The European Union estimates that about 85 per cent of buildings in the bloc were built before 2000. Of these, 75 per cent have a “poor energy performance,” the EU said. The EU has set a goal of cutting emissions in the building sector by 60 per cent by 2030 and completely decarbonising it by 2050. At 42 per cent of energy consumed, buildings “are the single largest energy consumer in Europe,” according to the European Commission.
Carbon footprint
The term “stranded assets” was popularised by the Smith School’s Stranded Assets Program roughly a decade ago, and refers to assets that have suffered from unanticipated or premature write-downs, devaluations, or conversions to liabilities.
UBS Group AG has noted that in the context of real estate, this can include buildings that are not energy-efficient, ultimately making them impossible to rent or sell, or uneconomical to own. Such properties may also become uninsurable due to rising physical climate risks, according to UBS.
Other EU rules also are making it harder for investors in the region to ignore the carbon footprint of real estate, including the Sustainable Finance Disclosure Regulation and the Corporate Sustainability Reporting Directive.
Warnings related to climate risk in real estate portfolios have been steadily picking up. In October, analysts at UBS Group pointed out that new regulations were adding to the likelihood that assets ended up stranded, “potentially saddling their owners with massive capital losses versus today’s book values”.
The Swiss bank said the issue had the potential to morph into a vicious cycle. “Inefficient buildings will likely also weigh on investors’ climate balance sheets and may prove less attractive to tenants due to high energy bills and low sustainability ratings,” according to UBS.
Hibernia’s Menzies said in an interview that investors were trying to come up with precise estimates for when real estate assets can be deemed as stranded, using a so-called Carbon Risk Real Estate Monitor.
Investors and bankers using the CRREM tool can “know exactly the date that a building is going to strand,” Menzies said. They’re asking detailed questions about climate-related issues such as expected energy usage, before providing credit.
“Lenders are becoming so sophisticated, they’ve got people in-house to model this,” he said.
Hibernia, which focused on the Dublin office market, refurbished old buildings and developed new ones to be net-zero carbon and climate resilient by 2030, Menzies said. The company’s 30 buildings were valued at about €1.3 billion ($1.4 billion) when it was acquired by Brookfield in 2022.
All in all, the decline in valuations that Menzies expects over the next year “will hopefully” get the market to a level that creates “opportunities for companies to come in and buy,” he said. And they’ll then be in a position to support valuations by investing in renovations that bring buildings up to the new standards, he added.
Meanwhile, firms like Hibernia “need to show real-time performance and improvements year-on-year to be able to gain the interest from investors and lenders,” Menzies said.
Bloomberg
Bloomberg
