European wave of renovations leaves investors at sea

Europe is witnessing a surge in ESG-driven renovations, however investors remain uncertain about the costs and benefits of these projects.

Colliers’ Europe’s Renovation Wave report examines the new era of asset renovation in real estate and moves investors, owners and occupiers can take to ensure their assets are not left stranded in the race to decarbonise the built environment by 2050.

“National and EU-wide goals for energy-efficient buildings are becoming transformational. ESG regulations in relation to the built environment continue to tighten, impacting both occupiers and landlords/investors,” said Andy Hay, managing director, EMEA property management and ESG at Colliers.

“When it comes to the real estate market, the EU believes that the rate of renovation needs to be at least double its current rate but this is still significantly behind the pace of change recommended by other leading industry think tanks.”

There is already a clear value to making buildings more energy efficient: where significant energy saving modifications are introduced, Colliers estimates an average potential uplift of 10% in value via the capitalisation of an additional ‘energy rent’ at no additional cost to the tenant.

“There is clear momentum in market activity concerning the retrofitting of assets. Notwithstanding the continued work of the EU and national governments and broader social pressure, this momentum is being pushed by market forces – including a drive to lower energy and occupational costs”, said Sam Addison, head of enterprise project management, EMEA Occupier Services at Colliers.

A Colliers survey of real estate investors found the top two focus areas for investors considering retrofitting to be energy efficiency and operational carbon reduction, followed by reducing water usage and embedded carbon.

However, 44% are unsure how much funding would be required for retrofitting assets (they estimate up to 10% of asset value) and half said they were not clear how these upgrades would be financed.

Furthermore, 45% of investors expect to be forced to sell up to 20% of their portfolio due for ESG non-compliance reasons. 

Colliers makes a number of recommendations for investors looking to upgrade their portfolio:

• Audit the existing portfolio to identify areas of clear opportunity for energy renovation, as well as assets which require repurposing or disposal.
• Consider partnerships with organisations which have specialist ESG expertise to achieve decarbonisation. 
• Assess and identify green financial instruments (like green bonds) to underwrite the required renovations.
• Factor all CAPEX outlays into ROI calculations, including both the cost of retrofitting, certification and funding.
• Tailor investment strategy based on key decarbonisation lessons.