Key takeaways

  1. Net-zero commitments are likely to accelerate, with market stakeholders taking tangible steps to embrace the need for and benefits of sustainable business practices. 
  2. Investor focus on sustainability/ESG is to remain strong, despite macroeconomic headwinds and a challenging geopolitical landscape. This is supported by their expectations of occupier preference and rental premiums for ESG-compliant assets. 
  3. Although the energy transformation of the commercial building stock is seen as a huge investment opportunity, securing CapEx in today's high interest rate environment can prove to be challenging. 
  4. The market will continue to speculate on the timeline for implementing regulatory frameworks related to minimum energy efficiency standards for real estate. 
  5. As more regulations are implemented, liability risks associated with statements and claims will increase. Transparency of data structuring and reporting will therefore become front and centre. 

The market is still focusing on costs related to the ESG agenda in stead of its benefits 

The E in ESG is expected to dominate the narrative also in 2023. Climate change is a systematic financial risk, and as such, it can not be hedged or diversified away. It must be addressed in the real economy. Therefore, the net-zero journey will be driving change in both company fundamentals and asset valuations. However, the main challenge remains the unclarity regarding how the net-zero transition will be financed. 

Market focused on creating 'carrots' due to a lack of 'sticks' 

Going into 2023, the market is expected to continue to speculate on the timeline for implementing regulatory frameworks related to minimum energy efficiency standards for real estate (EPC ratings). However, this attitude can prove to be dangerous as it focuses solely on regulations implemented by the government while omitting the fact that markets are also being ruled by the users of real estate. 

Even if assuming that the legislation regarding minimum EPCs for real estate will first come into force in 2030, this will become irrelevant, provided a majority of occupiers increasingly choose to occupy only the most energy-efficient stock. 

As both stakeholder and regulatory pressure will increase, the window of opportunities for investors must be regarded as transitory. Adopting a proactive approach to the ESG agenda and, in particular, the net-zero transition will prove to be a huge advantage for those who do it well. 

Figure-19

Valuations will increasingly reflect sustainability features 

Correctly pricing the value of building environmental features will remain important both for asset owners and financial institutions, provided the asset is being used as collateral. Although the relationship between energy efficiency improvements, credit risk and asset value is rather complex, evidence suggests energy­efficient buildings are associated with a lower risk of default. 

In addressing the need to retrofit existing assets, securing financing will remain a huge part of the challenge. While some investors will be able to finance energy efficiency improvements themselves, others will be either partially or fully dependant on external financing. However, securing CapEX in today's high interest rate environment can prove to be challenging, in particular in relation to the value to be attributed to retrofitting from an LTV perspective. However, the support from the real estate credit markets is of vital importance for ensuring the Danish commercial real estate market has the ability to contribute towards net zero commitments.