As temperatures soar once again across Europe having smashed all previous records in June, attention inevitably turns not only to climate change mitigation, but to adaptation specifically the buildings in which we live and work.
Research from Allianz reveals that across Europe, which is the fastest warming continent but hugely lags its American counterpart when it comes to the provision of air conditioning, countries can expect cumulative heat-related GDP losses of 5 per cent to 7 per cent by 2030.
By the end of this decade, extreme heat might have cost Europe’s biggest economies USD 638 billion.
This is a serious issue for Europe’s institutional investors whose property portfolios are desperately energy inefficient.
Research from re:sustain, a science-based technology platform which optimises the energy consumption of real estate assets, reveals more than half (57 per cent) of European pension fund managers with more than EUR86 billion in assets under management, said that between 10 per cent and 30 per cent of their commercial real estate portfolio has poor energy consumption.
While around a third (31 per cent) said between 30-50 per cent of their portfolio was performing above expected energy benchmarks for that asset type and location, and 8 per cent said that more than 50 per cent of assets in their portfolio are poor performers.
Consequently, all respondents have stranded assets in their portfolios, which is defined as properties experiencing reduced capital value, leasing or future liquidity due to energy performance. More than half (54 per cent) have seen their stranded assets decrease in value by 20-30 per cent over the past three years and a further 25 per cent said they had seen values decline by 30-40 per cent.
Over the next five years, 25 per cent expect to see the number of stranded assets to increase by 5-10 per cent, and 43 per cent predict an increase of between 10 per cent and 25 per cent.
Katie Whipp, Chief Business Officer at re:sustain, said: “The impact of poor energy performance on real estate assets is no longer a future risk; it is already being priced into asset values. The findings show that a material share of portfolios are underperforming on energy, which is already translating into value erosion. For pension funds in particular, this creates a direct challenge to long-term income security and maintaining asset quality over extended holding periods.”
Rather than attempting to retrofit property in their portfolios, however, investors are turning to technology as the solution.
A study of 200 European real estate institutional asset managers in the UK, Germany, France, Netherlands, Spain and Italy, with a combined AUM of EUR296 billion also from re:sustain finds almost seven in 10 (69 per cent) will increase the amount they spend on technology over the next three years to improve energy efficiency across their portfolios.
When asked the main advantages of technology as opposed to retrofitting when it comes to improving energy efficiency of buildings, 73 per cent of respondents say it delivers faster results and 55 per cent say it is cheaper.
Almost two thirds (61 per cent) highlight the lower levels of disruption from using tech to improve energy efficiency versus retrofitting, while half of respondents say it is easier to secure tenant buy in compared to upgrading a property. Almost half (46 per cent) of real estate managers say technology helps to protect their assets’ value, while 17 per cent point to the ability to use technology across old and new buildings.
Whipp said: “Bringing properties into line with the green transition on budget and on time, can be a daunting prospect, especially for those managers facing major retrofits or upgrades. Our research shows that asset managers recognise the importance in using technology has evolved considerably to understand their buildings and make positive changes without unnecessary capital expenditure. But the use of tech is far from universal. It is essential that the sector utilises technology to reduce energy consumption, manage costs and ensure a smooth journey to Net Zero.”