Heitman and the Urban Land Institute (ULI) developed a new research report focused on the risks that climate change poses to real estate and the measures that leading firms are taking today to mitigate those risks.
Climate Risk and Real Estate Investment Decision-Making explores current methods for assessing and mitigating climate risk in real estate, including physical risks such as catastrophes and transitional risks such as regulatory changes, availability of resources, and attractiveness of locations. It also highlights proactive measures by Heitman and other leading firms to stay at the forefront of mitigation strategies and accurately price risk into investment decisions. The report is based on insights from more than 25 investors and investment managers in Europe, North America, and Asia-Pacific, as well as existing research.
The real estate industry as a whole has recently begun the development of more advanced strategies to recognize, understand, and manage risks. The report found that, presently, the industry relies on insurance to cover the majority of the shorter term, financial-oriented risks related to climate change. However, insurance does not protect investors from devaluation or a reduction in asset liquidity. Combined with the likelihood of future changes in insurance availability and costs, is prompting a growing number of investors and investment managers to explore new ways to build climate risks into investment processes, including:
- Mapping physical risk for current portfolios and potential acquisitions;
- Incorporating climate risk into due diligence and other investment decision-making processes;
- Incorporating additional physical adaptation and mitigation measures for assets at risk;
- Exploring a variety of strategies to mitigate risk, including portfolio diversification and investing directly in the mitigation measures for specific assets; and
- Engaging with policy makers on local resilience strategies.
Climate Risk shows that leading investment managers and institutional investors are at various points in the undertaking of resilience scans of their portfolios. These scans help to identify vulnerabilities and impacts resulting from sea-level rise, flooding, heavy rainfall, water stress, extreme heat, wildfires and hurricanes. This includes short-term considerations such as business disruption for building tenants as well as higher operating and capital costs caused by increased wear and tear on properties.
As a whole, the industry needs to understand the pricing impacts of physical climate risks, and how climate change is likely to have a bigger impact on valuation in the future as asset and market liquidity are affected, the report says. It identifies several steps to raise awareness, such as:
- Improve analyses of climate risk in annual and quarterly reports. This helps create awareness among investment managers and investors and helps drive change.
- Use big data to better understand patterns around changes in asset liquidity and value, and weather forecasting.
- Work with the insurance industry to understand data and gain knowledge on how climate change is affecting premiums and coverage.
- Engage with city leaders in vulnerable areas to support city-level commitment to and implementation of physical and transitional risk mitigation strategies.
Climate Risk and Real Estate Investment Decision-Making was prepared through a collaborative effort between Heitman; ULI UK, which serves the institute’s members in the UK; and ULI’s Center for Sustainability and Economic Performance.