Sustainability and real estate Sustainability: when should I replace my heating system?

The use of renewable energy in new buildings has been standard for several years. In more than 90 percent of all new homes and apartment blocks, heating and hot water are now provided by renewable energy. Geothermal heat pumps are particularly popular. As for older buildings, there is a definite need to act.

“In Switzerland around 60 percent of homes and 70 percent of apartment blocks are still heated with fossil fuels,” explains Maciej Skoczek, economist and analyst at UBS CIO (Chief Investment Office) Real Estate.

There are a number of reasons for this: new systems can be installed in new buildings more easily and at a lower cost. In the case of old buildings, however, challenging structural conditions mean the options are limited. There may also be a lack of long-term planning and capital. Some owners are deterred by the considerable initial investment required when switching to a new energy source and wonder whether sustainable renovation really pays off.

To answer this question, the CIO team made some detailed test calculations. These show when it is worth replacing an oil or gas heating system with a geothermal heat pump, taking various scenarios regarding the condition of the building and state subsidies into account.

According to current prices, it costs around CHF 20,000 to replace an old heating system with a new oil-fired one in a single-family home; replacing a gas boiler is slightly less expensive. “However, switching to a renewable energy system with a geothermal heat pump can cost around CHF 35,000 to CHF 45,000,” notes Maciej Skoczek. These costs depend on the individual situation and suitability of the building plot.

The investment pays off if the higher installation costs are offset by lower running costs throughout the expected service life. The running costs of heat pumps are much lower than for oil or gas heating systems. If the house is well insulated and the system is set up correctly, electricity and other running costs will be no more than a few hundred Swiss francs per year. What’s more, geothermal heat pumps (or air-to-water heat pumps) require very little service and maintenance.

The UBS economists are in no doubt: Replacing an old oil heating system pays off in virtually all cases within 10 to 15 years. Financially speaking, a conversion is especially worthwhile if the existing oil heating system has already reached the end of its service life, and the building costs a lot to heat due to poor insulation. Should there be a carbon tax hike on fossil fuels in the medium term, the conversion will have paid for itself in less than ten years.

If the homeowner received a subsidy of CHF 10,000, the payback period would be even shorter. In the best-case scenario, if the existing heating system has already been written off, the estimated payback period would only be five years.

Gas heating systems are generally quite easy to implement and use. In residential buildings with good thermal insulation, the operating costs are relatively low. “From a cost perspective, this makes a heat pump harder to justify,” the UBS economists point out. The decision would be easier if the old system had to be replaced anyway and the building was poorly insulated. Here too, return on investment will be much faster if state subsidies are available.

Investments in renewable heating systems are fully tax-deductible in all cantons. Should you lack liquidity for a sustainable renovation, consider increasing your mortgage.

This makes good economic sense because the savings you make on the running costs of the property will, in most cases, exceed the additional mortgage interest costs.

There are currently a lot of changes in the areas of energy, real estate and investment. It is already clear that energy efficiency and heating systems can affect the marketability of real estate. The market value of renovated buildings that comply with energy regulations is higher than those that have not been refurbished. There is also talk of whether a building’s energy footprint could affect risk assessment and mortgage conditions in years to come.

Fossil fuel heating generates unnecessarily high running costs. Well-insulated residential buildings with gas heating are relatively energy-efficient. However, subsidies and tax advantages make installing a heat pump advantageous in many cases. Those who continue to install or modernize systems that use fossil fuels run the risk of them not being operated for the full duration of their service life.