Introduction
Stranded assets have long been a major concern for property investors. Historically, commercial buildings have become obsolete due to sudden shifts in consumer habits, such as the rise of e-commerce decimating the demand for traditional department stores. Now, with governments pushing toward net zero targets, the commercial real estate sector faces a new and more complex challenge.
What Are Stranded Assets in Commercial Real Estate?
Stranded assets refer to properties that lose their value due to changes in market conditions, regulations, or consumer preferences. In the case of net zero targets, buildings that do not meet new energy and emissions standards could become too costly to upgrade, potentially outpacing the rental income they can generate.
The Global Scale of the Stranded Asset Risk
Former central banker Mark Carney recently highlighted the significant risk posed by stranded assets as governments aim for net zero emissions by 2050. According to a 2019 academic study, the global value of stranded commercial assets could reach $5 trillion. While the precise scale of the problem varies by region, the underlying concern remains the same: many commercial buildings may fail to meet future energy efficiency standards, putting their long-term value at risk.
The UK’s Net Zero 2030 Challenge
The UK serves as an early testing ground for the net zero transition, with a 2030 target that requires commercial properties to have an Energy Performance Certificate (EPC) rating of at least B. However, the market seems ill-prepared. Estimates from Knight Frank indicate that around 70% of commercial floor space in England and Wales has an EPC rating of C or below. If this trend holds across the UK, approximately £700 billion worth of non-residential building stock could be at risk of devaluation.
Can Refits Save Commercial Property Values?
Not all hope is lost. Retrofitting efforts are on the rise, and newer commercial buildings are typically more energy-efficient. According to CBRE, more than one-third of EPC ratings issued since early 2022 have achieved a B or higher. Property experts, such as Savills’ Steve Page, suggest that many buildings can be improved incrementally, allowing them to remain in use while upgrades are implemented.
The Cost of Achieving Net Zero Standards
The financial burden of upgrading commercial properties varies. British Land estimates it will cost £100 million to bring 42% of its portfolio up to an EPC rating of A or B by 2030. Fortunately, the company projects that two-thirds of these costs could be recouped through service charges. Similarly, Land Securities has announced a £135 million net zero transition plan.
However, these figures primarily reflect the efforts of larger, listed companies that focus on prime office spaces, which represent only about 10% of the overall market. The real challenge lies with lower-tier buildings in less desirable locations, where private landlords and smaller property owners may not be taking climate risks as seriously.
Additional Pressures on the Commercial Property Market
The push toward net zero is not the only issue facing commercial real estate. Other unpredictable factors, such as the rise of artificial intelligence and the ongoing trend of hybrid working, are creating additional uncertainties. Jefferies analyst Mike Prew points out that these developments could further disrupt workforce dynamics, adding to the complexity of managing commercial properties.
Conclusion
As the UK moves toward its 2030 net zero targets, property investors must stay vigilant. While refits and retrofits are gaining momentum, the risk of stranded assets remains substantial. Investors should focus on future-proofing their portfolios by prioritizing energy efficiency and considering the broader economic forces at play, such as AI and remote work, that could shape the commercial real estate landscape in the years to come.