Climate Change as Real Estate Investment Risk Factor

The report from ULI and Heitman predicts that assessing a property's exposure will become institutionalized and suggests next steps for raising awareness.
Source: Eric Wüstenhagen

A report entitled Climate Risk and Real Estate Investment Decision-Making just released at the Urban Land Institute’s Europe Conference in London reveals the need for a better understanding of investment risk posed by climate change.

The report was co-authored by ULI and Heitman LLC. “Members of the industry are relying on insurance as a mitigator for their risks,” according to Heitman managing director and director of global investment research Mary Ludgin.  “Insurers have the right to not renew or they can certainly up the prices, so to think that something that exists for one year is a protection against a rapidly shifting set of risks seems to be ignoring some of the important insights.”

The report, based on existing research as well as insights from more than 25 investors and investment managers from companies such as CalSTRS, Grosvenor and PGGM identifies next steps for raising awareness, including: improving analyses of climate risk in quarterly and annual reports, using big data to better understand changes in asset liquidity and value and to forecast weather, working with the insurance industry to understand data and learn how climate change is affecting premiums and coverage, and to engage city leaders in vulnerable areas on the implementation of physical and transitional risk mitigation strategies.

Evolving Concerns

Ludgin notes that Heitman uses one of the emerging climate risk assessment providers, Four Twenty Seven, to score each of its assets on multiple dimensions, including risks arising from climate change such as sea-level rise, flooding, heavy rainfall, water stress, extreme heat, wildfires and hurricanes. The impacts of these risks range from business disruption for building tenants to higher operating and capital costs resulting from wear and tear on properties.

A decade ago, Ludgin points out that ESG (environmental, social and governance) focused on how buildings contributed to the global carbon footprint and the industry coalesced around making sure buildings were running as efficiently as possible and on using materials to build that were less harmful to the environment. “We think that’s where we are relative to the climate risk part of this and that over time it will become more institutionalized,” she says.

Fourteen years ago, many people were suggesting that climate change wasn’t real—just changing weather patterns. “Could there be a similar shift over a 14-year hold that suggests the value of this property doesn’t fully reflect its risk and that has implications for investment performance?”