By Felix Brocker and Sarah Huemer

When It's Worth It to Renovate

Renovations are tedious and expensive—Yama Mahasher knows this from personal experience. Mahasher has renovated two homes: an apartment building he rents out and a single-family home where he lives. He’s not only familiar with the subject from a personal perspective but also serves as managing director of Westbridge, a management consulting firm that advises the real estate industry. Houses from the 1970s and ’80s, in particular, have a certain appeal, he says.

Mahasher has an explanation for this. The structural integrity of these homes is often good—at any rate, better than that of many even older buildings. At the same time, they are sold at a discount compared to newer buildings because they often lack energy-efficiency features. These include, for example, insulated facades, modern windows, or a heat pump.

The market now penalizes properties with a low energy efficiency rating. It is precisely this gap that makes these homes attractive to buyers, especially since new-construction prices have risen sharply. Anyone who gives an existing property an energy upgrade can benefit from a higher valuation, says Mahasher. In the past, the mantra was always “location, location, location” when it came to a property’s value. Now, he says, it’s “location, location, energy.”

Mahasher is not alone in this assessment. An analysis by the real estate brokerage Colliers, which the F.A.S. has seen in advance, reaches a similar conclusion. According to the analysis, renovation is particularly economically attractive for homes that are neither particularly energy-inefficient nor already largely modernized. Many properties in the middle energy efficiency classes—namely D, E, and, in some cases, F—date back to the 1970s and 1980s. Someone who buys a property in energy class E with a market value of one million euros can achieve an increase in value of several hundred thousand euros through appropriate renovation. Other studies also conclude that energy-efficient homes command a premium, even if the exact amount of that premium varies.

Colliers focused its analysis on multi-family homes. However, the results can also be applied to owner-occupied single-family homes, says Felix von Saucken, head of Colliers Germany. One caveat must be taken into account, though: Investors can claim renovation costs as tax deductions. In addition, they pursue a return on investment, either through renting out or selling the property. While owner-occupiers also benefit from rising property values, what matters most to them is that an older home is generally more affordable than a new construction.

So, should you go for older properties? Even though there are many reasons to do so, Stefan Hubenschmid, vice chairman of the Association of Private Homebuilders, doesn’t want to gloss over the hurdles. “The renovation project must be well thought out and follow a plan.” Not every older house is automatically a gold mine. For example, the house itself may be structurally sound, but it could be located in an area that is no longer in demand. The condition of the building should also be assessed. One risk, for instance, is that asbestos—a hazardous material—might suddenly be discovered during the renovation process. This can result in significant additional costs.

In addition, houses from those decades are often built in a somewhat more whimsical style, says Hubenschmid. In other words, the exterior walls are not always straight but feature projections and recesses. Some of the houses have bay windows. “That looks nice, but it makes the renovation more complicated,” he says. The expert also warns against underestimating the costs. They often turn out to be higher than originally anticipated. “There’s always something else that comes up.”

Using a cost model, Colliers calculated two scenarios: the renovation of an apartment building from energy class H to C, and another from E to A. The examples are based on real, anonymized existing properties. In the first case, the exterior facade is insulated, new windows are installed, and a solar system is mounted on the roof; the costs total around 600,000 euros. The second building receives better insulation, new windows, and a heat pump. The cost is 420,000 euros; the insulation was not quite as expensive as in the other building, and fewer measures were required overall. Both buildings increased in value, but the upgrade from energy class E to A was more economically attractive. Government subsidies were not factored into the calculations. Felix von Saucken explains this by noting that there are constant changes in this area, as was recently the case with subsidies for heating system replacements. However, anyone calculating the costs of their own project should take potential government subsidies into account.

What’s often even harder to predict than the cost is the time such a project takes. Originally, Yama Mahasher, the managing director of the consulting firm Westbridge, had estimated about a year for the single-family home. By the time everything was finished, it had taken three. Those who use the property for personal use can often move in even if the house isn’t quite finished yet. For investors, this is more difficult. In the worst-case scenario, a delay can throw the entire budget off track.