The ‘Brown Discount’ refers to the reduction in value that energy-inefficient properties face on the market. Buyers and investors pay less for such buildings or demand a higher return because of the risk of higher operating, CO₂ and refurbishment costs, as well as regulatory risks. The term is the counterpart to the ‘Green Premium’ – the premium paid for sustainable, energy-efficient buildings – and has become significantly more important in recent years.
What is Brown Discount?
The Brown Discount is a price premium observable in the market for properties that fail to meet environmental and regulatory requirements. Such buildings are considered less attractive because they incur higher running costs and are subject to an increased risk of failing to meet future efficiency standards. This effect is reflected in lower purchase prices, weaker rental demand and higher required rates of return. Studies and market reports indicate that energy-inefficient buildings are subject to price discounts – in some cases substantial ones – which have become more pronounced in recent years.
How does the Brown Discount arise?
Several factors are at play. Tighter regulations, such as the EU Buildings Directive and the minimum efficiency standards derived from it, are putting pressure on inefficient buildings. CO₂ pricing on fossil fuels is driving up running costs, and part of these costs is borne by property owners. At the same time, major tenants and investors are increasingly seeking premises with verifiable sustainability credentials and avoiding properties without such evidence. Overall, the willingness to pay for inefficient buildings is falling, whilst efficient properties command a premium.
How are the ‘brown discount’, ‘green premium’ and ‘stranded assets’ linked?
The ‘green premium’ and ‘brown discount’ are two sides of the same coin: the market rewards sustainable buildings with a premium and penalises inefficient ones with a discount. If this discount becomes so severe that a property loses a significant amount of value before the end of its economic life and is virtually impossible to let or sell, it is referred to as a stranded asset. To counteract this, owners need reliable data on the energy performance of their properties. Energy monitoring and targeted efficiency measures are therefore key levers for limiting the Brown Discount.
Related terms
Sources and further information:
- Betterspace: Regulatorik, ESG und Resilienz für Betreiber
- Betterspace: better.energy – Control
- aedifion: Brown Discount
- Julius Kerker, Sven Bienert: Sustainability in Times of Economic Downturn: The Resilience of Green Premiums and Brown Discounts in German Residential Markets
- Corporate Finance: EY-Real Estate ESG-Snapshot: Green-Premiums und Brown-Discounts erwartet