Climate Change & Real Estate Investment: How Risk Impacts Property Value

Worsening climate change events are posing a significant challenge to current and prospective real estate investments. To meet the evolving landscape of climate risk, it is essential to explore how climate change impacts real estate investment and assess valuation risks, as well as adaptation strategies for property resilience.

In short, climate change can affect your current and future real estate investments through various channels, including:

• Increased risk of property damage or destruction due to climate disasters - a more direct impact on physical assets.

• Higher exposure of properties to more severe and frequent extreme weather events affects property attractiveness, value, and shifts market demand.

• Growing regulatory pressures to adapt to climate risks, while the real estate industry in some regions is still unprepared (lacks advanced tools) to address such risks.
• Understanding the link between climate change and real estate investment is essential to making informed, future-proof decisions.

If you want a deep dive into how climate risk affects asset valuation, and how to identify, assess and manage the financial risks associated with climate change, download our whitepaper below.

Prioritising climate change real estate investment is a critical move to support positive property value in the long term. Investing in climate-resilient design and construction features helps create properties that withstand potential climate disasters and opportunities to minimise financial losses. According to the US Green Building Council, US-operating financial institutions are providing attractive financial incentives, including low-interest loans, to promote climate-resilient real estate investments. For example, in 2024, BMO launched its US climate financing programme, offering climate resiliency loan discounts of up to 0.5%, including investor-owned real estate mortgage loans.

This also highlights the increasing need for adaptation measures to maintain long-term market value. Furthermore, Marylis Ramos, director of Savills Earth Advisory, claims that “adapting to risk now will save in terms of repair costs, insurance costs, the potential loss of tenants and the reputational damage that might arise from failing to protect buildings and occupants from extreme weather events.” Investors focused on resilient real estate are better equipped to maintain value even as climate risks escalate. Similarly, Ahmed says that "real estate is where we see the most immediate financial impacts of climate change - valuation, insurance, lending. [...] Clients don't just need data - they need to understand what they mean for their business decisions".

Climate Risk and Rental Income: What Investors Should Know

The intersection of rental returns and real estate climate risk is more pronounced than many investors realise. In the UK, commercial properties suffer damages of approximately £120 million per year on average due to underestimated coastal flooding. In such instances, investors need to better understand the riskiness of climate-related deficits and how climate risks can channel their impact on asset values. This is necessary to avoid mispricing their properties and maintenance costs, which can affect their attractiveness and lead to income deficits, including those from leased properties.

Put simply, as a real estate investor, you should keep the following in mind:

• Climate-related events can cause considerable damage to properties, leading to costly repairs and reduced rental income, and ultimately reduced return on investments. For instance, while Hurricane Helene alone was projected to cost insured commercial and residential property owners in Florida between $6 billion and $11 billion in recovery plans, only 15% of US homebuyers and renters in disaster-prone or affected areas relocate. Locals usually remain relatively in the neighbourhood, as they have solid community ties. This also suggests that, despite increasing climate risks, community ties are a crucial factor in determining the demand for investment and resilience in disaster-prone areas.
• From another angle, higher insurance premiums, as a result of rising climate risks, can equally cause a rent increase. A 2024 study highlights that disasters can trigger a 5% average increase in rent among low-income households. It is also worth noting that the latter are often uninsured (due to unaffordable insurance premiums) or underinsured (with limited coverage), which exacerbates their vulnerability.

You can reduce the risk of property damage and maintain property value over time by considering climate-resilient measures and adapting your finances to the evolving climate risk landscape. Incorporating CapEx planning into your climate change real estate investment strategy is a critical step. Think of CapEx as your long-term climate resilience playbook. Investing in properties with a well-planned capital expenditure (CapEx) timeline can potentially result in a 15-20% improvement in long-term value retention.

This implies that adopting adequate CapEx planning can yield significant financial benefits, ultimately enhancing the overall resilience and return on investment of your real estate portfolio. Exploring solutions such as Adapt will give you a step ahead in a rapidly evolving market towards climate resilience.

As climate change continues to impact the real estate market, understanding the relationship between its growing risks and their impacts on real estate investment is a key step toward climate resilience. Looking forward, it is critical to integrate adaptation measures into your investment strategy by incorporating CapEx planning and making climate-conscious decision-making. Assisted by our experts, you can better navigate suitable climate change real estate investments.

If you want a deep dive into how climate risk affects asset valuation and how to identify, assess, and manage the financial risks associated with climate change, download our whitepaper below.