Climate Risks a Determinate Factor for Real Estate Investors

Climate Risks a Determinate Factor for Real Estate Investors

October 9, 2020

A recent climate risks report from ULI and Heitman claims there is an increasing need for improved screening of market-level risk and resilience and says real estate investors are extending their assessments beyond individual assets to capture market-level exposure.

A report by the Urban Land Institute (ULI), and Heitman LLC (Heitman), a global real estate investment management firm, finds that real estate investors have expanded their analysis of climate risk to explore impacts at the market-level.

Investors interviewed for the report noted a heightened appreciation for market-level climate risk and expect assessments of that risk to increasingly influence investment decision-making and outcomes.

Emerging Practices in Market Assessment finds that investors now commonly view local climate risks, such as wildfires, increasingly frequent and intense storms and sea-level rise, as core factors in investment decision-making. Exact weighting of climate risk varies from investor-to-investor; however, climate risk is having greater impact on investment outcomes overall. Certain investors revealed they were starting to pull back from investment in some local property markets due to lack of climate resilience.

ULI CEO Ed Walter says the most climate-aware investors are increasingly taking a hard line on local climate risk.

“They are looking beyond the individual asset and assessing a city’s preparedness for climate change, but the models and metrics they need are still in their infancy. Benchmarking cities for climate risk and resilience is a challenge and I anticipate significant progress from the industry on obtaining this much-needed data,” says Walter.

Heitman CEO Maury Tognarelli agrees.

“Market-level risk assessment is a critical component of the investment and portfolio management decision-making process. Due diligence screens must incorporate the accelerating risks posed by climate change, fiscal policy constraints, and critical infrastructure investment, repair and replacement. The data management and business intelligence tools required to assist investors in making decisions about these factors continue to evolve. This evolution, combined with the depth of real estate experience and judgement found within the industry today, should result in improved portfolio construction and the proper management of these growing risks,” says Tognarelli.

The report also claims that investors raised an acute need for better data and frameworks to make market-level impacts transparent and allow benchmarking between markets. In the context of accelerating climate change, information about city-scale risk and resilience is needed for the impacts to be understood and incorporated into decision-making.

In the context of the unprecedented challenges the world faces today, the report warns that the global COVID-19 crisis, and the stress it has placed on local governments, could undermine responses to climate risk by diverting funding earmarked for resilience infrastructure. While investors recognize the need for temporary diversion of resources for COVID response, they cite the need for additional funding sources to develop adequate resilience infrastructure.

The report, developed in partnership with Arup and Milliman, found broad agreement among investors that consistent and reliable information about city-scale risk was needed. Real estate investors were increasingly keen to understand the physical risks facing a city, the adequacy of existing infrastructure in the face of climate change, the planning and financing of new resilience infrastructure and capacity of city governance to manage risk.

To date, the majority of the financial impacts of climate change have been mitigated by the operation of insurance, disaster relief, and public  sector accounting conventions. The report claims these mitigants alone are unlikely to be sufficient to address the expected climate-related risks ahead, however, it points to a longer-term solution for the most affected regions that will likely encompass a collective public and private approach informed by market selection decisions of employers, residents, and institutional investors.

The report clams information about city-scale risk will also help city governments to create a more robust business case for major resilience measures,  alongside more transparent accounting for the actual costs of catastrophic climate events. The economic benefits of resilient infrastructure projects include job creation and retention, preservation of the tax base and avoided losses.

Globally, most major economic hubs are in coastal locations, river deltas, or other high-risk areas and these cities house more than half the world’s population. Many cities’ key business districts are in their most at-risk area, their waterfronts. In many cities, high value residential development, representing a key part of the local tax base, is likewise located in waterfront districts.

The report claims some cities threatened by climate change are in the process of moving their populations, most notably Cairo and Jakarta. Climate migration is also an increasingly recognized phenomenon, with prominent examples in the U.S. including migrations after disasters such as Hurricane Katrina, Hurricane Maria and the 2020 wildfires. With claims that climate change risks are intensifying, and costs of insuring, protecting, or rebuilding property rising, the report argues that the trend to pick up and move altogether may become more common, more quickly than anticipated.

Climate change is increasing the frequency and intensity of many different weather events that result in catastrophic losses, including extreme precipitation, drought, floods, tsunamis, wildfires, heat waves, and landslides. Globally, there were 40 disaster events in 2019 that resulted in at least $1 billion in near-term, direct losses each – part of an upward trend of billion-dollar disasters. Worldwide losses from extreme weather events from 2010-2020, some on a smaller scale, totalled over USD 3 trillion.

(Ed. The full report is available here.  Featured image by Photographer Ricardo Esquivel.) 

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