European real estate decarbonisation costs increase but remain achievable, according to a report from asset manager AEW.
It is anticipated that this will be achievable for investors given AEW’s projected annual return of 8.8% across all European prime sectors for the 2024-28 period. This compares to an estimated 15 bps of annual required capex in AEW’s September 2023 report.
Current energy intensity of European buildings is 31% behind schedule compared to the Paris Agreement targets as incorporated in the CRREM pathways on average. This will require the industry to adopt steeper pathways to catch up with and meet the targets by 2050. According to the report, the UK and French markets are ahead of the European average, while Spain is well below.
Separately, new data now offers a way to account for the embodied carbon in the individual elements of a retrofit that reduce operational energy intensity such as installing heat pumps, windows and insulation. This embodied carbon further increases the need to reduce energy intensity. The report estimates the embodied carbon for retrofits at 67 kg CO2/sqm, with offices most impacted.
Finally, capital values declined by 9% since last year, as a result of interest rate increases, which have been integrated in the analysis. Since the cost of the required retrofits is measured as a percentage of capital values, this contributes to an increase in the climate transition risk premium. An expected continued decline in interest rates should help reverse this impact going forward.
Hans Vrensen, Head of Research & Strategy Europe at AEW, said: “Real estate owners and investors need to adapt their assets to meet long term decarbonisation targets according to the Paris Agreement.
“Based on our latest analysis, we remain confident that the additional retrofitting capex investments required to meet these targets are manageable for the industry, despite the increase in costs to do so. Investors should still be able to achieve attractive risk-adjusted returns in European real estate.”
