Real estate investment and asset management consultancy AEW has published a study on climate transition risk and its impact on the European real estate sector. Covering 196 market segments in 20 countries and five sectors, the study examines the impact of expected costs associated with the energy transition on expected total returns from prime real estate .
The latest data on rising temperatures and sea levels confirm that climate change is becoming more pronounced due to increasing greenhouse gas (GHG) emissions. Current forecasts suggest that the Paris Agreement target of limiting global warming to 1.5°C by 2050 may be out of reach worldwide.
The study highlights an average 37% increase in the climate transition risk premium in Europe, reaching 26 basis points (bps) of expected annual total returns for the period 2025-2029, compared with 19 bps in the previous study (2024), in the 196 European markets, taking into account more detailed data and a new methodology.
Nevertheless, the study points out that the transition risk remains moderate in relation to expected total returns of 8.1%, suggesting that for real estate in Europe the objectives of the Paris Agreement remain relevant. AEW's latest modelling incorporates rising asset-based renovation costs, according to four expert data partners analyzing a market-representative European real estate portfolio: CFP Green Building, BuildingMinds, Deekpi and Helios Exchange. Based on this data, the study estimates a renovation cost of €14/m²/year, up from AEW's previous estimate of €12/m²/year on a comparable basis.
" Despite global efforts to reduce carbon emissions, climate change continues, and the Paris Agreement's net-zero emissions targets for 2050 now seem increasingly out of reach, comments Hans Vrensen, Head of Research & Strategy Europe at AEW. Nevertheless, we remain convinced that most investors will remain committed and will be able to achieve the decarbonization targets for their European real estate assets. Our latest study uses a new methodology, updated with improved data sources, to estimate the average costs for investors to decarbonize their portfolios. While this has helped to revise costs upwards by 37%, or 26 basis points per annum of total returns, we believe this remains manageable and still allows investors to benefit from attractive short-term risk-adjusted returns while preserving the long-term value of their assets."