Risk management: when do properties become stranded?

The German government’s Climate Protection Plan 2050 is a policy initiative that has yet to be translated into operational reality at the commercial level. To close this gap, DENEFF (the German Industry Initiative for Energy Efficiency) and Union Investment jointly commissioned the development of a new risk management tool for the industry. The tool will be freely available and indicates what investments are needed and when they should be made in order to ensure commercial properties do not end up as stranded assets.

 

An article by:
Susann Bollmann, DENEFF

 

The Climate Protection Plan 2050 was adopted by the German government in response to the Paris Agreement, which seeks to limit global temperature rise to well below 2 degrees Celsius above pre-industrial levels. A number of targets are set out in the Climate Protection Plan, including the reduction of CO2 emissions by 80 to 95 per cent by 2050. All reductions will be compared to reference values from 1990, the baseline year for all sectors. The buildings sector has a key role to play here – the aim is to make Germany’s building stock climate neutral by 2050.

Precise quantification of the benefits of climate investments – managing risks


For members of the real estate industry, there has been a lack of clarity to date on what investments will be necessary to achieve the goals contained in the German Climate Protection Plan and the Paris Agreement. There is thus a need for a standardised tool that can precisely quantify which investments in the building stock will lead to what climate protection effects, thereby helping to meet requirements regarding the overall real estate portfolio. The tool must also support the property acquisition process by identifying whether an investment made today can meet future challenges. In addition, it is highly likely that investment managers who ignore political climate targets will suffer financial consequences. These consequences may take the form of possible sanctions, such as levies on CO2 emissions, or a steady decline in value of the properties concerned during the legally prescribed regular assessment by independent valuers. An entirely realistic scenario is that individual properties with particularly high CO2 emissions will lose so much value that it will no longer be possible to sell them on the commercial real estate market, thus turning them into “stranded assets”.

The red curve shows the number of assets in a virtual portfolio that require modernisation until 2050. The blue bars reflect the calculated investment volume in mn €.

New tool: prototype on trial

In response to these challenges, DENEFF commissioned Hamburg-based consultancy The CO-Firm to develop a tool for measuring and quantifying the effect of investment in climate protection measures. Union Investment is the strategic partner for practical implementation of the tool, which will be freely available across the industry from autumn onwards. In summer 2017, a prototype was presented to members of the German Bundestag and various government ministries, where it received a positive response. The operational prototype enables key parameters for the future environmental viability of a property to be determined, evaluated and visualised. These include:

  • Determining dates for energy efficiency upgrades by means of a progress chart
  • Calculating the investment required to upgrade the energy efficiency of a building in line with government climate protection targets
  • Determining and visualising the proportion of the real estate portfolio that already meets the challenges of the future
  • Carrying out a risk analysis on all properties in the portfolio to establish where action is required

 

The tool commissioned by DENEFF has the potential to make political climate targets measurable and quantifiable for the real estate industry in Germany and thus create benchmark standards for the entire sector. Market players will be able to determine the climate effects that various investment measures will have on individual properties and the wider portfolio.

Impact on property valuation

The existing prototype can already make work easier for executives, fund managers, investment managers and asset managers by reconciling investment decisions with the Climate Protection Plan 2050 and its interim objectives. If the tool makes it possible to establish uniform criteria for calculating climate protection measures throughout the real estate industry, these criteria can also be used by expert surveyors when valuing properties. It is clear that the provisions of the Climate Protection Plan will have an impact on the valuation of commercial properties sooner or later, and will thus also affect market prices. Against this backdrop, the prototype tool commissioned by DENEFF can act as an important, and perhaps even crucial, catalyst.

 

DENEFF is an independent, cross-industry network of companies with a pioneering commitment to energy efficiency. It advocates an ambitious and effective energy efficiency policy. Accordingly, the network helps to limit the effects of climate change, reduce dependence on fossil fuels and boost the international competitiveness of companies, including those in the real estate sector.