Real estate companies are facing a major blow to asset valuations, as evolving European requirements drive investors and bankers to cut their exposure to buildings with a big carbon footprint. The issue has increased the possibility that property owners’ assets will end up stranded, devalued by the impact of climate regulations.
"The commercial real estate industry is facing a problem with stranded assets,"Neil Menzies, the director of sustainability at Hibernia Real Estate Group Ltd, which is owned by Brookfield Asset Management, a Dublin-based firm, told Bloomberg. He added that the risk has increased as it is now also legislated.
The industry has seen a drop in commercial real estate values due to higher interest rates and lower occupancy levels, which has disrupted the financial logic of the industry's debt-based business model. The European Central Bank and the Federal Reserve are now monitoring what lenders are doing to reduce potential losses.
Moreover, Menzies says that the industry is now facing a bigger "valuation shock" due to the amount of refurbishment and investment buildings in Europe need to meet new energy efficiency requirements. He expects that the market will "probably see values plummet over the next 12 months for unsustainable buildings with very high energy consumption."
The European Union estimates that about 85% of buildings in the region were built before 2000, of which 75% have poor energy performance. The EU aims to reduce emissions in the building sector by 60% by 2030 and become completely decarbonized by 2050. Buildings are Europe's largest energy consumer, accounting for 42% of energy consumed, according to the same source.
(source:Bloomberg)
