ULI Europe CEO warns of ‘carbon bubble’ in property values

Lisette van Doorn says urgent action is needed to save assets from decline as ULI launches guidelines to assess transition risks.

The European chief executive of the Urban Land Institute has warned of a “carbon bubble” in the pricing of European real estate at its inaugural summit on climate change in Rotterdam on Wednesday.

Lisette van Doorn said that current building values are “too high” because the transition risk costs of decarbonising buildings – which can include factors such as energy costs, changes in rental income and exit value, and measuring embodied carbon – are not being factored into property valuations in a standard way, if at all.

Van Doorn explained that “while almost everybody in the industry acknowledges the need to decarbonise the built environment” only a handful of market players had started to consider the costs of decarbonisation and started to act on it.

She argues that decarbonisation activity is therefore currently only focused on higher-value assets, predominantly in higher-value locations such as prime offices in CBDs and high-end residential, where the cost-to-value ratio of retrofitting is lower.

The ULI is urging the wider industry to be supported to “speed up the process” and “prevent the bubble from bursting”.

Today the organisation has published the latest draft of its own valuation methodology as it attempts to make transition-risk costs more transparent, an issue van Doorn described as the “biggest hurdle” to addressing decarbonisation.

The ULI’s Transition Risk Assessment Consultation Guidelines, which are being developed with support from Allianz Real Estate, Arup, Catella, Hines, Immobel, Redevco and Schroders Capital, aim to provide the industry with a common methodology on transition risks.

“Standardisation speeds up progress. Without collaboration and transparency on transition risks, there is the danger of a two-tier market 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,” she said.

The guidelines aim to provide valuers with evidence to price transition risk as part of property valuations, information that can be shared between owners, lenders, investors, potential buyers about the main transition risks and their impact on values.

Crucially, it will also 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”, van Doorn added.

“With the industry sharing information on transition risks, it will be able to build up an evidence base to support valuers to understand the impact on building values and demonstrate some of the benefits to net income that decarbonisation can offer,” she added.

The consultation guidelines contain a standardised methodology, and assessment of which risks to take into account. The disclosure of that assessment is intended to “get the whole industry on board”, van Doorn explained.

The ULI will now begin a period of consultation over the coming months as it seeks to further develop the methodology.

In its current form the proposed guidance identifies nine transition risks of material impact to real estate assets that can be financially modelled, standardised and communicated:  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.

“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.”