Stranded assets: real estate’s €1.5 trillion time bomb

That is the estimated cost of the investment required to decarbonise buildings, but the real estate sector has not woken up to reality. Nicol Dynes reports.

The real estate sector does not fully comprehend the risk of stranded assets. “It’s the €1.5 trillion elephant in the room,” says Anna Tsartsari, co-founder and head of ESG and sustainability at BE Design. “This is the estimated cost of the investment required to decarbonise buildings over the next 30 years if we want to reach net zero.”

The goal is 2050, but 80% of the building stock in that year already exists at present and 97% of these buildings do not meet decarbonisation requirements. In the European Union, only 0.2% of assets are refurbished every year to the 60% energy reduction level needed.

“Although the focus has been primarily on designing new sustainable assets, targeting all new buildings to be net zero by 2030, our existing assets are by far the biggest challenge,” explains Tsartsari.

There is a huge amount of work to be done. To give just one example, solar panels have been installed on the roofs of only 5% of warehouses.

Two case studies from BE Design underline the complexity of the problem, but also highlight possible solutions.

UK Decarbonisation reduction pathway

The first focuses on the UK. To meet the UK’s target of net-zero carbon by 2050, the built environment must comply with a prescribed energy and decarbonisation reduction pathway. Failure to comply may result in stranded assets.

BE Design used the CRREM (Carbon Risk Real Estate Monitor) decarbonisation target tool, which allows the assessment of country and building type-specific greenhouse gas intensity and energy reduction pathways.

“We physically surveyed an early 1990s gas-heated commercial building which has been stranded since 2018,” says Tsartsari. “We collected all the data and tried to find retrofitting ideas to improve it, such as adding insulation, air-source heat pumps, photovoltaics and LED lights, which make a huge difference. Our work gave the asset an extra 20 years of life, but it will be stranded by 2042.”

‘The fact is that by 2030 all buildings must be net zero, which means that by 2025 buildings must be designed to be net zero. We must start the decarbonisation of existing assets now’

Anna Tsartsari BE Design

The cost of upgrading the 26,000 sq m industrial asset was €346 per sq m, equating to a total cost of €9.5 million. This contrasts with the second case study, which focused on a new distribution warehouse in Germany that generates more energy than it needs. The solar panels are producing a surplus of 33kWh/sq m.

The warehouse is already in line with the 1.5 deg C target. “This shows the advantage of having a future-proof new building,” says Tsartsari.

German climate targets require an almost complete reversal of the country’s primary energy consumption, 80% of which is still based on fossil fuels. Climate neutrality by 2045 means that the use of diesel, coal and natural gas must end by then. As an interim target, emissions in Germany are to be reduced by around 65% by 2030 compared with 1990.

“The fact is that by 2030 all buildings must be net zero, which means that by 2025 buildings must be designed to be net zero,” says Tsartsari. “We must start the decarbonisation of existing assets now, because there is a lot of work that needs to be done.”

A combination of peer pressure and demands from tenants is likely to force positive change. “We’re already seeing people move out of old assets into new assets, because new company policy dictates that they must be in a grade A building with a good EPC rating,” says Stephen Oakden, co-founder of BE Design.

Increasing demand for ESG compliance

As old assets become stranded, there will be increasing demand for ESG-compliant buildings, not just in the office sector, but across asset classes.

At present it is difficult to put a price on ESG compliance, but it will increasingly be seen as the right thing to do. “Reputation is a word we should throw in the mix, because it will matter more and more,” says Tsartsari. “Being sustainable will pay dividends and peer pressure will deliver positive changes.”

A new CBRE survey shows the environmental building features that are already having a positive impact on investment decisions and real estate transactions.

The feature most people are prepared to pay extra for is good energy performance.. Features that reduce energy consumption are top of the list, followed by green building certifications and onsite renewable-energy generation.

Resilience to the effects of climate change, such as floods, is also high on the list. “Climate resilience is now near the top of people’s concerns,” says Oakden. “The way forward is a fabric-first policy, creating places that are cooler in summer and warmer in winter.”

The use of sustainably sourced building materials, such as timber, or the choice of a refurbished building over a brand-new one are much lower down the list at present, according to the CBRE survey.