Anticipating the Energy Discount: A Valuation Framework for Real-Estate Investors

Executive Summary

The energy transition of the Swiss building stock is a critical component of the country’s pathway toward its 2050 climate targets. Buildings account for nearly 40% of Switzerland’s final energy consumption and more than 22% of direct greenhouse gas emissions.

In an environment marked by tightening regulations, rising societal expectations, and heterogeneous cantonal requirements, real estate investors face increasing uncertainty regarding the scope, timing, and cost of the renovations required to achieve regulatory compliance.

This report develops a valuation framework that explicitly integrates energy performance into the financial assessment of income-producing buildings. Relying on a discounted cash flow (DCF) model, the methodology incorporates: (i) the technical condition of the asset, (ii) component-level life cycles, (iii) future regulatory pathways, (iv) investment cost levels and volatility, and (v) the evolution of operating expenses, rents, and vacancy risks.

The approach compares two investment trajectories: a baseline strategy, which maintains the asset without targeting any specific energy improvement, and a constrained strategy, which complies with anticipated regulatory requirements (e.g., minimum CECB classes, fossil-fuel heating bans, or HDI thresholds). The difference between the net present values of these trajectories defines the energy discount or brown discount. This discount reflects both the expected cost of future upgrades and the uncertainty surrounding the interventions required.

To capture these uncertainties, the model introduces a stochastic representation of key variables, including energy prices, construction costs, post-renovation performance outcomes performance gap), component lifetimes, and vacancy rates. The resulting simulations generate a full distribution of net present values rather than a single point estimate.

This enables a detailed risk assessment through indicators such as the coefficient of variation, Value-at-Risk (VaR), and Expected Shortfall (ES). Buildings that are already renovated and certified thus benefit from a valuation premium stemming from lower exposure to regulatory and technical uncertainty.

The empirical application conducted on multiple Swiss real estate portfolios shows that the cost of compliance varies widely depending on the initial condition of the asset, its typology, and the regulatory scenario considered. Assets with poor energy performance (CECB classes F or G, high HDI, fossil-fuel heating systems) exhibit a substantial brown discount, driven not only by high capital expenditures but also by the elevated dispersion of outcomes across scenarios. Conversely, recently built or renovated buildings demonstrate stronger resilience to future regulatory requirements, improved visibility on future cash flows, and significantly lower valuation volatility.

Overall, the proposed framework provides owners, managers, and investors with an operational tool to anticipate the financial implications of the energy transition on real estate assets. It supports strategic renovation planning, quantifies associated risks, and reframes green value not as a discretionary premium but as the financial materialization of reduced uncertainty and regulatory vulnerability. This methodology thus offers a robust analytical foundation for navigating the evolving landscape of sustainable real estate investment.