Towering cost of greening property a likely €7tn: Colliers

That the built environment accounts for 40% of direct and indirect carbon emissions is now widely known and accepted, as is the need to retrofit buildings to reduce this figure as the bid for zero carbon continues.

What is less well known is that the bill for retrofitting buildings to comply with emerging ESG requirements could be €7 trillion in Europe alone, according to a report just published by Colliers EMEA, titled ESG: A Tipping Point.

“This retrofitting cost challenge needs to be spread over the next 25 years if we are to aim to hit Net Zero,” said Damian Harrington, director and head of research EMEA, and head of capital markets research global at Colliers.

“But to put this in context, it equates to the typical annual volume of investment activity in Europe – around €300 billion,” Harrington said.

He added that who pays or contributes to this cost – investors, owners, governments or society as a whole – remains to be seen.

“But what is already clear is that the transition will create a wide array of obligations and new investment opportunities in effectively mandating the upgrading of properties worldwide,” he said.

The report also states that the global drive for sustainability is creating uncertainty in the property investment market and that there is an urgent need for policy makers to agree on “pragmatic, actionable targets that will support the creation of clear, consistent technical standards and benchmarks enabling reallocation of both capital and skills”.

More common ground needed on reporting frameworks

Another problem that Colliers highlights is that no one set of reporting frameworks has established itself as the accepted worldwide benchmark for ESG performance. This makes predicting future requirements and liabilities “very challenging” for real estate investors, the report says.

“The challenge at the moment is to understand what, exactly, needs to be done to calibrate property portfolios with the incoming requirements for decarbonisation in particular,” said Luke Dawson, managing director, cross border capital markets, EMEA.

However, emerging regulations such as the EU’s Corporate Sustainability Reporting Directive (CSRD), expected to come into force in 2023, should provide both greater clarity as well as fresh challenges. Initially it will be geared to a company’s size, but nearly all commercial real estate companies will be expected to comply with it, Colliers pointed out.

“These standards will mean that landlords will need to understand what their occupiers are doing within their rented spaces – something the report notes could prove especially challenging for big-box units hosting confidential industrial processes or data repositories,” the report said.

Slowdown in deals activity possible as investors find their way

Colliers believes that a raft of adjustments will be required as disclosure metrics and reporting frameworks are formalised during the the next two years. The firm predicts that this could lead to a slowdown in transaction activity as investors come to terms with new norms.

“While the details of how emerging standards will impact specific property assets may not yet be apparent, the extent of change required means a strict ‘wait-and-see’ approach will not be feasible,” said Andy Hay, managing director, property management, EMEA at Colliers.

“It’s important that investors begin to respond now, by enhancing their understanding of ESG’s potential role in their portfolios and securing the necessary talent and partnerships.”