The Urban Land Institute (ULI) has published guidelines for assessing and disclosing the costs of decarbonising buildings, as it warns of a ‘carbon bubble’ in the pricing of European real estate.
The proposed guidelines set out a standardised carbon assessment and disclosure method for real estate owners, investors and valuers to help them price transition risk into their assets.
ULI says urgent action is needed to decarbonise buildings, if targets set out in the Paris Agreement are to be achieved. There is currently a lack of regulation driving change, and the cost of doing nothing is not factored into property valuations, according to the non-profit institute. This means current building values are too high, resulting in a 'carbon bubble’.
If transition risk costs are not factored in now by owners, ULI argues, the industry could face a major crisis in achieving decarbonisation if the bubble bursts due to a change in regulation or an economic shock, causing values to fall quickly. And this may happen rather sooner than later, it says, given the current energy crisis, which may significantly impact rent affordability by tenants.
ULI Europe CEO, Lisette van Doorn, said: ‘All buildings have transition risks and we know that some leading market players have started to consider the costs of decarbonisation and started to act on it. However, we need to bring the wider industry on board, and spread the knowledge to speed up the process and prevent the bubble from bursting.
‘We need to get the whole industry moving faster by building a strong case for a collaborative approach to transform existing stock.’
A common methodology for assessing and disclosing transition risks would help to break the current 'deadlock' on progress, Van Doorn said.
ULI's Transition Risk Assessment Consultation Guidelines are part of its C Change programme launched late last year, which aims to mobilise the real estate industry to decarbonise. The guidelines were published on Wednesday at the inaugural ULI C Change Summit in Rotterdam, where real estate leaders gathered to discuss how to tackle the main barriers to decarbonisation in real estate.
ULI’s analysis suggests that the current approach by property owners means that decarbonisation activity is focused on higher-value assets in higher-value locations, such as prime offices in CBDs and high-end residential, where the cost-to-value ratio of retrofitting is lower. Without collaboration and transparency on transition risks, the institute believes there is a danger of a two-tier market emerging with a strong concentration of retrofitting activity in locations and of assets with higher values, while lower-value assets and locations are at threat of decline.
Said Van Doorn: ‘Our combined goal should be the long-term preservation of values across all our buildings, keeping all of our cities and neighbourhoods investible and liquid. If we don’t act on real estate valuations, our industry’s significant contribution to climate change will continue and we will exacerbate social inequality.’
‘The consultation guidelines help remove transition risks as a point of competitive advantage for the market and instead close the knowledge gap to the benefit of all owners and managers. If everyone is better educated on these risks, we can better achieve the broader goals of decarbonisation.’
The proposed guidance identifies nine transition risks of material impact to real estate assets that can be financially modelled, standardised and communicated. Those risks include the cost of decarbonisation, internal resourcing, energy costs, the carbon price, and embodied carbon, as well as the impact of decarbonisation on depreciation, changes in rental income and exit value.
The consultation also includes three standard templates for disclosure and reporting – a manager disclosure sheet, a valuation service provider disclosure sheet and an investor reporting sheet.
ULI says it will begin a period of consultation over the coming months, engaging with the industry individually, across companies and in specialist groups.
The draft consultation guidelines were prepared with the support of the founding partners of the ULI C Change programme, Allianz Real Estate, Arup, Catella, Hines, Immobel, Redevco and Schroders Capital, together with feedback from interviews and workshops involving ULI Europe members.