Europe: Accounting for climate transition risk in CRE required returns

We are adding a depreciation risk premium that incorporates climate transition risk to our required returns framework.

What you will learn:

• The new depreciation risk premium averages 140bps for Europe across all sectors, and ranges from 70bps for Norwegian industrial under a major renovation scenario to 280bps for Polish hotels under a minor renovation scenario.
• If we think of the climate transition risk premium as the difference between required annual renovation costs and past expenditure on building improvements – on the assumption that the latter represents the typical cost of defending against depreciation – then a European required return needs an additional climate transition risk premium averaging 70bps, albeit with a minimum of zero and a maximum of 230bps.
• Consistent with our previous research on obsolescence risk and renovation costs, we find that the hotel, residential, and office sectors require a higher depreciation risk premium, while the industrial sector offers the lowest level of risk.