Research has warned that UK commercial real estate investors are already seeing significant valuation drops due to poor energy efficiency, which could threaten up to half of some portfolios within the next five years, according to a report from building consultant re:sustain, Property Week can reveal.

Re:sustain warns that the sector is in the midst of “a radical strategic pivot”, noting that as retrofits are proving to be too slow and disruptive, real estate fund managers are aggressively shifting capital towards remote-optimisation technologies to protect asset valuation.

The report, based on a survey of 50 UK commercial real estate fund managers, found that all fund managers possess stranded assets in their portfolios that no longer meet minimum energy efficiency standards or investor environmental, social and governance (ESG) requirements.

This has led to asset values plummeting, with 64% of managers witnessing falls of between 11% and 30%, and 28% reporting devaluations of between 31% and 40% over the past three years.

Over the next five years, nearly two thirds (66%) expect their volume of stranded assets to increase by up to 25%; while 24% of those surveyed fear that between 25% and 50% of their portfolios could become stranded if energy efficiency is not addressed immediately.

Additionally, the report shows that due to climate regulations and tenant demand for green spaces, 59% of managers plan to modernise HVAC systems, while 48% plan to make greater use of technology to improve operational optimisation of existing systems including controls, set points and scheduling. Some 41% of managers are even considering demolishing poorly performing buildings.

However, 76% believe that technology capable of optimising building systems remotely will have the greatest impact on tackling energy efficiency. This outperformed more traditional capital-intensive measures, such as installing new lighting or HVAC hardware (66%).

When asked to identify the top challenges to improving energy consumption, 74% of managers cited the operational disruption caused by significant physical retrofits as a primary barrier.

Furthermore, just under two thirds (64%) of respondents noted that critical energy data remains trapped in disconnected, legacy systems, preventing a portfolio-wide view of performance. Some 60% also expressed concern over security risks associated with introducing new smart energy solutions.

As a result of these challenges, 90% described technology as an ‘important’ part of their strategy, with 14% of these categorising it as ‘highly important’.

Finally, almost three quarters (70%) of respondents expect their technology expenditure on energy efficiency to increase over the next three years, with 10% predicting a ‘significant’ spike in spending. The primary drivers for this digital gold rush are the speed of results compared with physical upgrades and the lower capital expenditure required to achieve compliance.

Katie Whipp, chief business officer at re:sustain, said: “The commercial real estate sector has reached a tipping point where energy performance is no longer a ‘nice to have’ but a fundamental driver of liquidity and valuation.

“The research shows that managers are moving away from the slow-burn of traditional construction retrofits in favour of agile, data-led interventions. They are looking for quick results that protect asset value without the prohibitive capex of a structural overhaul.”