Evaluation of investment to improve the quality of buildings and generate positive externalities

Investment in housing construction is an investment of major importance for families and, in Italy, is still the largest investment of most Italian families. In recent years, however, the housing market crisis has resulted in a reduction in trading volumes and investment in housing has been a sharp reduction in the domestic market. However, the Italian government has provided tax benefits to encourage investment in renovation with the aim of improving building quality via energy saving investments in order to promote the generation of positive externalities and to reactivate the construction sector. In this context, the work has the aim to develop and apply a discounted cash flow (DCF valuation model) to a sample of 20 civil buildings located in northern Italy which were scheduled for a building renovation intervention to improve energy efficiency. Applying the model via the calculation of internal rate of return (IRR) allows shifting the focus from cost assessments to private home building performance assessments in order to compare the investment in building renovation with other investments, including financial investment. The analysis result shows, at a duration of 10 years, that the return on investment for building renovation has no cases of negative return in the 20 cases analyzed and has an average IRR of 8.5619% and median IRR of 8.1050% higher than the bond issued by the Italian Treasury (BTP) and is particularly affected by tax benefit incentives. The IRR approach may allow a better assessment of building renovation investment, particularly to achieve a better knowledge of the effects of tax benefits on building renovation investment.