A large slice of holdings in commercial real estate portfolios are now being identified by managers as stranded assets, with properties having lost their value due to poor energy efficiency. And more are at risk of gaining the same categorization.
Research by the environmental, social and governance (ESG) data firm Deepki on 250 European commercial real estate asset managers in the UK, Germany, France, Spain and Italy found that the financial threat managers face from holding assets that are not meeting energy-efficiency standards is “all too real.” Managers run a combined €226.3 billion ($244.3 billion) in assets under management.
Almost all respondents (94%) said the level of financial risk from “brown discounting” — the depreciation in value of a property that is not sustainable — and asset attractiveness was high due to reduced asset value or difficulty in finding tenants to rent.
More than half of respondents said that over 30% of their assets are stranded, adding that a further 20% to 40% of their real estate portfolios are at risk of becoming stranded assets in the coming three years.
These managers are now prioritizing reducing, mitigating or limiting the financial risk of these buildings, with 15% labeling it as an extremely high priority, 59% as quite a high priority and 26% as a medium priority.
By sector, the greatest risk of stranded assets are retail (29%), industrials (26%), offices (13%), health care (10%) and residential (9%).
“The European commercial real estate sector faces a stranded-asset time bomb due to much stricter energy regulations and commitments to hit fast-approaching net-zero targets,” Vincent Bryant, CEO and co-founder of Deepki, said in a news release accompanying the research. “The lack of a clear net-zero trajectory — or commitment to implement one — acts not only as a barrier to accessing capital but also impacts property valuation. Our research shows that many asset owners and institutional investors do have a strategy in place to address the problem, but success is dependent on auditable and reliable data, KPIs and reporting."
Separately, the latest “consensus indicator” by the European Association for Investors in Non-Listed Real Estate Vehicles shows a second consecutive improvement in market sentiment for the European nonlisted real estate market.
The headline reading was 53.6, up from 50.2 in March, which INREV said suggests that the European nonlisted real estate market may be close to the start of a recovery.