Prime European real estate requires 19bps of annual capex reserve – AEW

Investors should factor in 19bps of annual capex to mitigate climate risks when investing in prime commercial property in Europe, according to research by AEW.

The premium, which takes into account both climate-related transition risk and physical climate risk, should be even higher – at 46bps – for non-prime buildings.

Real estate fund manager AEW said transition risk was measured according to the long-term anticipated regulatory requirements that need to be addressed 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.

Hans Vrensen, managing director and head of research and strategy for Europe at AEW, said: “For the first time we have combined the measurable climate risks into a single risk premium for prime and non-prime asset markets, which are estimated at 19bps and 46bps, respectively.”

The 19bps premium can be broken down to 15bps relating to transition risk, 4bps relating to river-flood risk and 0.4bps relating to sea level rises.

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.

According to AEW’s analysis, the annual transition-risk premium stands at an €8 per sqm for prime assets, across 196 markets measured in Europe.

“This is the amount we estimate will need to be spent to prevent prime assets becoming stranded in line with the current 2050 deadline as stipulated by the Paris Accords,” Vrensen 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’ve 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.”

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