It was only earlier this month that this blog explored the concept of "stranded" real estate assets. As one Financial Times interviewee remarked: "The price will have to adjust for those stranded assets". With some coincidence, we now have fresh RICS guidance on how valuations in commercial real estate should account for sustainability and ESG. The guidance will take effect on 31 January 2022. Perhaps we are one step closer to marked price adjustments and the emergence of a new "distressed" asset class?
Paragraph 10 (Sustainability characteristics, considerations and risks), in particular, is worth a read. For example, as you’d expect, this touches on capital expenditure in relation to carbon efficiency improvements, which will no doubt have increasing relevance as the regulatory burden tightens (e.g. "EPC B by 2030"). From another perspective, the note refers to excess energy (e.g. arising via photovoltaics) and how this may generate income/ enhance a valuation.
As a lawyer, the rather non-committal reference to green leases is worthy of note. "In all cases where contractual arrangements exist relating to sustainability performance, valuers should assess whether they may have an impact (positive or negative) on value". Helpful! From a legal perspective, what will lenders want moving forward? How will legal reporting evolve?
As Basil Demeroutis, Managing Director of real estate investors Fore Partnership, writes on Twitter: "Is this the seminal moment for real estate? Legacy portfolios with poor energy performance will be hit w/ significant valuation penalties creating stranded assets we have been predicting. Buying opportunity for us, but quite concerning for larger prop cos". Interesting times.
“This seems like a landslide shift that will lock in losses for those big asset managers that have big legacy portfolios...Santa may be leaving ‘stranded assets’ under the Christmas tree.”