European pension funds expect commercial properties which lack good environmental, social and governance (ESG) credentials to record “significant value depreciation due to brown discounting”, according to a report by real estate ESG data firm Deepki.

According to the research, 79% of the 250 European pension fund managers surveyed, expect commercial real estate with good ESG credentials to provide better returns or ”green value” over the next five years.

However, real estate which falls short will suffer significant value depreciation as a result of brown discounting, the report revealed.

The report highlights the significant impact of brown discounting for commercial property assets which ”demonstrate poor ESG compliance and deferred maintenance risk that may require additional capital outlay” for improvements.

The study showed that over the past 12 months, 40% of pension funds said they had seen depreciation of 21%-30% due to brown discounting, and a further 21% have seen assets devalue by 11%-20%.

Some 18% had seen a 31-40% depreciation, “highlighting the growing focus on climate risk and resilience, carbon emissions and occupant health” the research highlighted.

The impact of brown discounting is set to increase significantly over the next three years, according to almost two thirds (62%) of European pension funds. Some 37% expect it to ”negatively impact assets” by a further 31%-40% and 24% by 21%-30%, ”severely devaluing poor-performing real estate”.

Vincent Bryant, the CEO and co-founder of Deepki, said: “The value of European commercial real estate with poor ESG performance is being significantly affected by brown discounting and our research suggests that the resulting devaluation is set to become even more pronounced.

“As a result, we are seeing rapidly growing demand for our technology as owners and managers take on the net-zero challenge to protect their assets.”

The Deepki European Pension Fund Report: Integrating ESG into commercial real estate surveyed European pension fund managers in the UK, Germany, France, Spain and Italy, with combined assets under management of €402m. The research was conducted by Pureprofile in February.

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