AEW, one of the world’s largest real estate investment and asset managers, has released a new climate-related risk report which examines the combined impact of the costs associated with the energy transition or greening of assets and losses from physical hazards on projected prime European real estate returns. The conclusions are based on a portfolio of 964 properties selected (but not owned) by AEW to best reflect the four main property sectors across 196 European market segments in 20 countries.
Improved availability of data has allowed AEW to include, for the first time, an estimate for the average climate-related risk premium linked to physical climate hazards – such as floods, wildfires and wind stress – in its research. AEW’s previous reports analysed costs associated with the energy transition and the decarbonisation of buildings. This new, expanded methodology provides investors with a more detailed and realistic estimate of the returns required to fully compensate for these risks when investing in specific prime European real estate markets.
The report shows that the European climate-related risk premium increases to 45 basis points (bps) p.a. for 2026-30 annual projected returns when accounting for both energy transition costs and extreme weather risks, versus 26 bps for transition risk alone. In terms of physical hazards, Norway is the most affected country, with an estimated risk premium of 41 bps. When combining both transition and physical climate-related risks, CEE and French markets are estimated to have the highest risk premium due to the amount of remote logistics assets.
The report highlights the fundamental importance of careful due diligence and monitoring of the technical building specifications and microlocation when investing in European real estate. By doing this, investors can successfully manage these climate-related risks alongside other key considerations in portfolio construction.
While the estimated impact on real estate varies significantly between data providers, climate change is broadly accepted to be advancing more quickly than previously anticipated, with the annual Earth System Science Data (ESSD) confirming the long-term trend that global surface temperature has increased by 1.39°C relative to pre-industrial levels.
Hans Vrensen, Head of Research & Strategy Europe at AEW, commented: “The extreme weather events that occurred across Europe over the summer and their increasing frequency serve as a timely reminder of the importance of physical climate hazards for real estate investors. For the first time, our research incorporates estimated physical hazard losses into the European climate risk premium, giving investors an improved picture of the potential impact on real estate returns, including on a specific market level. As the availability and quality of climate risk data continues to improve, investors who are rigorous in their asset selection and management are well-positioned to deploy capital confidently, ensuring they are fully compensated for the costs of both energy transition and physical climate hazards.”
