‘Brown discounts’ are emerging in real estate, but they are patchy

The global real estate market is starting to price in sustainability, with ‘brown discounts’ being applied to assets that are not on a credible course to decarbonisation, according to market participants. However, the phenomenon is patchy.

“I see it more as a binary question of whether your asset fits or not,” said Stéphanie Bensimon, head of real estate at private markets firm Ardian, who described recent sales processes by the firm of core assets. The fact that they were able to market the assets as “following the Paris Agreement – that the next buyer won’t need to re-inject capex over the lifetime of the project to fulfil the regulation and their ambition – was definitely a ‘tick the box’ criteria”.

“I don’t know whether this means a discount, or just liquidity at some point,” Bensimon continued, noting that the market was not currently active enough to give a clear picture.

Bensimon was speaking on a webinar hosted by the PERE Network. An audience poll showed that 66 percent of those tuning in reported seen brown discounts in the market, with around a quarter (24 percent) describing ‘higher discounts’. More than a third (35 percent) said they had not seen brown discounts.

“I’m seeing it a bit,” said Marit van Rheenen, head of real estate ESG for Europe and APAC at Goldman Sachs Asset Management, “but it does surprise me how many [net-zero] committed buyers are willing to buy brown assets that are not aligned without asking us some critical questions about what it is going to take to get them aligned.”

Van Rheenen described a range of attitudes among buyers: “I’m seeing buyers not showing up because the product isn’t at the the quality they require to go into their net zero carbon-aligned core fund. Or they are showing up and chipping on the price. Simultaneously, still plenty of people are showing up that are not necessarily thinking through whether the assets they are buying actually fit into the mandate they have, and how that might affect their bottom line.”

The emergence of brown discounts for assets that require more capex is a “logical outcome”, noted Steve Goossens, a real estate portfolio manager and sustainability specialist at Dutch pensions manager APG: “It’s a natural outcome of increased regulation on the one end, but also increased [net zero] target setting commitments.” It is also showing up in debt markets, added Goossens, where lenders are asking for net zero plans as a route to a lower cost of capital, or to access capital at all.

Exactly what it is that an asset owner can do to ensure they avoid brown discounts is complex, said Robbie Epsom, EMEA head of sustainability at CBRE Investment Management. “It’s subjective in a way,” he said. “If you are a value-add fund looking at building a brown-to-green type portfolio, you are on the hunt for those brown assets. Equally, when it comes to repositioning an asset for a new occupier, it is subject to what those occupiers are looking for; [they] might have very specific commitments around rooftop solar or EV charging points. So there would be a premium to that occupier, but not to another.”