Stranded assets are a “ticking time bomb” for European CRE

Stranded assets are a ticking time bomb Europe’s commercial real estate sector has yet to acknowledge or deal with, according to new research by Deepki, the ESG data intelligence company.

Vincent Bryant, CEO & Co-founder, Deepki

A survey conducted by Deepki among over 250 European CRE asset managers working for pension funds and other institutional investors, who collectively manage €226.3 billion in assets, found that 94% face a high level of financial risk from stranded assets.

In Germany, France, Spain and Italy 58% of respondents acknowledge that 30% or more of their assets are currently stranded, while for UK respondents the figure was 71%. These are buildings that have lost their value due to poor energy performance.

“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,” said Vincent Bryant, CEO and co-founder, Deepki. “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.”

The retail and industrial sectors face the greatest stranded asset risk, the research shows, followed by offices, healthcare and residential.

The financial risks include brown discounting and reduced asset value and attractiveness, and the difficulty finding tenants willing to rent properties with sub-standard ESG credentials, which leads to vacant buildings and loss of income.

The majority of the commercial real estate asset managers and owners surveyed agreed that it was a management team priority to focus on reducing, mitigating, or limiting the financial risk of these buildings, with 15% describing it as an extremely high priority, 59% said it was quite a high priority and 26% said it was a medium priority.

The problem will not be easily solved: 50% of respondents say that a further 20 – 40% of their real estate portfolios are at risk of becoming stranded assets in the next three years. For the UK, the situation is even more bleak with 55% of respondents stating that a further 30 – 50% of their real estate portfolios are at risk of becoming stranded assets in the same time frame.

“Urgent and decisive action” is needed to bring about significant change, Deepki says, if net zero emission targets are to be met by 2050.

“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,” said Bryant.