As interest grows in environmentally friendly buildings, or “green buildings,” the real estate industry is expected to play an increasingly active role in the realization of a low-carbon society. Various efforts toward such society are now being promoted vigorously within an international framework.
To supply a socially desirable level of green building via the market mechanism, the economic value of green buildings (as measured by the marketplace) must be commensurate with the required investment. Many remain skeptical, however, about the true economic value of green buildings. A thorough analysis has yet to be conducted to evaluate whether green buildings realize income increases commensurate with the enormous initial investments required, although it is clear that cost savings do result from lower energy consumption. The issue becomes even more complex when we consider whether net income increases over short and medium-to-long investment periods, given that future repair costs are proportional to the initial investment. Another question is how these buildings will be valued in the market once they are offered for sale.
This paper shows, through a series of analyses, that in order for green buildings to produce economic value, accurate information about the buildings must be disseminated throughout the marketplace, market participants’ behavior must be transformed by such information, and public regulations must be in place to effect this behavioral transformation. Based on a demonstration analysis of the housing market, the author shows that new condominiums with “green” labels command a premium of approximately 5 percent. Through these analyses, the author suggests that in the real estate investment market, the longer the investment period, the more important it is to plan for environmental risks.
Will green buildings be appropriately valued by the market?
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