Rising Flood Risk: 5 Key Meanings for the Future of UK Property Market and Regulation

• Intensifying flood risks are leading to a decline in property values in high-risk areas, as buyers and investors grow more cautious about potential liabilities.
• The UK government has implemented stricter building regulations and planning permissions, requiring new developments to incorporate flood-resilient features like elevated foundations and sustainable drainage systems.
• The increasing frequency of UK’s flooding since have reshaped the insurance landscape, with potential increases in premiums plans and challenges to the viability of the Flood Re scheme.
• Significant investments in flood defences aim to enhance infrastructure and protect properties from the escalating threat of flooding.
• The regulatory framework is evolving towards integrated flood risk management, combining engineering and nature-based solutions, and fostering collaboration among stakeholders to effectively address flooding challenges.

In recent years, the UK has experienced increasingly frequent and severe flooding events, posing significant challenges for the property market and regulatory landscape.

The worsening flood risk carries profound implications for real estate, affecting not only property values but also collateral valuation for loans and investments over time. This has prompted shifts in regulatory frameworks to mitigate the impact.

In this article, we present five key perspectives on how the escalating flood risk is shaping the future of the UK property market and associated regulations, exploring the evolution of flood maps and damages, and considering major regulatory changes over the past years.

As flood risks intensify, property buyers and investors are becoming more cautious, directly impacting property values.

A 2023 study by Aviva shows that out of 2000 surveyed residents, 43% of individuals acknowledge their worry about the potential effects of floods on their residences, and 57% would take into account the risk of flooding when selecting a new home.

Reacting to this, Aviva’s senior home insurance underwriter Hannah Davidson says: “It’s worrying that even physical signs of water, including rivers or proximity to sea, aren’t a warning to some residents that flooding could pose a risk to their home”.

Despite effort to introduce and revise the Environment Agency’s 2021-2027 flood risk management plan, over 200,000 properties are facing heightened flood risks due to the degradation of flood defences, according to a January 2024 news article by the Bracknell News.

Looking at their effects on property value, a 2023 research report by the Bayes Business School’s Real Estate Centre (University of London) highlights that “residential properties in England with flood risk are sold at a 8.14% discount compared to non-affected properties […reaching a price discount of…] 31.3% for very high risk properties”.

This situation, coupled with the findings of the Aviva study, underscores the need for regulatory shifts to bolster flood defences and mitigate the impact of climate change on the real estate sector.

Furthermore, the intensifying flood risks and heightened concerns among property buyers and investors are likely to reshape the UK property market, potentially leading to a further decline in property values, particularly in high-risk areas.

From another angle, there are several implications for collateral valuation in this context due to escalating flood risks:

• Property devaluation in high-risk areas are likely to diminish collateral value over time, leading to lower loan-to-value ratios and increasing the risk exposure for financial institutions.
• Falling property values could potentially lead to higher default rates in these areas, as borrowers may struggle to repay loans that exceed the worth of their properties.
• From a regulatory perspective, regulatory demands for climate risk assessment and reporting could escalate compliance costs.
• A persistent devaluation of flood-prone properties poses a threat to long-term market stability, by eroding the asset base of financial institutions and reducing investor confidence. 

Looking at these risks, institutions need to incorporate long-term risk factors into their collateral valuation models to ensure the accuracy and reliability of their assessments.

By taking into account long-term threats, like rising flood hazards, institutions could more effectively foresee and lessen potential financial damages linked to property depreciation and heightened default rates.

To address the rising flood risk, the UK government has introduced and revised (2022) stricter building regulations and planning permissions.

Among other approaches, this comprises of Property Flood Resilience, and the Sequential and Exception tests. New developments must adhere to stringent guidelines to ensure they are resilient to flooding. This further includes elevated foundations, flood barriers, and Sustainable Drainage Systems (SuDS).

These measures aim to minimise flood damage and enhance the resilience of new constructions. As a result, these measures could help to enhance long-term property value and market stability by improving flood exposure assessments, reducing related damages and insurance costs, and thereby making new developments more attractive to buyers and investors due to their increased resilience to climate change impacts.

From 2022 onwards, the UK has witnessed unprecedented levels of flooding, with a record-breaking impact on approximately 160 properties in 2023, primarily attributed to an increased frequency of heavy rainfall events.

A 2022 report commissioned by LV= General Insurance indicates a 211% rise in flood claims due to inadequate drainage systems from 2017 to 2021 due to inadequate drainage systems.

Currently, 5.4 million properties are at risk of flooding, with most of these particularly vulnerable to surface water flooding. Furthermore, of all the flood claims handled by the insurer, 57% are attributed to drains failing to cope, with the average claim cost amounting to £32,000.

These escalating flood risks and stresses on flood insurance schemes signal a growing vulnerability of properties to flooding, primarily due to increased rainfall and inadequate drainage systems, leading to a surge in insurance claims and costs.

In response, it's crucial to consider investing in drainage systems improvement, implement stringent building regulations in flood-prone areas, and develop comprehensive flood risk management strategies, including climate adaptation measures and sustainable insurance schemes.

In response to the growing threat, there has been a substantial increase in investment in flood defences and infrastructure. The UK government has committed to invest £5.2 billion over six years (from 2021 to 2027) to improve flood defences across the country.

This includes the construction of new barriers, enhancement of existing defences, and the implementation of natural flood management solutions. These investments are crucial in protecting properties and maintaining market stability.

The regulatory landscape is continually evolving to address the escalating flood risk.

The introduction of the Flood and Water Management Act 2010 marked a significant step towards comprehensive flood risk management since 2010. As it was recently updated and all changes planned to be enforced in 2024, the new lines will emphasise on the introduction of the SuSD on Schedule 3 section, as to help “reduce the impact of new and existing developments with respect to surface water drainage discharges”.

Future regulations are likely to emphasise integrated approaches, combining traditional engineering solutions with nature-based strategies. Policymakers are also expected to promote greater collaboration between local authorities, developers, and environmental agencies, and physical risk data provider such as Climate X to ensure a holistic response to flooding challenges.