Mark Carney warns against stranded net zero assets

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Former central banker Mark Carney has warned that as governments move towards net zero, there will be “significant stranded assets” in commercial property, highlighting the risk for property owners and lenders of older buildings that cannot adapt.

Real estate investors are facing a double whammy as asset values ​​plummet due to higher interest rates and increasingly urgent demands to invest in energy efficiency.

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Stranded assets are often associated with fossil fuels that will be phased out as part of the green transition, but Carney stressed that there are also older buildings that “will not survive” as countries regulate greenhouse gas emissions cuts across all sectors.

“There will be a tail of stranded assets… that will need to be reclaimed and, if possible, refurbished or demolished and repurposed,” he said.

A report published this week by investment manager AEW shows that European property investors need to increase their annual capital expenditure by 30 percent to continue to modernize buildings. It has been found that the energy performance of European buildings is significantly behind the progress needed under the Paris Agreement, in which countries around the world agreed to limit global temperature rises.

At last year’s COP28 climate conference in Dubai, countries agreed to double the pace of energy efficiency improvements by 2030.

However, in some cases, such as older, poorly located office buildings, the upfront cost may be uneconomical due to lack of demand or low rents for the space.

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Attempting to demolish buildings deemed obsolete – such as the Marks and Spencer Oxford Street flagship or the former Museum of London – could also spark controversy, as retaining existing structures saves carbon emissions from building materials such as steel and concrete.

Operating buildings account for 26 percent of global energy-related emissions, according to the International Energy Agency, which warns that faster progress is needed for the real estate sector to reach net zero emissions by 2050.

Commercial buildings in the UK face a series of tough deadlines in which they must increase their energy efficiency ratings by 2030. According to the City Centre, last year around 12 per cent of commercial properties failed to meet the energy efficiency rating deadline.

Carney warned investors against extending those dates. “There will be people… who, directly or indirectly, believe that this time frame will shift or that it will somehow not become a binding restriction. However, this is a big risk that must be taken,” he said.

Carney, chairman of Brookfield Asset Management, was speaking in London at the opening of Eden Dock, a new waterfront garden at Canary Wharf co-owned by the Canadian asset manager. He said that in addition to reducing emissions, another key challenge for property owners is increasing biodiversity in urban areas.

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Last month, Dutch bank ING warned 2,000 of its largest clients, including developers and commercial property owners, that it would stop providing them with financing if they did not make enough progress in tackling their climate impact. Commercial real estate has been found to lag behind other sectors when it comes to disclosing its climate impacts.

However, despite climate threats to the sector, Carney said he was not concerned about threats to financial stability from the real estate sector.

“I am very optimistic about commercial real estate risk across the financial sector as the risk is more broadly spread and there is less liquidity pressure than in the bank-based commercial real estate sector,” he said. “And I think the process of working out those assets that need refinement is progressing.”

© 2024 The Financial Times Ltd

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