New research by Catella warns of the critical need for residential property investors to prioritise climate finance strategies in their portfolios to avoid being saddled with stranded assets.
The European Residential Vision 2024 report argues that rising global temperatures are forcing investors to prioritize climate finance strategies within their portfolios. Failure to consider climate change could lead to stagnant property values and stranded assets – buildings that become undesirable due to climate-related issues.
The report positions climate finance, encompassing both mitigation (reducing emissions) and adaptation (preparing for climate impacts), as equally important to future investment returns as traditional factors like interest rates. However, Catella emphasizes that, unlike interest rates, climate-related costs can be actively managed.
Residential property values will diverge based on how well they handle climate change. Buildings that are energy efficient and adaptable to future conditions will see a premium (green premium), while those that lag will face depreciation (brown discount). This trend is expected to accelerate, creating a new market order based on climate resilience
Xavier Jongen, managing director, Catella European Residential Investment, said: 'Residential real estate is the source of around a third of total global greenhouse gas emissions and sits at the epicentre of the great challenges of climate change and societal inequality. But it is not widely understood by investors that integrating climate finance into your residential investment strategies is just as relevant for your future returns as interest rates.’
A climate mitigation strategy considers the costs of reducing carbon emissions from buildings and other holdings to meet ambitious goals like the EU's Green Deal which aims for a 55% cut in emissions by 2030 and net zero emissions by 2050.
Potential measures include the installation of solar panels as one of the most cost-effective ways to “green” buildings, redesigning houses to make them less prone to flooding and high summer temperatures, relocation of companies or dwellings, or even entire cities.
The costs of adaptation vary depending on the severity of climate change. Estimates suggest the EU and UK would need to invest €80-€120 bn for a 2°C temperature rise and €175-€200 bn for a more extreme 3-4°C rise.
Said Jongen: 'Mitigation through decarbonisation is financially the rational thing to do as it enhances income, strengthens energy security, avoids paying carbon taxes and most crucially, it lowers decarbonisation costs and avoids future value destruction. Institutional investors are, next to the state, the main stakeholders to get us into the ‘Green Growth World'.’
