The phenomenon of “stranded assets” is widespread in the real estate industry. These assets have suffered unexpected or premature write-downs, devaluations, or conversions into liabilities. Often, real estate project developers cannot react timely to such losses, resulting in financial damages. In this blog post, we will delve into the concept of Stranded Assets and discuss ways for developers to protect themselves from it.
- Definition of stranded assets
- History and climate protection
- Causes of the emergence of stranded assets
- Consequences of the emergence of stranded assets
- Measures to prevent the emergence of stranded asset
- Ten principles of how smart buildings create real value
- Modern technical solutions
After reading this article, you should have gained a deeper understanding of the phenomenon of stranded assets and the various ways to protect yourself from them. We have compiled some information to provide you with some ideas on safeguarding against unexpected or premature write-downs and devaluations.
Definition of stranded assets
The term stranded assets refers to real estate or other assets that result in write-offs, devaluations, or conversion into liabilities due to sudden and premature decisions. Although the property itself is often valuable and useful, the costs can exceed the returns. This sends a message to investors that the property is no longer profitable and discourages further investment. The concept of stranded assets also provides an appropriate term for potential financial risks, immediate correction requirements, and regulation and compliance issues.
Stranded assets can arise in various situations and take different forms. They may sometimes result from changing economic conditions, such as market volatility and political risks. It could also be that the asset has become outdated and no longer meets market needs. In other instances, stranded assets may be attributed to unexpected legal reasons, such as changes in zoning regulations or development requirements.
History and climate protection
The German government has adopted its Climate Protection Plan 2050, a comprehensive strategy to reduce greenhouse gas emissions to mitigate climate change significantly. The plan is ambitious yet attainable, with a target of reducing emissions by 55-60% by 2030 compared to 1990 levels and achieving net-zero emissions by 2050. The government plans to phase out fossil fuels and transition to renewable energy sources, among other measures, to achieve this goal. The German building sector plays a crucial role in achieving the climate neutrality target by 2050, which entails completely eliminating greenhouse gas emissions.
The consequences of this situation could be significant, with potential penalties in the form of carbon emission levies and a gradual depreciation of properties at regular intervals. It is not difficult to envision a scenario where individual properties with high carbon emissions are devalued to such an extent that they find no buyers in the real estate market, becoming stranded assets.
Causes of the emergence of stranded assets
Stranded assets, such as real estate, have significantly lost their value due to societal changes like technological advancements and innovation cycles. Evaluating the worth of properties in the face of climate change becomes uncertain, as future policy decisions to restrict harmful emissions and modify buildings can impact the demand for real estate. Additionally, a relative undersupply of low-interest financing for properties contributes to the emergence of stranded assets. Overall, the occurrence of stranded assets results from unexpected and premature write-offs, devaluations, and the conversion of real estate into liabilities due to shifting economic and climate conditions.
Other factors include law changes, eliminating grants, subsidies, and other incentives. Furthermore, the declining demand for specific types of properties like shopping centers or office buildings can also lead to the creation of stranded assets. Ultimately, inadequate monitoring of environmental and social risks can result in long-term stranded assets if these risks are not effectively managed.
Therefore, it is crucial to implement and monitor an effective risk management strategy with the right tools and technologies to prevent them from becoming stranded assets. This is especially important for commercial properties, which can play a significant role in achieving the goal of climate neutrality by 2050, i.e., the complete elimination of greenhouse gas emissions. To bridge the gap between theory and practice, the German Business Initiative for Energy Efficiency (DENEFF) and Union Investment have joined forces to develop a risk management tool specifically for commercial properties.
With this innovative solution, business owners can confidently prepare for potential climate changes while protecting their companies. This free tool provides insights into the necessary investments and when they should be made to avoid losing assets due to non-compliance with the German government’s Climate Protection Plan 2050.
This instrument must determine whether a current investment can meet future requirements regarding property acquisition. Real estate professionals are currently unsure which investments are essential to meet the German Climate Protection Plan’s and Paris Agreement’s goals. Ignoring political climate targets can lead to long-term economic consequences.
Consequences of the emergence of stranded assets
The emergence of stranded assets has detrimental implications for the real estate industry. Securities-based property projects can suddenly lose their value or be converted into liabilities. This poses significant challenges for property owners to adapt to the constant technological and structural changes and trends in real estate markets. Moreover, insolvency can be a consequence, necessitating real estate companies to operate with greater financial stability and agility to accommodate potential transformation or restructuring processes driven by technological innovations.
For instance, coastal properties may lose value due to climate change. In the long run, this issue would negatively impact investors. The economists at LBBW highlight that while climate change poses certain risks, it also presents various opportunities. Assets such as land and coastal properties are likely to depreciate over time, while other sectors of the economy will experience significant value appreciation. So far, industries dependent on fossil fuels appear to be particularly affected by this trend towards environmental consciousness.
Measures to prevent the emergence of stranded assets
Smart building technologies, IoT devices, and the EU Taxonomy offer protective measures against the emergence of stranded assets. Incorporating smart buildings with ESG (Environmental, Social, and Governance) criteria allows businesses to assess the security of their processes. Smart buildings and IoT devices provide CFOs with valuable data to anticipate unexpected risks of fluctuation and losses. The EU Taxonomy supports transparency in our financial systems, ensuring investors know where their investments are going. By leveraging smart building technologies and intelligent analytical approaches, companies set a standard for smart investments, moving away from stranded assets.
Real estate funds are among the foremost investment instruments for institutional investors in the European Union (EU). The EU has developed a taxonomy for real estate funds to mitigate risks and enhance transparency. This taxonomy defines the structure and operation of real estate funds to comply with EU regulations. It is based on three fundamental principles: risk diversification, separation of assets and liabilities, and transparency.
These principles aim to safeguard investors and provide comprehensive information about the risks associated with investing in a real estate fund. Risk diversification is achieved by dividing a real estate fund’s assets and liabilities among different legal entities, ensuring that the others can still meet their debts if one unit fails.
Building digitization and intelligent optimizations can help fulfill the taxonomy requirements for real estate funds. GMS’s smart building solutions enable real-time monitoring and analysis of building performance, facilitating efficient management and optimization of assets. Our solutions also offer transparency for investors by providing comprehensive data on a building’s performance and status. Choose GMS as your partner for smart building solutions and ensure compliance with the EU Taxonomy for real estate funds.
Ten principles of how smart buildings create real value
The Buildings Performance Institute Europe (BPIE) report outlines ten principles for achieving tangible results through smart buildings. These include reducing energy consumption, improving indoor environmental quality, maintaining comfortable temperatures, and creating an optimal workspace. Smart buildings also generate data that can serve as a basis for decision-making by investors and owners. Moreover, their high efficiency and adaptability make them more cost-effective than conventional construction methods.
1. Above all, prioritize maximizing the energy efficiency of the building.
Maximizing the energy efficiency of a building is a crucial step towards reducing environmental impact and achieving sustainability goals. Significant reductions in energy consumption can be achieved by harnessing intelligent building technologies and advanced analytics. Smart buildings excel in efficiently regulating temperature, humidity, and airflow, surpassing conventional methods. This leads to substantial cost savings and enhances overall environmental performance.
2. Promoting the production of renewable energies and self-consumption, both on-site and in the surrounding areas.
Promoting such initiatives is crucial both on-site and off-site in creating a more sustainable energy future. Buildings can generate their green power by harnessing local renewable energy sources like photovoltaic systems, wind turbines, micro-hydropower plants, and biomass facilities. Moreover, intelligent building solutions can be employed to monitor and optimize energy generation, enabling buildings to become self-sufficient in energy. These smart building technologies also facilitate the integration of renewable energy sources into the power grid, allowing for electricity exchange between buildings.
3. Activate buildings’ energy storage capabilities to achieve a new efficiency level.
The ability to store energy within buildings is a crucial prerequisite for achieving new levels of efficiency. Energy storage allows buildings to capture and utilize excess energy from renewable sources like solar or wind power. This contributes to grid stability by reducing reliance on fossil fuels and other non-renewable energy sources.
4. Integrate demand control capacities into existing building stock to achieve energy efficiency and sustainability.
Demand response is a vital tool for optimizing the sustainability of buildings and energy systems. It encompasses strategies and technologies that control energy demand in buildings while meeting consumer needs, by reducing electricity consumption during peak periods. This includes shifting or curbing electricity demand.
5. Decarbonizing the energy used for heating and cooling buildings.
Decarbonizing the energy used for heating and cooling buildings is vital for achieving a sustainable future. There are two main approaches to decarbonization: increasing the utilization of renewable energy sources such as solar or wind power and implementing more efficient devices and technologies to reduce energy consumption.
Significant advancements can be made in most buildings regarding using renewable energy sources like solar or wind power. Furthermore, technologies such as smart thermostats and advanced building automation systems can be employed to decrease energy consumption further. These technologies enable more efficient temperature and humidity regulation without compromising customer comfort. Additionally, using energy-efficient insulation materials and advanced air conditioning systems can reduce energy consumption.
6. Provide users with the capability to monitor their energy consumption using smart meters and controls.
Data transparency is the key to optimizing energy efficiency in buildings. With data transparency, building owners and operators can effectively monitor and control their energy consumption, identifying areas where energy savings are possible. It also helps users understand how their energy usage compares to similar buildings and provides insights into areas of potential waste.
Smart meters and controls, also known as smart meters, can be used to empower occupants or office personnel to monitor and control their energy usage, enabling them to take an active role in reducing the energy consumption of their buildings. This can include setting individual temperature preferences, turning off lights when not needed, and adjusting device usage accordingly.
7. Provide all consumers with the opportunity to leverage dynamic price signals.
Dynamic price signals are an energy pricing system that can incentivize more efficient energy utilization in buildings. This system adjusts energy costs based on dynamic or real-time prices that align with supply and demand. By embracing dynamic price signals, consumers better understand the market forces that influence energy prices and can respond accordingly by adjusting their pricing.
8. Creating a business model that brings together small energy centers to harness the collective power of their resources.
Consolidating small energy producers is a great way to harness the collective power of their resources and maximize their efficiency potential. By joining forces, these small producers can reap the benefits of economies of scale, resulting in lower prices for consumers and higher profits for the producers.
9. Creation of smart and interconnected neighborhoods.
Creating intelligent and interconnected neighborhoods is a crucial step toward a more sustainable future. By leveraging advanced technologies to connect homes, businesses, and local services, smart neighborhoods have the potential to reduce energy consumption while providing better services to residents. For instance, intelligent lighting systems can automatically adjust to occupancy and time of day, minimizing energy usage.
Intelligent irrigation systems can optimize water consumption in outdoor areas. Connected devices can be programmed with personalized settings, while connected vehicles and public transportation systems contribute to reducing traffic congestion and air pollution. Lastly, smart communities generate clean electricity by linking houses and businesses to renewable energy sources like solar panels or wind turbines.
10. Building the necessary infrastructure to accelerate the market acceptance of electric vehicles.
Electric vehicles (EVs) are becoming increasingly prevalent, although their acceptance rate is still relatively low due to the lack of infrastructure. Despite the numerous advantages of EVs, such as higher energy efficiency and reduced emissions, there are still several challenges to overcome before we can truly reap the benefits of electric transportation.
One crucial aspect is establishing a reliable and affordable charging infrastructure. This entails cities investing in developing necessary power grids, public charging stations, and other supportive technologies like battery storage solutions. By doing so, the costs of electric vehicles can be lowered, making them more accessible to the general public and accelerating their adoption.
Modern technical solutions
Memoori Research’s analyst team recently published an article titled “Dumb Buildings Are Stranded Assets In The New Climate Economy.” The article highlights how the absence of “smart” technologies in buildings, known as “Dumb Buildings,” can result in stranded assets. Real estate developers and asset managers are constantly seeking ways to enhance the value of their properties. One effective approach is the implementation of Smart Building technology. These intelligent buildings can contribute to reducing energy costs, enhancing the comfort and safety of occupants, and ultimately elevating the overall property value.
A stranded asset is an investment that is no longer profitable or necessary. Smart building technology prevents properties from becoming stagnant by keeping up with current industry trends and requirements. GMS offers customizable smart building solutions that can be tailored to any property, whether it’s a new construction or an existing structure. Our experienced technicians will collaborate with you to develop an intelligent building system that meets your needs.
Integration of digital systems throughout the building
Integrating digital systems into a building can benefit investors, owners, and residents. This is not just a futuristic concept but something achievable today. By leveraging intelligent building technologies like sensors, analytics software, and Internet-of-Things (IoT) devices, buildings can gather a wealth of data on their performance.
This data enables the early detection of potential issues before they escalate and allows for optimization of energy efficiency and maintenance. Tenants also gain greater control over their spaces, tailoring them to their specific needs. Moreover, digital systems provide building owners with enhanced transparency, simplifying facility management and offering a comprehensive overview of building performance.
As an asset manager, safeguard your property from becoming a stranded asset by conducting thorough research and selecting the right smart building solutions provider. GMS Smart Building Solutions is here to assist you – invest in the future of your property with us today.
“Future proof” as a blueprint
Building operators and real estate developers must prioritize the “future-proof” aspect when constructing their projects. This means designing buildings that can keep pace with ever-evolving technologies and trends. To achieve this effectively, integrating smart building technology is crucial for the future-proofing of any project.
Intelligent buildings go beyond just adapting to changes in occupancy or new technologies; they also can save energy. For instance, when a new energy-efficient light bulb hits the market, it can be quickly integrated into innovative building systems. Moreover, these advanced structures utilize intelligent algorithms to adjust power consumption based on user fluctuations, resulting in tangible financial savings.
Smart buildings have the potential to revolutionize both construction and operation processes. They are more cost-effective and easier to upgrade compared to conventional structures. Operators can add new features or make quick changes without the need for a complete infrastructure overhaul. This is crucial for staying ahead of current trends, introducing cutting-edge technologies, and avoiding stranded assets. Engaging with smart building technology has never been more important for builders and owners – it is simply the future.
Update on the subject
As the world grapples with the ongoing climate crisis, as reported by the Financial Times, increasing attention is being directed towards stranded assets such as fossil fuel infrastructure that could be left behind due to an accelerated shift away from carbon-intensive energy sources. This focus on reducing the risk of stranded assets is now also being applied to buildings, with building managers tasked with optimizing buildings for energy efficiency and sustainability to safeguard against potential future losses.
Thanks to data from air quality sensors and thermal mapping technology, building managers today have greater capabilities than ever to assess their building’s current state and identify areas that need improvement. This data can be utilized to make decisions regarding building design and retrofitting, ensuring buildings are resilient enough to adapt to changing environmental conditions over time. For instance, the data can be used to optimize insulation systems or improve ventilation channels, thereby reducing the need for air conditioning or heating. This is relevant for end-users and particularly crucial for property developers and landlords.
In the coming months and years, stranded assets are expected to become increasingly common in building modernization as building owners and managers leverage data-driven insights to make their buildings more resilient. Specifically, buildings will be designed and retrofitted to withstand better changing environmental conditions, resulting in lower energy bills, increased comfort for residents, and fewer maintenance issues. Building owners must stay one step ahead of the times to remain competitive in a rapidly evolving environment, and data-driven insights make this possible.