Q: What are the most critical factors you consider when determining the value of a real estate asset in today’s highly competitive market?
When assessing the value of real estate assets, several factors are always taken into account, such as financial performance, technical condition and investment strategy. However, today's market presents two significant additional challenges: the current macroeconomic environment and the growing significance of sustainability. On the economic front, the European Central Bank's recent interest rate policy has reshaped market dynamics, affecting everything from the cost of funding to investors' appetite for risk. Investors need to navigate this terrain carefully. In addition, the weight of sustainability in investment decisions appears to have increased with lower market demand, with almost all investors extending their due diligence to include climate-related risks. This includes both physical risks - such as vulnerability to extreme weather events - and transition risks, such as evolving regulations aimed at decarbonization. These factors are no longer an optional premium, but have become the new standard, meaning that properties that fail to take them into account may face regulatory fines, reduced liquidity or, ultimately, significant devaluation in the future. As we move forward, the integration of sustainability into asset valuation will only become more important.
Q: What role do you believe non-financial disclosures, such as sustainability metrics, play in shaping real estate investment decisions today?
Sustainability metrics are playing an increasingly dominant role in real estate investment decisions. Data on energy consumption and emissions can directly impact rents and prices. Additionally, regulatory requirements are influencing the market. Metrics that accurately track sustainability performance (e.g., energy efficiency ratings and carbon emissions) not only help ensure compliance but also increase the liquidity of assets. As investors seek greener portfolios, assets with strong sustainability credentials are becoming more marketable. In this environment, sustainability is not just a reporting requirement—it is a key determinant of a building’s long-term resilience and value. To note: available data to date often includes detailed information on Energy Performance Certificates (EPCs), assessing energy efficiency. However, EPCs are traditionally modeled using standardized methods to estimate energy usage. True energy consumption data from properties is less accessible and is often not obtained. Real consumption data provides a more accurate and comprehensive understanding of financial benefits, and potential discounts associated with sustainable real estate investments. Informed investors recognize that focusing on these (real data) metrics ensures that their assets are future-proofed against both market and regulatory shifts.
Q: As a European Valuation Standards Board member, how do you ensure that the latest valuation methodologies incorporate sustainability without undermining traditional financial performance indicators?
Incorporating sustainability into real estate valuations requires a tailored approach, considering the unique characteristics of each asset and its market context. While traditional financial metrics—like cash flow projections, cap rates, and comparable sales—remain central, sustainability factors must also be assessed. For instance, the risk exposure to extreme weather events, regulatory compliance, and the carbon footprint of a property are now integral to understanding its value. These sustainability factors are not separate from financial analysis; they directly impact long-term value, risk, and liquidity. Valuers today must skillfully integrate these considerations, using existing valuation methods in a way that enhances rather than undermines financial performance indicators. Moreover, sustainability considerations can be integrated both implicitly (through risk-adjusted discount rates, for example) and explicitly (through specific sustainability valuations). This flexibility ensures that appraisals are comprehensive, reflecting both financial and non-financial dimensions of value.
Q: How do you see the integration of ESG factors in property valuations evolving, particularly in light of new regulations and decarbonization targets?
The integration of ESG factors into property valuations is becoming increasingly consequential. As global decarbonization targets come into sharper focus, and as the regulatory landscape around emissions tightens, real estate assets will be increasingly judged on their actual carbon emissions, rather than only looking at the energy efficiency of the buildings. Recent market events, such as the ECB’s interest rate hikes, have highlighted the growing importance of ESG compliance: Properties that failed to meet sustainability standards faced diminished marketability and liquidity. In some cases, deals have even collapsed because assets did not align with ESG criteria. This trend will only accelerate as climate regulations become stricter and investor expectations shift toward greener portfolios. Valuers should, therefore, adapt their methodologies to account for ESG matters.
Q: Which carbon pricing instrument/s do you believe to be the most effective for the real estate sector?
For the real estate sector, carbon pricing is the most effective way to internalize the environmental costs associated with property usage. These mechanisms encourage property owners to invest in energy-efficient technologies and retrofits, as they create clear financial incentives to reduce emissions. However, there must be clarity and consistency in the regulatory framework to avoid overburdening the sector with complex compliance requirements. Simple, transparent carbon pricing systems with measurable risks offer the greatest steering effect, ensuring that both investors and developers can plan accordingly. One challenge specific to real estate is the split incentive problem, where property owners bear the cost of sustainability upgrades, but tenants reap the benefits of reduced energy consumption. Addressing this misalignment will be key to making carbon pricing more effective in driving decarbonization in real estate. A useful instrument may be the derivation of the Carbon Value at Risk (CVaR). The CVaR provides a risk assessment that quantifies the potential financial impact of transition risks on asset- or portfolio level. This metric enables investors to understand the extent of potential losses due to non-compliance with future carbon standards and aids in strategic decision-making to mitigate these risks. The CVaR is derived by calculating the net-present value (NPV) of all future cash flows (energy and carbon costs), then placed against the Gross Asset Value (GAV).
