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.
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