The concept of real estate assets becoming stranded has been around a very long time indeed. However, the need to slow global warming is turning these age-old economic definitions on their head and speeding up the ageing process of buildings. It’s also now on the forefront of every real estate market investor's mind.

When does a property become stranded?

The stranding year in real estate is when a building or real estate asset loses its value before the end of its expected useful and economic life. Whilst this phenomenon is not new it is now increasingly having an impact in the real estate world. 

Historically, buildings only became stranded when they became financially unviable due to changing market conditions or external factors such as changing resource landscapes, technological change, changes in taste or social norms and to a lesser extent due to changes in regulations. Alas now the scope has broadened dramatically and it's inherently linked to climate change.

The risk of real estate assets becoming stranded has both changed and increased dramatically since the Paris 2015 Climate Agreement. Unlike the usual forms of economic obsolescence, it has a higher immediacy, due to rule changes that drive the transition to a low-carbon economy. There is also the risk that climate change itself could be causing the stranding year to be brought forward too, this is particularly relevant where climate change is already having an effect. An example of this would be where a property is located in an area that has become more susceptible to flooding.

More than 30% of emissions from the real estate industry

The EU in particular has introduced a number of regulations that aim to address ESG topics, with the real estate sector also being firmly in their sights, particularly since the sector is responsible for around 35-40% of GHG emissions. 

One key regulation is the EU's Energy Performance of Buildings Directive (EPBD), which requires member states to set minimum energy performance standards for buildings and to encourage the renovation of buildings to improve their energy efficiency. This means that properties that do not meet these standards may become stranded way before they show and outwardly visible signs of decay. The market already shows signs of a brown discount for example depressed rents and valuations on buildings that are less sustainable or are close to their stranding year.

According to a recent German JLL report

The difference in value between energy-efficient and less efficient buildings is likely to increase further in the medium term

In another way, the stranding year is now in every investor and asset owner's sights.

When raising  finance for buying real estate,  particularly if looking to obtain debt financing, lenders will be asking for the stranding year of the project. Green bonds and climate bonds related to real estate are attracting more investors than ever before, in part driven by investor demand so investors alike will be looking at the stranding year of portfolios of real estate.

Funding for sustainable buildings attracts lower rates since the stranding year is likely to be far off in the future. They will attract  higher valuations and higher rent levels too. Stranding risk can be mitigated by retrofitting inefficient spaces and carrying out renovations - there is no shortage of financing for this either and there are also numerous state backed funds to help with this too, for example the KFW in Germany. 

There are various tools that can be used to predict the stranding year of an asset such as CRREM. This is an EU backed project, which has created a tool showing the trajectory of when a building is likely to become stranded. It is based on various rulings and objectives coming mainly from the EU and  provides the industry with  transparent, science-based decarbonization pathways to achieve the Paris goals.

The next battleground on the back of retrofitting will be around the embodied carbon involved in the construction and materials used as well as the full life cycle of the building.  In Germany since the beginning of this year, the QNG (the government agency issuing quality certificate for sustainable building) has already started making demands in this direction. Before long, what happens at the end of a building's life, the quantity of materials that can be reused or recycled, and the logistics required to remove the rubble, will likely soon all need to be taken into account too.

Regulations are only going to get tighter so it is likely that further retrofitting will be needed again in the future. Asset owners will certainly need to include refurbishment and updating costs having a larger impact on their business model than they have done in the past.

Calculate your stranding year now