Transition risk is causing property investors to abandon deals, says ULI

Most respondents to an Urban Land Institute survey on the influence of climate risk on real estate investment decisions said they have walked away from potential acquisitions because of concerns about being stuck with stranded assets.

Over 200 European property investors and managers took part in the non-profit industry body’s research, the results of which were announced at its C Change Summit in Copenhagen on October 11.

A full 61 percent of respondents said assessment of transition risk – the risk associated with decarbonizing assets – had resulted in an acquisition not proceeding. Separately, 54 percent said they had allocated assets for disposal because of transition risk.

In addition, 89 percent of companies taking part said they now factor in the risks of transitioning assets to a low-carbon economy into their decision making.

The ULI, which is working to mobilize industry-wide action on decarbonization through its C Change program, said the results are a firm indication climate risks “are being taken seriously” by a growing part of the market and has called on the rest of the industry to “adopt the same strategy.”

Lisette van Doorn, chief executive officer of ULI Europe, said: “We can see that transition risks have already become a significant factor in investment decision making, adding a new layer of risk analysis to an already challenging market.”

The survey also found evidence of prices paid for assets being adjusted to account for transition risks. Around 62 percent of investor and manager respondents reported they had completed an acquisition at a lower price due to a transition risk in at least one deal. Lower prices reflected the higher levels of capital expenditure required and a need for the asset to align with the buyer’s decarbonization strategy, the survey concluded.

Van Doorn said: “Industry headwinds from high interest rates and inflation have driven the investment market in Europe into a period of quasi-stagnation. With a lack of transactions, there is a lack of clarity on how much is currently being done within the industry to incorporate transition risks into decision-making. The results of our survey indicate that many in the industry are using this time to get their houses in order, preparing for renewed market activity.”

She added: “It would be advisable for the rest to also be prepared for a different market when transaction activity picks up again – this is our call to action.”

The ULI has been campaigning for a standardized model of valuation to support investors, managers and lenders to assess and disclose transition risks as part of property valuations. In June it published its Transition Risk Assessment Guidelines, a methodology to identify material impacts of climate transition on real estate.

In September, van Doorn told affiliate title Real Estate Capital Europe lenders are “financing real estate against a value that isn’t the real value of an asset,” and added: “The value of some buildings are already much lower than its official valuation, as the cost of decarbonization is not incorporated. We should not be pretending this is not happening. These numbers are keeping people asleep.”