With recent weather events, we experienced how extreme weather events, exacerbated by climate change, are causing severe disruption to businesses across all sectors. This article focuses on how climate change-induced natural disasters will affect the real estate market. Also, we'll discuss some solutions to help owners and asset managers protect their portfolios and let real estate investors figure out what assets to invest.
What are real estate climate-related risks?
Climate change physical risks
Although we've been aware of climate change for decades, its physical risks have not been fully understood yet. This is why buildings worldwide are not designed to stand the impact of global warming.
Whether triggered by typhoons, intense rain or sea-level rise, flooding is one of the major physical hazards which will be impacting your real estate portfolio. As water enters a building, its pressure will stress foundations and basement walls, possibly forming fractures. On top of that, water can be "cancerogenic" for reinforced concrete. To be more specific, when steel bars get wet, they rust and expand, thus cracking through the concrete. Obviously, things get worse with seawater intrusion.
While buildings may withstand water impacts under normal conditions, things are rapidly changing. Over the last 40 years, the number of climate-related floods occurring in the UK doubled. In addition, according to the IPCC, extreme sea-level events that happened once a century in the past will have an annual cadence by 2100 in some regions of the world. Other than structural damages, this looming trend will eventually cause some of your properties to become stranded. And this could happen soon in North Wales. A climate risk platform like Climate X Spectra can harness models to give you a clear and science-backed vision of your portfolio exposure. With reliable data in your hand, you can start defining an effective strategy to minimise the climate impacts on your assets.
Out of the other climate physical risk examples, extreme heat is the one you should sweat for. This is particularly true if you have British buildings within your portfolio. In fact, the NIC, UK dated infrastructures are not prepared to endure heatwaves.
A hotter climate would attract tropical pests such as timber-eating termites, which can wreck wooden constructions. Moreover, higher temperatures cause metal expansion and faster corrosion, thus potentially triggering the failure of steel-concrete composite structures. While going through a heatwave is tough for the property occupiers, its aftermath could be detrimental for buildings laying on clay. Being able to absorb a great amount of moisture, this type of soil tends to swell. However, when the heatwave hits, clay will dry up fast and shrink. This swell-shrink cycle can make walls crack, and foundations sink. Also known as subsidence, this phenomenon will impair around 11% of British properties by 2070. Having said that, as heatwave frequency may increase over time, these may be conservative estimates.
Apart from increasing maintenance (e.g., insulation outlays) and operational (e.g., higher cooling demand) costs as well as leading to structural decay, hot spells could make some of your properties inhabitable in the long run. This is a likely scenario when you take into account the urban heat island (UHI) effect in London and other British cities. Here, the high degree of urbanisation coupled with air pollution and other factors will increase summer night temperatures by up to 0.55 C per decade. Besides being greater than that in local rural areas, this is a 3x higher heating rate compared to Earth's warming pace so far.
Climate change transition risks
Aside from physical risks, real estate portfolio managers and investors should not overlook the impacts of transitioning to a net-zero economy. When combined, building and construction sectors emit around 40% of global energy-related carbon emissions. As we move towards a low-carbon world, you should expect tighter regulations to skew the real estate market. For example, as recommended by the UK Committee on Climate Change (CCC), from 2028, properties can be sold only if they meet the minimum Energy Performance Certificates (EPC) standard.
Improving the sustainability of your properties could significantly thin your profit margins. Property managers will have to invest in technology for climate change mitigation (e.g., insulations, renewables, more efficient HVAC systems) to prevent their assets from becoming stranded. To add to that, more frequent extreme weather events will cause property devaluation and an insurance premium increase of up to $183bn.
Why should real estate players care about climate risks?
RICS Global Commercial Property Monitor (GCPM) interviewed 4,000 people working in the real estate industry worldwide. Based on GCPM’s survey, 46% of UK real estate professionals believe climate risks are not a priority when making investment decisions. This is a dangerous and costly misperception as some estimates suggest climate risks could reduce real estate annual returns by up to 40% by 2030. But there’s already evidence that extreme weather events should be front of mind for real estate investors when choosing which asset to bet on.
Based on some estimates, 35% of real estate investment trusts (REITs) assets around the world are affected by climate hazards such as inland flood risk, sea level rise, coastal floods and hurricanes. In 2018, Hurricane Florence hit the portfolio of 94 American REITs, featuring nearly 9,000 assets among properties, loans on commercial mortgage-backed securities (CMBS) and others. The Harvey & Irma destructive combo caused American Homes 4 Rent $20 million worth of damages. Despite the insurance cover, the residential REIT still faced $10 million in losses because of maintenance outlays and revenue penalties.
Following several hurricanes battering Florida over the last few decades, the value of the State properties in high-risk areas is now $5 billion lower compared to buildings in less vulnerable regions. 5 years after Hurricane Sandy happened, property prices sunk by up to 8% in New York’s flood zones. Besides cyclones, sea level rise will also lower real estate returns. Researchers estimated that high-risk (i.e., coastal) properties will be up to 10% cheaper than low-exposure ones. This discount will be driven by buyers' pricing in the increasing tab for floods and the decreasing property resale value.
Climate resilience solutions to save your real estate bottom line
To shield their portfolio against climate-induced disasters, real estate players should invest in climate resilience solutions. These can include both nature-based solutions (NBSs) and digital technologies.
City planners and real estate developers can harness NBSs to build urban climate resilience while optimising environmental and financial resources.
According to some simulations, green (vegetative) roofs could lower outdoor air temperature in an arid city like Cairo. By driving down the use of air conditioning, this NBS could reduce buildings’ cooling-related energy consumption by up to 30% in some cases. Furthermore, retrofitting an accessible green roof on top of a building would uplift its value by nearly 7%. Besides saving 8% of the overall building power output, installing a green wall or facade could cool down indoor air temperature by ca. 3 C. Overall, extensive adoption of green design elements and spaces is a key strategy to reduce the UHI effect in urban areas, thus enabling the development of climate resilient cities.
There is an array of digital technologies that can enhance the climate resilience of critical infrastructures.
EDGE is integrating Internet of Things (IoT)-enabled sensors with artificial intelligence (AI) to achieve smart management of HVAC and lighting systems, thus reducing their buildings’ energy consumption. Last January, the sustainable real estate developer unveiled a new office settlement in London. Through a combination of on-site renewable power, energy saving and carbon offset, the complex aims to be net zero carbon.
By providing long-term asset-level insights on your real estate portfolio’s climate risks, models can help managers understand which properties are more likely to be affected by extreme weather events. Leveraging climate intelligence, you’ll then be able to make timely and informed decisions to strengthen vulnerable assets’ climate resilience or dispose of stranded properties. On the other hand, real estate investors will have a better picture of what assets are worth investing in.
Featuring hard-to-relocate physical assets, real estate is one of the most susceptible sectors to climate change. As mentioned above, floods, heatwaves, hurricanes and other extreme weather events could generate conspicuous monetary losses for your company.
However, nature-based and high-tech solutions can help you dodge this risky fate. For instance, climate risk assessment tools like Spectra will let you gain valuable insights to build your assets' resilience and identify new profitable avenues.
Safeguard your investment portfolio before it's too late. Book a demo for an early evaluation of your business climate exposure.