Property groups across Europe risk major writedowns unless they take urgent steps to reduce carbon emissions from buildings they own, according to an industry research group.
European property owners, investors and valuers have failed to account for the cost of transitioning to net zero, the Urban Land Institute said, resulting in a widespread overvaluation of offices, shops and residential property, which it describes as a “carbon bubble”.
“If transition risk costs are not factored in now by owners, then the industry could face a major crisis,” said the ULI, which has a membership of 46,000 people working in real estate and urban development.
A change in regulation or an economic shock could quickly expose the mispricing of older, less green buildings and cause “values to fall quickly”, it warned.
Standing buildings and new construction are responsible for about two-fifths of energy-related CO₂ emissions, according to the World Green Building Council.
There have been steps towards decarbonising real estate, but these have largely been driven by deep-pocketed property owners improving the energy efficiency of their stock to attract tenants willing to pay a premium.
Large property investors and owners have set their own targets for hitting net zero over the next two decades, but the vast majority of property has been relatively untouched.
Efforts to decarbonise will also be hit by rising interest rates and inflation, which have slowed office sales and eaten into the amount European property owners are able or willing to invest in bringing buildings up to standard.
On Wednesday, the ULI will publish a methodology for assessing the costs of decarbonisation and highlight the risks for property owners and investors.
It hopes this will help put a price on the transition to net zero and encourage property owners and public bodies to invest in retrofitting existing buildings to stave off a bigger hit to values in future.
The institute said that the current flawed approach to decarbonisation in the real estate industry “could lead to our investment markets polarising and an increased risk of stranding assets in parts of our cities that require more investment, not less”.
“We think that by introducing the guidelines, we can prevent a real shock from happening. If regulations come in, there will be a shock because a large part of the market needs to be adjusted in a very short amount of time,” said Lisette van Doorn, chief executive of ULI Europe.
“If we don’t act on real estate valuations, our industry’s significant contribution to climate change will continue,” she added.