How to Streamline Climate Risk Due Diligence in Real Estate

In 2024, UK properties were affected by climate-related disasters, resulting in insurers paying out up to £585 million to impacted homes. However, the damage did not stop there, as it has discouraged many insurers and lenders from continuing to support the property market in affected areas. As an investor, these are becoming a significant threat to your assets, affecting both owned properties and lending portfolios. This article explores critical steps you can take to adapt to real estate climate risk, streamline your process, and apply climate risk due diligence real estate strategies that support faster action, and how climate risk tools can facilitate these.

As climate change-related physical risks in real estate continue to rise, it is necessary to pay attention to the growing damages of climate risks in recent years, as well as the status quo of unprecedented threats to investment portfolio performance, traditional construction and design practices, and the viability of current policies and regulations.

In the last year, Wall Street investors have called on the financial hub to prioritise climate-related risks, driven by growing concerns over the underperforming housing market, among other factors.

Additionally, a joint 2024 survey by EDHEC Infrastructure and Private Assets Research Institute (EIPA) revealed pressing concerns among investment experts. Of the 70 respondents, who collectively manage over $2 trillion in assets, many admitted to lacking effective methods for assessing climate risk.

The study's findings also foresee potential losses of up to 54% in the value of unlisted infrastructure portfolios by 2050, with potential financial impacts reaching $600 billion.

This signals that the real estate market is somewhat unprepared (holistically) to anticipate risks related to climate disasters, and investors are waking up to understand this dynamic and potential responses.

The key factors that contribute to the rise of real estate climate risk today:

• Rising sea levels and coastal erosion

  Properties located in coastal areas are at risk of damage or destruction due to rising sea levels and erosion, which in turn can lead to considerable financial losses.

• Increased frequency and intensity of extreme weather events

  Properties are more likely to be damaged or destroyed by extreme weather events such as hurricanes, floods, or wildfires, which can disrupt business operations and impact investment returns.

• Changes in precipitation patterns and droughts

  These factors can impact the value and usability of properties, particularly those that rely on water resources.

• Heatwaves and urban heat island effects

  Properties that are located in urban areas are at risk of being impacted by heatwaves and urban heat island effects, which can lead to increased energy costs and health risks for occupants.

  Like the above factors, this can also negatively impact rental income and repair costs.

• Impact on insurance costs and lending

  Climate disasters are increasing insurance premiums, making it more expensive for property owners to insure their assets.

  This can also lead to a decline in property values and investment returns.

  Additionally, lenders that are taking climate risk into account when making mortgage lending decisions may impose higher interest rates or stricter loan terms for properties located in high-risk areas.

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When you navigate the real estate market for investment, it is essential to incorporate climate risk into your due diligence process.

This involves assessing the potential impacts of climate-related events on your investments, including damage to properties, disruption of business operations, and potential liability.

Doing so will help you make more informed investment decisions and avoid costly surprises down the line.

As climate risk is increasingly prominent in the European real estate market, a recent JLL UK Investor Survey shows that 94% of respondents are taking proactive measures to address it through mitigation and adaptation strategies.

Essential factors to consider when conducting real estate due diligence:

• Property location and exposure to natural hazards

  You need to assess the location of properties and their exposure to natural hazards such as floods or hurricanes.

  This information is essential for determining the potential risks and impacts on your future investments.

• Building design and construction quality

  You should examine the design and construction quality of properties to determine their resilience to climate-related events.

  Well-designed and constructed buildings are more likely to withstand extreme weather events.

• Existing and proposed climate resilience measures

  Exploring the existing and proposed climate resilience measures in place for properties, such as flood protection measures or energy-efficient systems, is crucial.

  Doing so helps you carefully assess which measures are most suitable for mitigating the potential risks of losses from climate-related events.

• Local climate change policies and regulations

  In this context, it is essential to be aware of local climate change policies and regulations that may impact your investments. They can influence risks and opportunities associated with investments.

Incorporating these steps supports more informed, resilient real estate investments.

With adaptation being a foundational pillar of climate change and real estate strategy today, planning is a critical step in managing real estate climate risk.

Developing strategies to adapt to climate change can help you reduce the potential impacts on your investments and improve their resilience.

This involves identifying potential climate-related risks, assessing their likelihood and potential impact, and developing measures to adapt to them.

For example, installing hurricane straps or clips can boost a roof's wind resistance by up to 50%, securing it to the house's structure.

This kind of forward-thinking aligns closely with effective climate adaptation and due diligence in real estate.

Some of the benefits of adaptation planning are:

• Reduced risk of property damage and business disruption

  Adaptation planning can help minimise the risk of property damage and business disruption due to climate-related events and potential impacts on your investments.

• Improved resilience and adaptability to climate change

  Adaptation planning can boost the resilience and adaptability of properties to the adverse effects of climate change.

  This can help ensure that your investments remain viable and valuable over time.

• Enhanced property values and investment returns

  Developing strategic adaptation can support positive property valuation and investment returns, increasing in turn the value and attractiveness of your investments.

• Compliance with emerging climate risk regulations

  Adaptation planning can enable you to comply with emerging climate risk regulations by considering meeting requirements and avoiding potential penalties. For example, investors can ensure that licensed contractors in Maryland comply with local building codes for wind and flood resistance.

Unprecedented flood and heatwave events in 2024, particularly in Europe and the US hotspots, have highlighted the importance of real estate resilience in the face of climate disasters.

Having learned from past events and their devastations, you can address relevant methodological gaps and develop more robust resilience strategies for your investments.

For instance, while installing green roofs and walls can help address the urban heat island effect, adopting forward-looking climate risk data and analytics tools can support better risk assessment and informed investment decision-making processes.

Key lessons from flood and heatwave events can include:

• Importance of climate-resilient design and construction

  Properties designed and constructed with floor-resistant structures and cooling features, including those in high-risk areas, are more likely to withstand severe flooding and heatwaves than properties with traditional structures.

• Need for adaptive maintenance and repair strategies

  As a response to climate-related damage, developing adaptive maintenance and repair strategies could save you money.

  This approach includes having cooling centres and blue roofs in place and conducting regular maintenance to prevent damage.

• Value of climate-resilient technologies and materials

  Considering the use of climate-resilient technologies (such as drainage systems and cooling systems) and materials (including concrete and albedo materials) when developing or renovating properties is key to mitigating losses.

• Importance of community engagement and climate awareness

  It is essential to engage with local communities and promote climate awareness to optimise preparedness against potential impacts of events such as flooding and heatwave.

  This includes partnering with local government to provide education and training on climate resilience and adaptation.

  This is important as a prepared community (with resilient infrastructure and buildings) means a more secure and attractive investment environment for the real estate market.

These adaptation strategies support the core principles of resilient real estate.

Leveraging climate risk tools can save you time and money in your due diligence process by providing quick and easy access to advanced climate risk data and analytics.

These tools can help you identify potential vulnerabilities and develop tailored adaptation strategies to your needs.

For example, utilising self-service platforms like Spectra helps streamline climate risk due diligence in real estate, enabling investors to make informed, data-driven decisions.

Spectra can provide instant access to hazard maps that indicate specific asset locations and climate risk scores, depicting accurate asset exposure to climate-related events.

The benefits of using advanced climate risk tools in due diligence:

• Faster and more accurate climate risk assessments, supporting better market intelligence and investment outlook.
• Improved decision-making and investment outcomes, thanks to actionable insights and data-driven recommendations.
• Enhanced climate resilience and adaptability, while reducing risks associated with climate-related events.
• Reduced costs and improved efficiency by streamlining the due diligence process and providing instant access to climate risk data and analytics.

As an investor, it is essential to understand key climate risk metrics that can help you in climate risk due diligence in real estate.

These metrics include, but are not limited to, climate risk scores, hazard maps, and resilience reports.

These are relevant to track, as you can leverage them to make more informed decisions and improve resilience.

Here is what these key climate risk metrics imply for you:

• Climate risk scores

  Tracking the climate risk score will provide you with a quantitative assessment of the likelihood and potential impact of climate-related events on your investments.

• Hazard maps

  This provides a visual representation of the potential risks and hazards associated with climate-related events.

• Climate resilient reports

  These are important as they can help you assess the ability of your investments to withstand and recover from climate-related events.

By integrating climate risk into your decisions and leveraging relevant climate risk tools, you can gain firsthand insight into the dangers climate risk poses to your investments in real estate.

You will also be able to unlock new opportunities for resilience in the face of mounting risks.

Adopting the right due diligence approach and climate risk tools is therefore crucial for staying competitive and adapting faster.

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.