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Aug. 11, 2021

Value of UK real estate without net-zero plans to depreciate in five years – report

This article originally appeared in IPE Real Assets on 11 August 2021.

The value of UK real estate assets without net-zero carbon plans will “depreciate significantly over the next five years”, according to a new report.

IPSX, the recently launched real estate stock exchange, and Carbon Intelligence, a sustainability data and consulting firm, have sought to predict the full impact of net-zero initiatives on valuations of UK commercial property and the mitigating actions investors should be taking.

Factoring in UK government commitments to 78% reduction in greenhouse-gas emissions by 2035 and the advent of more stringent energy-efficiency standards, the report has set out a number of upsides and downsides facing the owners of assets over the short, medium and long term.

“By not investing capex now into a long-term net-zero strategy, not only will you miss out on the short-term advantages associated with a building that drives high tenant demand, due to minimal energy costs, prestige, and ESG credentials, but you will also have to invest the same or more to deal with obsolescence as a result of non-compliance, voids, and capital deprecation of the building,” said Oliver Light, real estate commercial director at Carbon Intelligence.

According to separate research by Fidelity International, 97% of commercial real estate in Europe will not support the transition to net zero in their current form.

The report by Kim Politzer, director of research, concluded that, left as they are, “they will become increasingly difficult to let or sell” and that the resulting “brown discount” will be “large enough to make upgrading buildings a prudent investment”.

The report says: “Today’s liquidity conditions mean valuations do not yet reflect the stark difference between buildings that are ready to support the low-carbon transition and those that are not.

“That won’t last forever, and owners who delay investment in retrofitting could come to regret it.”

IPSX said it is looking to play a role in improving transparency at the asset level as investors grapple with net-zero and energy-efficiency strategies.

David Delaney, group CEO of IPSX, said: “Investors need actionable data to help benchmark a building’s energy efficiency performance in order to make informed investment decisions.

“This cannot be tackled without the involvement of asset owners and investors. Our mission as a new stock exchange is to make asset reporting ever more transparent, helping investors understand exactly how assets that they are investing in are performing”.