There's A Window To Get Rid Of Your Stranded Assets. But It's Closing Fast

The UK real estate market is not fully pricing in the expenditure needed to make sure properties are compliant with sustainability regulations.

That means there’s still a chance to sell assets that can’t be made green before values drop precipitously. 

“On dispositions, we think that there's a key moment where the market is mispricing this risk slightly from a decarbonisation perspective, and we're actively selling some of the worst performers in anticipation for that being priced in,” LaSalle Investment Management Net-Zero Carbon Lead for Europe Brett Ormrod told the audience at Bisnow’s UK Real Estate Investment and Financing Conference.

Data increasingly highlights that green properties sell for more than their “brown” equivalents. But the disparity doesn’t take into account how far values might fall going forward, Ormrod said at the event, held at America Square Conference Centre.

While environmental, social and governance initiatives are being challenged in the U.S. under the new Republican administration, there is little sign of the same from policymakers in Europe and the UK, panellists said. 

Perhaps more importantly for fund managers and anyone that raises money from institutional investors, particularly those from Europe and Australia, stringent ESG analysis and targets are a prerequisite for getting capital. 

The same is increasingly true of lenders. Sustainability targets that were once part of loans that explicitly presented themselves as green or “sustainability-linked” are now becoming a basic element of property loans of all types. That is forcing anyone that borrows to invest or develop to have a sustainability plan in mind. 

“If you don't have it, you are probably going to face a significant uplift in the rate, or you're going to have to look elsewhere,” Tishman Speyer Head of ESG Andres Guzman said.

Even value-add fund managers are being impacted by changes to the lending world. Until recently, they had worked under the assumption that they could sell an asset before ESG regulations really take hold. 

“There are more and more sustainability-linked loans that we see funding value-add funds especially, and in the terms of those loans, this is where we see the real impact of the policies and the regulations shifting,” Catalyst Chief Strategy Officer Sandra Fives said. 

All of these factors are combining to make it more essential than ever to have a business plan in place to decarbonise assets.

That is going to cost money and is not going to get much cheaper in the future, the audience heard. That means it could be a decent time to sell assets that might not be capable of making the grade. 

“Business plans are more and more required to allocate more capital to a broader set of sustainability issues, and we're doing this amidst an inflationary environment where the cost of materials and the cost of money is higher than it has been for a long time,” Guzman said.