ESG compliance is real estate’s biggest challenge, say property chiefs

ESG is one of the most significant challenges facing the real estate sector in both the short and long term, according to the latest edition of PwC and ULI’s Emerging Trends in Real Estate Europe report. The report found that some 70% of 1,143 respondents were concerned about environmental issues in 2025, with 72% flagging this as an issue for the next five years. Many admitted that they were struggling to keep competing environmental concerns at the top of the agenda. Physical climate risk and real estate’s transition to net zero carbon emissions have been recurring issues in a number of Emerging Trends reports, however, this year’s report also examined the far-reaching implications for real estate insurance and finance. As real estate faces increased risks from the rising frequency and severity of extreme weather events alongside the transition to net zero, the impact on the industry is becoming clearer in terms of financial costs and business interruption, with almost two-thirds of respondents expecting an increase in insurance costs over the next five years. While the issues around the insurance and financing of real estate from climate risks are widely acknowledged, the report found that current levels of industry awareness and collaboration did not reflect the scale and urgency of the challenge. A new normal has emerged Top of the agenda for most respondents was European and global economic growth, with some 77% and 62% respectively either “very” or “somewhat” concerned. The report found the market players largely believed that a “new normal” was emerging, with valuations falling and interest rates regaining some level of predictability. This led to more than 80% of respondents expecting business confidence and profits to stay the same or rise next year. In addition to concerns about economic growth, there were fears of growing geopolitical uncertainty, with 85% citing political instability (up from 74% the year before) and 83% the conflicts in Europe and the Middle East as sources of considerable volatility. In tandem with an uncertain geopolitical and economic landscape, real estate business issues that continue to stifle development include the impact of increased regulation, which at 74% now ranks as the top real estate business concern in EMEA, and construction costs and resource availability the number two concern, at 70%. The report also reveals that reduced tenant demand remains an issue for 44% of survey respondents, although this has fallen from 48% last year, and 42% of respondents are still expecting challenges to the occupier markets, even after a three-to-five-year window of recovery. Data centres lead growth opportunity Respondents outlined a number of core areas of real estate where they saw opportunity for growth. Data centres ranked first in the overall investment and development prospects for European real estate, followed by new energy infrastructure, student housing and logistics. The outlook for office and retail investment, however, remains subdued following continuing caution about the impact of structural change. London and Paris continued to dominate European real estate investment, ranking first and third respectively among survey respondents for overall prospects for 2025. London retains the top position for a fourth consecutive year, and despite slipping to third place, Paris remains a strong market, boosted by Olympic-driven investment and major infrastructure projects being planned. ULI Europe chief executive Lisette van Doorn said: “This year’s report holds a mirror to an industry that, despite its much-needed optimism following the last three years, still faces a complex and volatile environment where fragile growth prospects and geopolitical turbulence are expected to continue to affect business confidence and whether players will be able to unlock the opportunities appearing.” Jean-Baptiste Deschryver, EMEA real estate leader at PwC, added: “While geopolitical and economic uncertainties continue to dominate discussions, it is encouraging to see a sense of cautious optimism returning to the European real estate market. Within this however, the industry must grapple with significant challenges, from ongoing instability and regulatory burdens to ESG demands and the rise of digital risks. Success will belong to those who can adapt, innovate, and embrace new technologies and sustainable practices.” Photo by Arun Thomas from Pexels