Hot property locations

London and Paris top Europe’s real estate demand, while Rome faces challenges. As heat got anything to do with it? Piyasi Mitra reports.

London topped LaSalle Investment Management’s 2023 European Cities Growth Index for real estate occupier demand, with Paris following closely. These cities, known for their robust economies and urban cores, are projected to drive over 30% of their countries’ GDPs and one-sixth of Europe’s growth in the next decade.

Additionally, the LaSalle research also found that since 2010 Sweden and Denmark have experienced GDP growth while also reducing emissions thanks to demographic changes, workforce expansion, and decarbonisation efforts.

But Rome is impacted by an extreme heat metric which LaSalle used for the first time to construct the index and the Copernicus Climate Change Service data also indicates that Palermo and Florence, among other Italian cities, face significant impacts from extreme heat over the next 50 years.
Italy witnessed an average of 11 extreme weather events daily in the first seven months of 2023, as reported by the national farmers’ organisation, Coldiretti. Buildings contribute significantly to CO2 emissions in Italy and in the residential sector, about 86% of buildings fall below energy class D.
Italy’s National Association of Builders estimates that approximately two million buildings will require energy upgrades by 2030.

“Not today”
However, Tom Walker, co-head of global listed real assets at Schroders, says that heat stress “may be a deterrent one day, but not today” for real estate occupier demand. Declining real estate demand in heatwave-prone areas might emerge as a trend this decade, though the previous decade’s data doesn’t suggest this was a factor before.
He backs this up with US data, which offers an excellent case study due to accessible internal migration and climate data. 2012 to 2021 IRS migration data revealed an “intriguing” trend: people were moving into areas experiencing higher heat stress – not away from them.
This trend persists across income brackets, suggesting it is factors beyond wealth that are influencing migration patterns, Walker points out.
Florida, Texas, North Carolina and Arizona – all states experiencing substantial inward migration – coincided with the highest summer temperatures in the US. Conversely, cooler states – such as New York – experienced outward migration, with few exceptions.

“This implies that the economic draws of the sunbelt states are strong enough to persuade would-be migrants that dealing with the hot climate is worth it – despite the stress risks,”

“This implies that the economic draws of the sunbelt states – lower income taxes, vibrant economies, looser planning laws, perhaps even the sunnier weather– are strong enough to persuade would-be migrants that dealing with the hot climate is worth it – despite the stress risks,” says Walker.

“Pull factors”
For now, the key to identifying opportunities in real estate investing is an understanding of a city’s more traditional ‘pull’ factors – such as its tax regime and affordability.

Based on these metrics, Zsolt Kohalmi, global head of real estate and co-CEO of Pictet Alternative Advisors says Milan has been a beneficiary in the former category, while Lisbon, Manchester and now Malaga show the appeal of “balancing a growing international spirit with a lower cost of living”.
He also says that as economies evolve, the traditional allocation of 40% to offices and 30% to retail in real estate portfolios loses appeal. Identifying the right sectors in key gateway cities becomes essential, says Kohalmi.
Multifamily residential is poised for robust performance in Europe driven by demand from young urban dwellers who face a shortage of high-quality apartments and have affordability constraints. The cost-of-living crisis persists and there is insufficient new construction to meet demand, Kohalmi points out.
“Last-mile logistics should also continue to be in strong demand and e-commerce benefits the sector, while the supply side remains severely constrained here too.”

Brown discounts
But Kohalmi notes the appeal of climate-related factors. Tenants increasingly prefer green buildings and prospective owners are hesitant to invest in assets with poor environmental profiles, he says, and for owners aiming to enhance a building’s environmental profile, securing skilled labour for upgrades like heat pump installations is a hurdle.
Real estate faces its struggle with greenwashing allegations due to the absence of standardised definitions in the sector and to embodied carbon emissions from construction that are often overlooked.
“Investors must scrutinise sustainability claims in marketing materials and prioritise improvements validated by third-party ratings, showing tangible progress beyond generic ESG messaging,” says Kohalmi.

Dr. Alex Murray, head of real assets within the research insights team at data provider Preqin, notes that grade-A highly efficient office buildings are holding their value better than those with lower energy efficiency standards.

He points to regulation emerging in the private residential markets, with authorities across Europe mandating properties are refurbished to remain eligible to rent, and that since Covid, upgrading properties to meet stricter energy regulations has become costly. Government subsidies aim to assist owners, but bureaucratic hurdles hinder progress. These challenges are prompting many small landlords to exit, paving the way for larger players to address housing needs through extensive build-to-rent projects, says Murray.

In 2022, the Bank of Italy found that climate-influenced realty transactions, pushing buyers towards resilient buildings and reducing prices for non-shielded buildings in extreme heat.

Non-ESG-compliant assets are also struggling to find tenants, therefore impacting liquidity. This means that they are increasingly being sold at a discount, giving rise to the so-called brown discount, points out Matteo Minardi, head of real estate, Italy at France-based private assets manager Ardian.

ESG regulations play a pivotal role in real estate, with Europe known for its stricter standards compared to the US or Asia. Besides regulation, there are also a growing number of policies and metrics across the continent. Minardi observes that although they are not enshrined in law, the “private” regulations in France such as DPE-2021 – an energy performance certificate – are becoming commonly used standards among investors, leading to some private equity clients going further than regulations require, simply due to their ESG principles.

Paris stands out for its strict regulations that promote energy-efficient building practices and the reduction of carbon footprints. From January 2023, French homes with energy consumption over 450kw/sqm are ineligible for rent. By January 2025, G-rated properties won’t be rentable, followed by F-rated properties being prohibited by 2028.

This is a critical issue as it affects almost half the residential units in Paris, resulting in a reduction in property values where changes are not implemented, adds Minardi.

“A nuanced challenge”
Minardi stresses the necessity of climate assessments in investment strategies, especially in cities like Rome. “To preserve value and position these buildings for the long term, significant capital expenditure is required to fortify assets against extreme weather,” he says.

However, historical cities like Rome have unique technical characteristics, so energy-efficient adaptation is often constrained by the preservation of heritage. Installing sustainable features like solar panels and efficient lighting is viable for logistics and industrial spaces. However, it is challenging for older buildings in central areas with hospitality, residential or office uses due to their age, says Minardi.

A nuanced challenge lies in maintaining property value but in some cases, investments may require reassessment if climate adaptation is a difficult risk, Minardi says.

“While investing in Rome, Palermo and Florence remains possible, it takes a motivated investor with significant ‘capex’ to ensure they are resilient over the long term.”

“While investing in Rome, Palermo and Florence remains possible, it takes a motivated investor with significant ‘capex’ to ensure they are resilient over the long term.”

Manish Garg, associate director of private markets at finance research firm Acuity Knowledge Partners, predicts that extreme heat might redirect demand to cooler areas, affecting property values and yields, but also creating demand for enhanced cooling systems. Additionally, heatwaves could exacerbate wildfires, raising insurance costs and potentially deterring tourists, impacting the short-term rental market.

“Heat stress in Rome and other Italian cities have also led to temporary decreases in both online and in-person searches for housing,” highlights Garg.

Europe’s heat stress

It is critical that investors implement comprehensive ESG strategies throughout their portfolios, to maximise value and longevity, suggests Samantha Kempe, CIO of prop-tech firm IMMO. “We already witness assets with poor energy efficiency seeing discounted trade prices and the market anticipation of green premiums associated with energy-efficient buildings,” adds Kempe.

Heat stress may seem less urgent compared to other climate-change impacts, such as rising sea levels and flooding. The Welsh village of Fairbourne is experiencing a declining population, with the council cautioning residents about potential uninhabitability by mid-century due to flooding, notes Walker at Schroders.

Meanwhile, talk has re-surfaced in France recently over whether to declare certain flood-prone areas of Pas-de-Calais uninhabitable after it was frequently flooded. “If the European experience is anything like the US, economic considerations will trump other factors until they become too painful to ignore,” adds Walker.

The high temperatures seen in Rome last year reiterate the importance of investment in buildings to reduce not only emissions from heating but also cooling buildings, says Murray. France has some ambitious targets, which started coming in during 2023 and have made doubtful the viability of older Parisian buildings. The UK currently requires a minimum Energy Performance Certificate rating of E to rent privately. However, the government recently turned on policy plans to increase this to C by 2025, points out Murray, who feels that despite challenges, due to evolving ESG regulations and the need for climate resilience Europe’s cities are transforming.





The tension between urgency and inaction will continue to influence sustainability discussions in 2024, as reflected in the trends report from S&P Global.
This white paper outlines key challenges impeding the growth of private markets and explores how technological innovation can provide solutions to unlock access to private market funds for a growing…


Luxembourg is one of the world’s premiere centres for cross-border distribution of investment funds. Read our special regional coverage, coinciding with the annual ALFI European Asset Management Conference.