Brown discount to widen in Asia, says M&G Real Estate

Asset repricing due to the global downturn could be amplified by “brown discounts” for less sustainable buildings in Asia, says M&G Real Estate.

In its latest global outlook report, the UK investment manager said APAC economies are ramping up their commitment to net zero carbon targets, with cities setting targets to decarbonise buildings.

Though the region’s real estate stock is generally newer compared with Western markets, a potential challenge to progress could arise from the fragmentation of property ownership. Strata-titled buildings in multiple ownership are often undermanaged.

Valuations are under pressure in many markets and this could be magnified by investors and occupiers increasing focus on sustainability. In Europe, this has already led to a gap in pricing between sustainable buildings and others.

M&G said the rental premium between green buildings and older assets remains difficult to pinpoint, as green buildings tend to be more modern and would naturally command higher rents.

“However, with increasing focus on ESG by both occupiers and investors, buildings without green credentials are at risk of lower occupancy. Older assets may also be subject to ‘brown’ discounts, amplified by the likelihood of wider repricing,” the report said.