Climate Risk and Real Estate Investment Decision-Making

The Urban Land Institute (and Heitman - a global real estate investment firm) have investigated how climate change impacts are affecting real estate assets and investments in the market today and the future due to increased exposure. The report describes the risks posed by climate change on real estate, how real estate investors are factoring climate risk into their investment decision-making, and offers best practices for managing and mitigating these risks.

Increased exposure to climate impacts will lower returns on real estate investments as they experience infrastructure damage, increased insurance premiums, higher operational costs, and reduced liquidity. In addition to these physical risks, the report describes “transitional risks” in which certain locations are expected to become less marketable after climate events or as they become more vulnerable to them. Transitional risks incorporate the economic, political, and societal responses to climate change into estimating asset value, along with physical climate impacts.

25 real estate investors and investment managers were surveyed globally on how they are integrating climate risk into their investment decision-making. The survey found that most investment managers and investors use insurance as their primary means of protection against extreme weather and climate events. However, insurance covers short-term risks or events - but will not cover loss in value from a reduction in the asset’s liquidity.

Some current Best Practices for measuring and managing climate risk include:

  • 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
  • Engaging with policymakers on city-level resilience strategies, and supporting the investment by cities in mitigating the risk of all assets under their jurisdiction

This report argues that climate change will affect valuation and markets. An eventual downward repricing of higher-risk assets will be the market’s way of redirecting capital to locations and individual assets where it is better used. But the markets are far from understanding climate risks enough to price them in today. This process will be painful for investors who are caught off guard, but those who are prepared have the potential to outperform."


Publication Date: March 2019

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