Valuer Insights
Navigating ESG Pushback in Real Estate and Avoiding Undue Risks at Pre-Investment Stage
July 3, 2025
Contact
Jiwon Choi
Senior Manager, ESG, Valuation & Advisory Services, Hong Kong
In Hong Kong and APAC’s cautious investment climate, corporates are resisting ESG mandates, citing high costs and low market sentiment. With only five years until 2030, when many companies face interim net-zero goals, investors and fund managers must prioritize portfolio net-zero readiness. Accelerating decarbonization while justifying investments in financial models requires pricing in the risks of inaction during deal underwriting. This article explores the risks of non-compliance, their impact on valuations, tenant and investor demand, and the critical role of pre-investment ESG due diligence in de-risking assets for Hong Kong and APAC real estate players.
Source: CRREM
While ESG shouldn’t halt deals, it shapes CapEx planning. Budgeting for energy-efficient systems, such as smart metering, can yield OpEx reductions and boost tenant appeal. Green buildings command up to 4% rental premiums and higher occupancy rates, enhancing lease renewals.5
Investment Memoranda should integrate ESG due diligence findings, detailing energy performance and asset enhancement needs. Setting KPIs—such as achieving a LEED certification or reducing EUI by 20% in three years—ensures accountability, balancing environmental and financial outcomes like OpEx savings and tenant retention.
Figure 2 Example -- Identifying CapEx measures for asset decarbonization
CBRE’s ESG & Sustainability Advisory team delivers expert pre-investment ESG due diligence, helping investors, fund managers, and developers assess risks and unlock value. Contact our experts to explore tailored ESG solutions.
1 CRREM: a tool used to assess and manage the financial risks associated with carbon emissions in the real estate sector. It provides science-based decarbonization pathways for real estate assets, aligning with global climate goals, particularly the Paris Agreement's 1.5°C target.
2 Stranded assets are investments or properties that become obsolete, uneconomical, or non-productive before the end of their expected lifespan due to factors like changing regulations, market shifts, technological advancements, or societal changes. These assets can no longer generate the anticipated economic returns and may even become liabilities for their owners.
3 CBRE, Hong Kong Figures - Office Q1 2025. https://www.cbre.com.hk/insights/figures/hong-kong-figures-office-q1-2025
4 Stranding year: The point in time when an asset becomes unprofitable or unusable due to changes in the market, regulation, or technology, effectively rendering it stranded. This often happens when an asset's emissions exceed the allowable carbon budget or when new regulations make the asset's operation uneconomical.
5 CBRE, “APAC Real Estate Market Outlook 2025” (2025).
Risks of Non-Compliance and Valuation Impacts
Non-compliance with sustainability standards poses significant risks to asset valuations, tenant retention, and investor appeal. Below are the key risks:- Risk of Devaluation
Buildings’ sustainability performance—green certifications, carbon emissions, and energy usage intensity (EUI)—materially impacts valuations through cash flows, operating expenses (OpEx), and capital expenditure (CapEx) forecasts. Failing to align with the Carbon Risk Real Estate Monitor (CRREM)1 risks stranded assets2.
In Seoul, the Building Energy Labelling Scheme, effective 2026, mandates energy efficiency disclosures for commercial buildings, driving transaction outcomes akin to the UK’s Energy Performance Certificates (EPCs). Unlike Hong Kong’s more lenient 10-year energy audit cycle, Seoul’s scheme is designed to impact sales, leasing, and operations – positioning it as a first “EPC” in Asia. Non-compliant buildings will likely face higher cap rates and lower valuations as investors prioritize greener assets.
- Risk of Not Meeting Tenant Demand
Leasing strategies must address occupier demands in Hong Kong’s competitive market, where the office sector vacancy rate is 17.5% as of Q1 2025.3 Quality tenants increasingly require landlords to commit to net-zero, use renewable energy, share utility data for emissions reporting, and integrate smart building technologies. Failure to meet these sustainability “asks” risks prolonged vacancies, reduced rental income, and lower tenant retention, undermining portfolio performance.
- Risk of Not Meeting Investor Demand at Disposition
Despite ESG skepticism, net-zero pressures remain critical, driven by capital providers, particularly European ones under the EU’s Sustainable Finance Disclosure Regulation (SFDR). Non-compliant assets deter buyers at disposition, depress resale values, and extend sale timelines, especially in Hong Kong’s high-stakes market.
Source: CRREM
Call for Action: Pre-Investment ESG Due Diligence
Portfolio owners must assess net-zero readiness to avoid stranded assets by 2030. ESG due diligence during pre-investment is a critical sustainability scoping exercise, evaluating financially material risks like green certifications, carbon emissions, EUI, stranding year4, and regulatory compliance.While ESG shouldn’t halt deals, it shapes CapEx planning. Budgeting for energy-efficient systems, such as smart metering, can yield OpEx reductions and boost tenant appeal. Green buildings command up to 4% rental premiums and higher occupancy rates, enhancing lease renewals.5
Investment Memoranda should integrate ESG due diligence findings, detailing energy performance and asset enhancement needs. Setting KPIs—such as achieving a LEED certification or reducing EUI by 20% in three years—ensures accountability, balancing environmental and financial outcomes like OpEx savings and tenant retention.
Figure 2 Example -- Identifying CapEx measures for asset decarbonization
“Green buildings command up to 4% rental premiums and higher occupancy rates, enhancing lease renewals.”
How Funds Price Tomorrow’s Risks Today
Pricing residual carbon risks—emissions exceeding 2030 targets—requires a “carbon cost” or shadow carbon investment approach. Funds adopt varied methodologies:- OpEx: Incorporate renewable energy certificates (RECs) or carbon credits as future OpEx costs, alongside insurance premiums, to reflect compliance expenses.
- CapEx: Allocate budgets for green upgrades, offsetting costs through OpEx savings and potential rental premiums. Scenario analysis can estimate impacts on exit cap rates, though attributing green value remains complex.
- Financing: Sustainability-linked loans (SLLs) offer interest rate savings and faster financing, improving deal economics.
CBRE’s ESG & Sustainability Advisory team delivers expert pre-investment ESG due diligence, helping investors, fund managers, and developers assess risks and unlock value. Contact our experts to explore tailored ESG solutions.
1 CRREM: a tool used to assess and manage the financial risks associated with carbon emissions in the real estate sector. It provides science-based decarbonization pathways for real estate assets, aligning with global climate goals, particularly the Paris Agreement's 1.5°C target.
2 Stranded assets are investments or properties that become obsolete, uneconomical, or non-productive before the end of their expected lifespan due to factors like changing regulations, market shifts, technological advancements, or societal changes. These assets can no longer generate the anticipated economic returns and may even become liabilities for their owners.
3 CBRE, Hong Kong Figures - Office Q1 2025. https://www.cbre.com.hk/insights/figures/hong-kong-figures-office-q1-2025
4 Stranding year: The point in time when an asset becomes unprofitable or unusable due to changes in the market, regulation, or technology, effectively rendering it stranded. This often happens when an asset's emissions exceed the allowable carbon budget or when new regulations make the asset's operation uneconomical.
5 CBRE, “APAC Real Estate Market Outlook 2025” (2025).