Real estate market under ESG pressure: Risks, figures, and the search for solutions
The European real estate market is facing enormous pressure to adapt. For decades, interest rate policy, location, and rental trends were the main drivers of property values. Today, the equation has changed. Sustainability and energy efficiency have become hard economic factors that determine value stability, returns, and access to financing.
Stranded assets: When buildings lose value
Mark Carney, former central bank governor and Prime Minister of Canada, strongly warns investors about a scenario that is no longer just a forecast: stranded assets. Buildings that fail to meet energy transition requirements could lose up to 30 percent of their value. The reason is simple. Inefficient properties are vulnerable to regulation, expensive to operate, and increasingly unattractive to both investors and tenants.
This development is already visible. In the United Kingdom, around twelve percent of commercial buildings failed to meet the minimum energy efficiency standards in 2023. Demand for so-called "brown buildings" is clearly declining, while banks like ING have publicly announced they will restrict or withdraw credit lines if owners do not meet their ESG targets. The capital market is setting clear limits. Those who ignore sustainability lose access to financing.
The role of regulation
At the same time, legal frameworks are tightening. The revised EU Building Directive (EPBD) standardizes the energy classification of buildings across Europe, from A+ to G. Buildings in the lowest classes F and G must be upgraded by 2030 in the case of public buildings and by 2033 for all other non-residential buildings. These deadlines are binding, and Carney explicitly warns against hoping for delays. He emphasizes that this is a major risk because there will be no leniency.
These requirements impact not only the long-term value of assets but also their short-term liquidity. An analysis by investment manager AEW concludes that real estate investors must increase their annual capital expenditures by around 30 percent to catch up with climate targets. This means that without additional investment, many buildings will fail to meet regulatory standards, with all the associated consequences for valuation and financing.
Market examples and investment reality
The consequences are already being seen. In London, high-profile projects such as the former Marks & Spencer flagship store on Oxford Street and the Museum of London have sparked controversy. On one hand, demolishing inefficient buildings promises energy improvements. On the other, it destroys enormous amounts of embodied carbon. This tension shows that the transformation of the real estate sector is not only a technical issue but also a political and social one.
At the same time, the current momentum is forcing property owners to make quick decisions. Older office buildings in peripheral locations, which require significant investment to upgrade, are increasingly seen as no longer economically viable. Investors are instead focusing on modern, energy-efficient new builds or upgraded existing properties. This is creating winners and losers in the market, a development that ESG requirements are accelerating significantly.
Opportunities for proactive owners
As great as the risks are, there are also clear opportunities for those who take action. Buildings that are modernized or optimized in their operation benefit from lower operating costs, stronger demand, and better financing conditions. Tenants, especially companies with their own ESG commitments, are increasingly seeking out spaces that support their sustainability goals. As a result, ESG is becoming a direct driver of demand in the market.
Importantly, the first step does not necessarily have to involve extensive renovation. Operational measures alone can significantly improve energy efficiency and immediately enhance a building’s classification. Technological solutions, such as AI-based control of heating, ventilation, and air conditioning systems, allow measurable progress without the need to alter the building structure.
Conclusion
The European real estate market is undergoing a revaluation driven by ESG. Stranded assets are no longer an abstract threat but an emerging reality. Value losses of up to thirty percent, rising investment requirements, and strict regulatory demands are forcing property owners and investors to act. At the same time, new opportunities are opening up for those who see ESG not as a burden but as a strategic lever.
Those who take early action not only protect the value of their assets but also improve their market position and access to capital. Whether through large-scale renovations or smart operational optimizations, what matters is taking action. The deadlines are real, and the markets are already responding.
Source: Financial Times – Mark Carney warns net zero will mean ‘significant’ stranded property assets
