Quantifying the stranding risk of assets – A semiparametric regional approach for rents and prices

Retrofit measures are critical for achieving policy-driven goals to reduce Carbon dioxide (CO2) emissions. Although the benefits of retrofitting are widely recognized, there has been limited research on how these interventions affect the pricing of assets, particularly regarding regional determinants. Predicated on the assumption that retrofits are compulsory for apartments with inadequate energy efficiency to align with regulations, an understanding of the pricing mechanism is essential. This paper therefore uses a semi-parametric model to examine the influence of energy-efficient refurbishments on the rent-to-price ratio, expressed as net initial yield, in the residential sector in Germany and explores the role of spatial variables that affect the pricing of assets. In addition, a fuzzy K-means cluster analysis is used to identify groups of assets that more likely to benefit form a retrofit. The results show that apartments in rural areas have larger rent and price deviations, which is reflected in the rent-to-price ratio. Furthermore, the analysis reveals that the yield premium from retrofitting fluctuates based on regional conditions and applicable regulations. These findings are crucial for effectively quantifying ESG measures and underline the importance of various determinants for investment decisions.