Valuing Transition Risk: The Impact of Carbon Intensity on Gross Asset Values

This paper quantifies the financial implications of carbon emissions on real estate investments by analyzing the relationship between asset-level carbon intensities and the valuer-based Gross Asset Value (GAV) in the German office market. Using the CRREM (Carbon Risk Real Estate Monitor) Tool, annual carbon emissions of assets are calculated, and transition risks are assessed on the grounds of sciencebased decarbonization pathways. A hedonic regression model is applied to evaluate the impact of carbon intensity on asset values. Contrary to existing literature, our findings suggest that GAV is not significantly affected by the carbon intensity of buildings. To investigate the dataset further, a logit model is used to examine how stranding risks influence value-driving characteristics such as vacancy rates. The findings show that stranded assets have a significant impact on vacancy rates, highlighting that market demand might not be fully reflected in valuations. This paper provides evidence that traditional valuation approaches may inadequately account for the effects of carbon intensity and transition risks, potentially misrepresenting market dynamics.