23 This difference between warm and cold municipalities is significant at a
1% level. Thirdly, sample split regressions of Models (5) and (6) show a higher low-
We premium
carbon rent use cookies
in municipalities with a higher share of supporters of the Swiss
CO2 Act, By
implying that these
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all”, you friendly
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emissions more.24 This difference in coefficients for the effect of carbon emissions on
net rents is again significant at all common significance levels (10, 5, and 1%).
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Consequently, we argue that the low-carbon rent premium is significantly correlated

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with ancillary cost savings of sustainable buildings and tenants’ preferences for
sustainability.

4.3. Europe’s Energy Crisis and the Low-Carbon Rent Premium

Despite including several hedonic variables in our analysis, estimating Equation (4) in a
simple hedonic framework does not allow for causal inference. Therefore, we conduct
an event study by specifying a simple difference-in-difference model in light of Europe’s
Energy Crisis that started in October 2021. This crisis could have strengthened the
negative relationship between a building’s carbon emissions and net rental values.

ln(𝑅𝑖 ) = 𝛽0 + 𝛽1 High CO2 Emissions + 𝛽2 Crisis + 𝛽3 (HighCO2 × Crisis) + 𝛹 𝑖 𝑋 𝑖 + 𝜖

with𝜖 ∼ 𝑁 ( 0, 𝜎 2 ) .
(5)

ln(𝑅𝑖 ) again denotes the natural logarithm of rental prices observed in a symmetrical
time window around the crisis’ start date (9 months before and after). We define CO2
emitting rental apartments as the treatment group (High CO2), whereas virtually
2
carbon-neutral apartments (CO2 emissions ≤ 5 kg/m /year) form our control group
(mostly heat pumps). In this regard, two possible channels might have affected our
treatment and control group differently. Firstly, 𝐶𝑂2 emitting rental apartments were
affected by the increase of ancillary cost as prices of fossil fuels rose due to the
economic upturn after the COVID-19 pandemic and skyrocketed after the start of the
Ukrainian/Russian conflict in February 2022.25 In contrast, carbon-neutral apartments
remained unaffected by rising fossil fuel prices due to their exclusive reliance on
electricity for heat generation. For renters or households, electricity prices did not
increase significantly in Switzerland until 2023 due to contractually based price
mechanisms. Secondly,
We use cookiesour treatment group might have been affected negatively by a
growing preference for environmentally friendly living due to the fear of oil and gas
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shortages.
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Two underlying requirements that have to be fulfilled to estimate this proposed

difference-in-difference model validly are the parallel trends assumption and the no-
anticipation effect. Our pre-trend analysis suggests that both the treatment and control
groups follow a similar trend despite being on different levels in terms of rental prices,
as shown in Figure 4. In this regard, we do not reject the null hypothesis of equal trends
in the pre-treatment period with a t-statistic of −1.22 or an empirical significance level of
22.01%. In addition, we argue that Europe’s energy crisis was not anticipated as it
represents an exogenous shock.

Figure 4. Difference-in-difference regression results – trend analysis of predicted rents.

These graphs show predicted rental prices for an average virtually carbon-neutral
apartment (CO2 emissions ≤ 5 kg/m /year) and for CO2 emitting rental apartments in
2

light of Europe’s Energy Crisis starting in October 2021. More specifically, the figures
show rent predictions according to our reference specification Model (4) in a symmetrical
time window around the crisis’s start date (9 months before and after, quarterly level).
Panel (A) keeps prediction inputs constant across all periods, whereas Panel (B) allows for
varying prediction inputs over time. Panel A: Rental predictions with constant inputs.
Panel B: Rent predictions with quarterly varying inputs.

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Table 5 reports the results of our simple difference-in-difference specification in

Equation (5). Independent of how we control for a building’s quality, the estimated
coefficients show meaningful and highly significant results with intuitive signs. We
estimate a price difference between the treatment group and the control group of
−2.83% and −8.58% before the crisis. After the crisis, these negative differences between
both groups increase to the range of −4.47% and −10.17%, which is the result of a
treatment effect ranging between −1.50% and −1.65%. Hence, Europe’s energy crisis in
2021/2022
Wecausally increased the low-carbon rent premium of residential buildings
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through the channels of increased ancillary costs and/or an aversion toward fossil
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heating systems.
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Table 5. Difference-in-difference regression results – low-carbon rent premium


model.

Display Table

4.4. Further Evidence from Residential Building Transactions

Shifting the focus of our analysis from rental contracts to transaction prices reveals
several possible channels of how sustainability affects a residential capitalization rate,
which is given by 𝐶 = 𝑟 𝑓 + 𝑟 𝑝 − 𝑔. For a low-carbon property, the risk premium (𝑟 𝑝 ) is
smaller because, e.g., regulatory and financing risks are lower, and the building’s market
liquidity and the preference of investors are higher.26 The risk premium is also reduced
by a lower vacancy rate which, implies a higher stability of monthly cash flows (low-
carbon residential buildings attract more potential tenants). Furthermore, investors can
expect a higher rent growth (g) for sustainable residential buildings due to tenants’
higher willingness-to-pay.

As a consequence, we expect residential buildings with lower CO2 emissions to have

lower capitalization rates. Therefore, we replace the natural logarithm of monthly net
rents in Equation (4) with transactions’ capitalization rates 𝐶𝑖 and obtain a low-carbon
cap rate premium model:

ln(𝐶𝑖 ) = 𝛽0 + 𝛽1 CO2 Emissions + 𝛹 𝑖 𝑋 𝑖 + 𝜖with𝜖 ∼ 𝑁 ( 0, 𝜎 2 ) .

(6)

To estimate the low-carbon cap rate premium according to Equation (6), we collect a
detailed transaction dataset on Swiss residential buildings and investigate capitalization
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rates of 611 transactions.27 These Swiss investment properties with a residential income
share of By
at clicking
least 60% have
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all”, you traded
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transactions of apartment buildings that changed hands in a private transaction are
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considered. Portfolio transfers are excluded. CO2 emissions on the property level are

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again quantified by the CO2 calculator of Wüest Partner AG. Due to differences in data
availability, the set of control variables is smaller.28 In Appendix B, Table B.2 presents
descriptive statistics on our dataset on Swiss capitalization rates, while Table B.3 lists
pairwise correlation coefficients.

Consequently, estimating this model in various specifications to differently control for a

building’s quality results in mostly statistically significant coefficients of CO2 emissions,
which are summarized in Table 6. Full regression results can be found in Table B.4 of the
2
Appendix. A decrease of 1 kg/m /year of dwelling’s CO2 emissions yields an average
decrease of −0.0025 to −0.0033 percentage points of a property’s capitalization rate. This
effect accumulates to −0.0550 to −0.0726 percentage points if an average fossil-fueled
2
residential building with 27 kg/m /year of CO2 emissions (in our dataset on Swiss
capitalization rates) goes low-carbon by installing a heat pump and cutting emission by
2
22 kg/m /year. Since the average capitalization rate in our dataset is 2.82%, the low-
carbon cap rate premium alone increases market prices by 1.94–2.56% in the case of a
building that installs a heat pump.29

Table 6. Coefficients of CO2 emissions – low-carbon cap rate premium model.

Display Table 
Regarding economic significance, the low-carbon cap rate premium seems small.
However, when a residential building goes green, not only will associated risks change
(reflected by the capitalization rate) but also its rental income will increase due to the
low-carbon rent premium. Combining these two effects for our reference specification in
Model (4) results in an overall increase in the market value of a typical residential
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building of 6.28% if it replaces a fossil heating system with a heat pump. 4.18 percentage
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points are duefortofunctional,
device the low-carbon rent
analytics, and premium
advertising (Section 4.1), and 2.10 percentage points
purposes.

are due to the low-carbon cap rate premium. Consequently, residential properties
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whose operation emits less CO2 emissions due to a heat pump installation are, on
average, more valuable than identical properties heated with fossil fuel.

This appreciation of a building’s market value, caused by higher rents and lower
capitalization rates, offsets, on average, the higher investment costs associated with
adopting low-carbon solutions. For example, the installation of new oil and gas heating
systems incurs average costs of CHF 1,300 and CHF 1,200 per apartment, respectively. In
contrast, switching to a heat pump generates higher investment costs. Costs for a heat
pump with an air-water heat exchanger amount to around CHF 9,300, and a brine-water
heat pump with a geothermal probe costs approximately CHF 14,300 per apartment in
an average residential building.30

5. Conclusion

The operation of residential real estate accounts for a large part of worldwide
greenhouse gas emissions and has to become more sustainable to contribute to
countries’ net-zero targets in the future. To measure the effect of going green, we
analyze 96,200 rental contracts from 2,653 residential properties in Switzerland and
study how a property’s CO2 emissions are related to apartment net rents. More
specifically, we use a novel measure to quantify operational carbon emissions by
utilizing various parameters on the sustainability and energy efficiency of a building as
well as the climate conditions of its location.

After controlling for a building’s quality, its macro and micro location, local rental market
conditions, green building certification, and various property or apartment
characteristics in an extensive hedonic framework, our results suggest that apartments
in low-carbon buildings have higher net rents compared to identical dwellings that emit
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more carbon emissions. From the tenants’ point of view, this higher willingness-to-pay is
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correlated with
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functional, cost savings
analytics, when living
and advertising in a sustainable property. Moreover,
purposes.

we point out that the low-carbon rent premium is also related to a tenant’s higher
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preference for living in an environmentally friendly apartment. Sample splits across

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urban and rural regions, warm and cold locations, as well as areas with a high or low
share of people supporting a Federal Act for the Reduction of Greenhouse Gas
Emissions, confirm these results. In light of Europe’s energy crisis, we further document
a causal increase in our main effect by carrying out simple difference-in-difference
regressions. Additionally, based on capitalization rates from 611 transactions, we
suggest that the market value is, on average, higher for low-carbon residential
properties due to lower expected risk premiums, but also due to higher rental income.

Our findings have interesting implications for policymakers, real estate professionals,
and the academic debate on sustainable real estate. Firstly, while relying on individuals’
sustainable behavior can contribute to achieving climate goals, policymakers must
recognize that it is not a standalone solution. Market intervention mechanisms, such as
CO2 taxes, are crucial instruments for inducing a transition toward a more sustainable
residential real estate market. However, policies shall consider potential adverse impacts
on low-income households and prevent the low-carbon rent premium from
disproportionately affecting those in affordable rental apartments. Additionally,
policymakers should carefully evaluate incentives for sustainable housing,
acknowledging that higher market values of low-carbon buildings compensate investors
for reducing carbon emissions. Secondly, for real estate professionals, our findings
highlight the importance of incorporating the lower-risk premium associated with lower-
carbon residential properties into valuation models. Furthermore, our results suggest
that acquiring brown residential buildings and investing in reducing their carbon
emissions can generate significant investment returns. Thirdly, in the academic debate,
our approach provides a more accurate and nuanced understanding of the relationship
between CO2 emissions and residential rents as well as prices compared to binary
variables like green certificates.

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Acknowledgments
device for functional, analytics, and advertising purposes.

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The authors are grateful to the editor, Michael Seiler, and the two anonymous referees
for valuable suggestions that have significantly improved the article. We are also
indebted to Jon Olaf Olaussen, Are Oust, Ole Jakob Sønstebø, and participants at the
2023 NTNU Business School Conference, the 2023 GPEF Poster Seminar at the University
of St.Gallen, as well as the 2022 AsRES-AREUEA Joint Conference. Furthermore, we thank
Wüest Partner AG for providing us with data on CO2 emissions as well as detailed data
on rental contracts and real estate transactions.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 The Swiss Federal Council decided that Switzerland should become climate neutral by
2050. Hence, by 2050, Switzerland should not emit more greenhouse gases than natural
and technical storage can absorb.

2 Ancillary costs in Swiss rental properties are additional charges that tenants must pay
on top of their net rent, covering expenses such as heating, water consumption, and
others (see Section 3.1).

3 During the last decades, mandatory government regulation and voluntary industry
standards have emerged with its main objective to reduce information asymmetries on
building’s degree of energy efficiency and sustainability between landlords (investors)
We use
and tenants cookiesor sellers and buyers, respectively. Mandatory approaches
(occupiers)
include the European
By clicking Union’s
“Accept Directive
all”, you agree to the on theofEnergy
storing Performance
cookies on your of Buildings in 2003
device for functional, analytics, and advertising purposes.
while market-based approaches and certificates are the Leadership in Energy and
Environmental Design (USA), Energy Star (USA),See
Green Globes (USA) as well as the
our privacy policy

Building Research Establishment Environmental Assessment Method (UK).

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4 Salvi et al. (2010) find the willingness to bear the extra costs in terms of energy-
efficient homes is mainly related to income levels in Switzerland.

5 Survey-based studies of Amecke (2012) and Murphy (2014) support these empirical
findings. Both authors state that only a small number of households consider energy
labels when buying a home and that certificates are not helpful in understanding the
implications of energy efficiency.

6 This high proportion of renters is partly due to strict mortgage lending criteria and
high property prices, making homeownership challenging for many Swiss residents,
especially in urban or touristic areas where property prices are the highest.

7 In Switzerland, the costs of fossil heating are mostly based on current market prices. In
contrast, electricity prices are contractually binding for each calendar year. The costs of
fossil heating include a CO2 tax of CHF 120 per ton CO2.

8 All buildings in our dataset are valuation mandates of Wüest Partner AG that are either
appraised on a quarterly, semi-annual, or yearly level based on the size and type of the
institutional investor. Wüest Partner AG is one of the largest real estate consultancies in
Switzerland, which serves a broad spectrum of institutional clients.

9 Residential buildings with both fossil heating and a heat pump are not included in the
dataset. Buildings with other types of heat generators (wood, coal, district heating, etc.)
are not included. For example, it is difficult to model the CO2 emissions of buildings
heated with district heating as carbon emissions depend highly on the type of energy
source used to feed the district heating network (some include fossil fuels during peak
times).

10 The dataset spans the COVID-19 pandemic due to the special nature of the rental
We use cookies
market during the pandemic. Balemi et al. (2021) summarize multiple studies and
By clicking “Accept all”, you agree to the storing of cookies on your
highlightdevice
that the residential
for functional, rental
analytics, and market was
advertising relatively unaffected by the pandemic
purposes.
due to economic support measures for individuals or households. Dubler et al. (2021)
See our privacy policy
shift their focus to Switzerland and highlight stable rental income for investors in

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residential real estate during the pandemic. Nevertheless, we include quarterly dummies
in our model specifications to control for macroeconomic effects and shocks such as the
COVID-19 pandemic.

11 We do not include gray energy due to two reasons. Firstly, the CO2 emissions caused
by the operation of real estate are mainly considered by investors and tenants, while a
property’s embodied energy is currently less present. Secondly, there is still hardly any
comprehensive data on gray energy.

12 In general and also in Switzerland, heat pumps are more likely to be installed in
newer properties. However, improved heat pump technology also allows for installation
in older buildings with sufficient insulation, likely increasing the number of older
buildings with heat pumps over our sample period. To address the concern about the
correlation between building age, heat pump installation, and CO2 emissions, we
emphasize that buildings with heat pumps are not considered carbon-neutral per se
(Appendix A). By including building age as a control variable in our regression analysis,
we can also more confidently attribute the low-carbon rent premium to the energy
efficiency and sustainability of the properties rather than solely to the presence of heat
pumps in newer buildings.

13 Electricity production in Switzerland is mostly based on hydro and nuclear power.

However, due to international electricity trade, 2% of the electricity consumption in
Switzerland is based on fossil fuels (Swiss Federal Office of Energy (2023).

14 A high annualized cash flow of future repairs signals that a lot of repairs have to be
made in the future and that the actual quality of the property is probably bad.

15 Other variables providing information about the quality of a property (e.g., the
renovation
Weyear
use of individual components such as facades, windows, or basement
cookies
ceilings) By
areclicking
not included
“Accept all”,inyou
this index
agree to theas these
storing characteristics
of cookies on your are already incorporated
device for functional, analytics, and advertising purposes.
in the modeling of a building’s carbon emissions.
See our privacy policy

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16 Swiss Minergie labels have three categories. Minergie is the basic certification for
energy-efficient buildings, requiring 20-25% better performance than conventional
properties. Minergie-P represents the highest energy efficiency standard, requiring
superior insulation and a maximum heating demand of 15 kWh / 𝑚2 / year. Minergie-A
labels are awarded to buildings that achieve net-zero energy balance, producing as
much energy as they consume through renewable sources like solar panels and heat
pumps.

17 As highlighted by Stutzer and Lalive (2004), Swiss citizens are used to expressing their
opinions at the poll. The direct democratic decision-making process is very common in
Switzerland at municipal, cantonal, as well as national levels. The voter turnout in these
votes and elections typically varies strongly across cantons. Urban municipalities usually
exhibit lower voter turnouts.

18 In a previous version of this paper, we estimate the low-carbon rent premium without
dummies for green building certificates (Minergie). In the estimation with dummies for
green building certificates, we receive lower absolute coefficients for CO2 emissions than
in the estimation without these dummies, which indicates that by controlling for green
building certificates, we can assume that our main estimate is not diluted by a green
building signaling effect. The correlation between CO2 emissions and the Minergie
certificate is −0.07 according to Table 2.

19 As outlined in Appendix A, the building age, overall number of units, building

standard, and heating degree days are also included in the calculation of a building’s
CO2 emissions. These carbon emissions are defined as the product of final energy
consumption and the emission factor in a physics-based rather than a model-based
(such as regression analysis) approach. Hence, to calculate the first term (final energy
consumption),
We use wecookies
use physical attributes to determine a physical outcome, considering
factors such as heat losses and solar and internal heat gains. The final energy
By clicking “Accept all”, you agree to the storing of cookies on your
device is
consumption forthen
functional, analytics,into
translated and advertising purposes.by multiplication
CO emissions with the regional
2

emission factor. See our privacy policy

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20 Other non-linear specifications of our low-carbon rent premium model did not yield
significant and/or meaningful results. More specifically, fitting a negative root function or
polynomial regression up to the 4th degree significantly underperformed our linear
version of Equation (4).

21 Although the exact quantity of an apartment’s operational CO2 emissions is unknown,

tenants are able to make assumptions about the apartment’s operational carbon
emissions by the property’s heating system, condition, and green building certificate. In
general, this information is provided by the real estate agent or given in the apartment
advertisement.

22 To better understand these independent sample splits: 70.5% in the High Yes-% sub-
sample can also be found in the urban sub-sample, whereas 68.7% of the Cold sub-
sample are urban observations. Furthermore, 34.1% of cold observations can be found
in the High Yes-% sub-sample.

23 We document a lower proportion (4.7%) of properties with heat pumps in our Warm
sub-sample. In contrast, 10.7% of residential properties in our Cold sub-sample are
equipped with a heat pump. This difference underlines the lower potential of ancillary
cost savings in warmer regions.

24 These findings are in line with Füss et al. (2023), who use a similar differential based
on municipal voting results in Switzerland to analyze externalities of going green
(installing photovoltaic systems) on apartment net rents.

25 According to the Swiss Federal Statistical Office (2023), average gas prices (per month)
in Switzerland peaked at CHF 0.1382 per kWh in June 2022 (43% price increase
compared to pre-crisis levels) during the crisis. Furthermore, average monthly oil prices
reached We
an all-time high of CHF 169.81 per 100 liters in June 2022 (72% price increase
use cookies
compared
By to pre-crisis
clicking “Accept levels).
all”, you agree to the storing of cookies on your
device for functional, analytics, and advertising purposes.

26 In Switzerland, for example, investors are reluctant to invest in fossil-fuel-heated

See our privacy policy
properties as the environmental taxonomy is steadily gaining importance. Low-carbon

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11/14/25, 1:55 PM Full article: The Low-Carbon Rent Premium of Residential Buildings

residential buildings may have better prospects for cheap financing with Swiss
commercial banks.

27 By using effectively applied discount rates from real transactions, we avoid an

appraiser’s subjective assessment falsifying our results.

28 In particular, information on green building certificates (Minergie) is not available.

29 The market value increase of a property with a new heat pump is calculated by
dividing the accumulated low-carbon cap premium of 0.0550 or 0.0726 percentage
points by the average capitalization rate.

30 We do not consider public subsidies or funding for going green and installing a heat
pump. Additional costs that may arise when installing a heat pump, for example, by
switching from radiators to underfloor heating or any costs for additional insulation
measures, are also not included.

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Appendix A

Modeling CO2 emissions

To quantify a residential building’s CO2 emissions, our analysis relies on the CO2
calculator of independent real estate consultancy Wüest Partner AG.* This estimation
procedure is designed to provide reliable estimates of operational greenhouse gas
emissions for commercial or residential buildings, even with limited input data. At its
core, the calculator uses a physics-based model enriched with empirical factors to
simulate a building’s energy demand and subsequent emissions. The fundamental
approach of modeling a building’s CO2 emissions can summarized as:

CO2 Emissions = Final Energy Consumption ∗ Emission Factor

In the first step, the calculator estimates the building’s energy demand, which will be
converted to the final energy consumption by accounting for the efficiency of the
building’sWe
energy systems. The process requires the following set of mandatory input
use cookies
parameters to start the simulation:
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device for functional, analytics, and advertising purposes.
Year of construction
See our privacy policy

Building location (exact geo-coordinates)

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11/14/25, 1:55 PM Full article: The Low-Carbon Rent Premium of Residential Buildings

Building area and area type (Energy Reference Area)

Number of heated floors

Use type(s) of the building (including area shares if multiple types)

Heating system(s) and energy carrier(s) with their respective shares

For space heating, the energy simulation follows the Swiss Heating Demand Standard
(SIA 380/1:2016), employing a quasi-static single-zone approach, which is evaluated
monthly. This procedure considers heat losses through transmission and ventilation, as
well as solar and internal heat gains.† The domestic hot water consumption is estimated
using benchmarks from the Swiss Thermal Energy In Building Construction Standard (SIA
380/1:2009), while electricity demand for appliances, lighting, and other systems is based
on the Swiss Standard of Space Usage Data for Energy and Building Technology (SIA
2024:2021). To enhance the estimation accuracy, additional optional inputs can be
included in the CO2 modeling:

Refurbishment year and details

Specific U-values for building elements

Window properties (g-value, frame fraction)

Shading factors

Ventilation type and heat recovery efficiency

Building system efficiencies

In the second step, emission factors are applied to the final energy consumption to
We use cookies
determine the building’s CO2 emissions. Emission factors vary based on regional
specifics,Byparticularly forall”,
clicking “Accept electricity,
you agree towhich depends
the storing ononthe
of cookies yourlocal energy mix. Hence, the
device for functional, analytics, and advertising purposes.
carbon emissions used in our analysis are reported according to the Greenhouse Gas
See our privacy policy
Protocol (Scope 2) and the Carbon Risk Real Estate Monitor whole-building approach.

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11/14/25, 1:55 PM Full article: The Low-Carbon Rent Premium of Residential Buildings

A key strength of the calculator is the ability to work with limited data. When specific
building parameters are not provided, benchmark values based on the building’s
construction period and region are used. This allows for quick assessments of large
portfolios or buildings with incomplete data. However, naturally, more detailed inputs
lead to more accurate results. In this regard, a full set of input variables (mandatory and
optional) leads to an estimation with a mean relative deviation of 18% regarding carbon
emissions based on actual energy demand (Scope 2) tested on a sample with complete
data for 148 buildings, 108 residential and 40 office buildings. If only mandatory inputs
are considered, the mean relative deviation increases to 40% in this testing sample.
Moreover, the simulation of carbon emissions has been checked against benchmarks
and official energy performance certificates in Switzerland.

*The basic foundation of the CO2 calculator was laid during the Swiss Greenhouse Gas
Inventory as well as the Paris Agreement Capital Transition Assessment in 2020.

†
In previous research, similar model configurations are applied (for example, in Walker
et al. (2022) or in Galimshina et al. (2020)).

Appendix B

Additional analysis

Table B.1. Equality tests of sample split results - low-carbon rent premium model.

Display Table 
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Table B.2. Descriptive statistics – capitalization rates.
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Display Table


Table B.3. Correlation matrix – capitalization rates.

Display Table 
Table B.4. Regression results – low-carbon cap rate premium model.

Display Table 
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