Owners of prime London assets will need to spend just under £1 per sq ft per year to prevent them becoming stranded in line with the current 2050 deadline, as stipulated by the Paris Accords.
This equates to €11.9 per sq m/pa, compared with a European average of €8 per sq m/pa for prime assets, according to research by investment and asset manager AEW.
For the first time, AEW has combined both climate-related transition risk and physical climate risk into a single combined climate-related risk premium for the European real estate sector. It estimates this premium at 19 basis points of annual capex reserves for prime assets and 46bps for non-prime assets.
Hans Vrensen, managing director and head of research and strategy for Europe at AEW, said: “Whilst the challenge of climate change is not without its difficulties for individual real estate owners, we are optimistic that these estimates are manageable for the industry as a whole within the context of wider capex budgets.
“We have used the latest data and analytical tools for our research, but we cannot become complacent. We are hopeful that the availability and consistency of data and analytical tools will continue to improve over time and, as actual regulations evolve to get closer in line with the Paris Accord commitments, we will be able to further fine tune our estimates.”
Transition risk is measured according to the long-term anticipated regulatory requirements which need to be addressed in order to prevent an asset from becoming stranded, including energy use and greenhouse gas reductions. Physical climate-related risk focuses on the damage and disruption to buildings as a result of river flooding and sea level rises.
Key findings:
- AEW’s research shows a combined climate risk premium of 19bps pa on average across the 196 European markets covered by the report, with an average 46bps estimated for non-prime European assets.
- The 19bps pa across 196 prime markets is made up of three elements: (1) transition risk of 15bps, (2) river flood risk of 4bps and (3) sea level rise at 0.4 bps.
- Among major markets, Lille and Lyon have the highest climate risk premium, estimated at 47bps and 41bps, respectively. London has the lowest climate risk premium among major European investment markets estimated at 8bps. German cities in the sample also show below average climate risk premiums.
- In an efficient market, the 27bps excess climate risk premium for non-prime assets would be reflected in the transaction yields as priced by market participants. However, AEW’s view is that is not currently the case.
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