Sustainability remains a key driver for European real estate investors

While many global firms are shying away from public statements or intent around sustainability, behind the scenes they are continuing to embed these strategies within their overall investment processes, understanding the commercial implications.

Data from Morningstar shows that global ESG funds attracted US$16 billion in Q4 2024, driven mostly by European investors. Although not necessarily all earmarked for real estate, this capital must be allocated to environmental, social or governance aligned activities, and among these, decarbonising real estate presents a significant opportunity. Recent JLL research shows a low carbon supply-demand gap of 54% for European offices by 2030 and 28% for industrial. With 2030 the year when many countries and companies have interim carbon reduction targets, this capital could support the longer-term low carbon transition of our buildings and cities.

The cost of retrofits being cited as a barrier to investment is not new – retrofit rates are well below the level needed to align with most net zero targets, largely due to upfront costs. Rising inflation and construction costs have a significant impact on capex allocation, which requires investors to make strategic decisions when it comes to prioritising building upgrades. JLL calculates the EMEA industrial market alone could require US$80 billion of debt funding to retrofit existing stock that is over 10 years old, and the estimated aggregate cost to retrofit potentially obsolete office stock in Paris, London, Berlin and Munich is between US$85-170 billion.

Institutional investors, investment managers and REITs view EPC ratings and other regulations, as well as energy and physical climate risk, as the biggest influences on decisions, probably due to their longer-term outlook and lower appetite for risk. Meanwhile, private equity, private investors and unlisted propcos/developers in our survey stated the financial viability of retrofits, energy and occupier considerations as the biggest sustainability drivers. These investors are more opportunistic and look for value-add product with a view to exiting to core capital upon fulfilment of their business plan.

Based on our survey findings, the role of regulation, energy and emissions in Europe and physical climate risk in the region will drive continued investment into sustainable real estate – due not only to compliance but also the need to deliver best-in-class product to meet the expectations from occupiers and to protect exit liquidity. Yes, the initial upfront capex is high, but the cost of doing nothing will increasingly become greater.

Respondents to our investor survey put energy performance as the number one sustainability consideration for occupiers, while also citing it as a top three sustainability driver when making investment decisions. As Europe has ageing stock across all sectors, most buildings will need to be retrofitted in order to improve energy performance. Investors recognise that energy efficient buildings command green premiums – both in terms of rental and capital values – and that energy performance affects leasing velocity and exit value, as well as visibility on costs. The shortage of low carbon, efficient buildings across Europe means that demand cannot be met with new construction alone, hence the critical need for retrofits.

For occupiers, energy security is becoming increasingly essential for resilient operations, especially in expanding power-hungry sectors like advanced manufacturing, life sciences and data centres, and reducing energy costs through energy efficiency and onsite renewables is now a key driver for reducing overall operational costs.

From an emissions standpoint, in 2025, nearly 40% of the UK office development pipeline is targeting net zero. Energy efficient, low carbon buildings have become standard for new construction, and asset owners who want to remain competitive will need to look to upgrade existing stock to meet rising market expectations.

Country-level renewable energy initiatives

Investors will be increasingly scrutinising the physical climate risk of real estate assets to protect themselves against additional maintenance costs, insurance premiums and risks to liquidity. As the cost and frequency of extreme weather events grow, adaptation and resilience measures are critical to minimising damage to buildings, maintaining business operations and managing additional costs. Research from the Graham Institute (2022) found that under current UK policies, the total cost of damages due to climate change are projected to increase from 1.1% of GDP to 3.3% by 2050 and 7.4% by 2100.

35% of respondents to our investor survey listed physical climate risk as a key sustainability driver when making investment decisions – 60% of these respondents listed the UK as the primary source of capital, while nearly 30% are global. In fact, physical climate risk was the top sustainability driver among the global respondents to the survey. In the July 2024 iteration of our survey, 94% of respondents said they were actively implementing or considering climate risk mitigation and adaptation within their portfolios. Looking to JLL’s proprietary transaction evidence, climate risk is becoming more prevalent as an influencing factor during the due diligence phases of a deal, and derisking buildings through adaptation measures is now one of the strongest business cases for implementing sustainability strategies in real estate.

JLL research found the true cost of climate change goes beyond the billions in damages we read about in the headlines. Physical climate risk will lead to increased costs through direct, indirect and consequential losses.

JLL estimates that roughly US$580 billion (37%) of European commercial real estate sits within the top 10 most climate vulnerable cities in Europe, including major metropolitans like Paris. Addressing these risks now will provide investors with more resilient assets that can withstand and recover faster from future potential extreme climate events.