Experts warn of "valuation shock" and stranded assets
The commercial real estate market is facing the risk of assets becoming “stranded” as stricter European regulations prompt investors and financial institutions to limit their exposure to properties with a high carbon footprint.
The European Union has said it wants to see a 60% reduction in carbon emissions within the bloc’s building sector by 2030. It has also set a long-term goal of complete decarbonization by 2050.
In order to meet these goals, the EU introduced new rules that are designed to make it difficult for investors to overlook the environmental impact of their real estate portfolios, including the Sustainable Finance Disclosure Regulation and the Corporate Sustainability Reporting Directive.
The EU has also introduced new energy efficiency standards, under which it has determined that buildings are “the single largest single energy consumer in Europe.”
According to estimates, approximately 85% of buildings in the bloc were constructed before the turn of the millennium. Among these buildings, 75% were categorized as having “poor energy performance.”
Amid these changes, experts within the CRE sector have raised concerns over assets becoming “stranded” or devalued.
Neil Menzies, director of sustainability at Hibernia Real Estate Group, spoke to Bloomberg about the “valuation shock” facing investors as they consider the costs needed to bring older buildings up to standard.
According to Menzies, the market could see plummeting values over the next 12 months for buildings that have “very high energy usage.”
Analysts from UBS Group have made similar warnings regarding the increasing likelihood of stranded assets in the real estate sector.
They noted that properties failing to meet new standards may not only suffer from reduced valuations but could also become less appealing to tenants due to “high energy bills and low sustainability ratings.”
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