A report by the Urban Land Institute and the global investment management firm Heitman shows that climate change is increasingly impacting the decisions of real estate investors.
The report, based on a series of interviews with institutional investors, investment managers, consultants, and other stakeholders, looked at how these people are factoring the risks of climate change into their investment decisions.
“The interviews revealed that while there is growing awareness of the impacts climate change could have on real estate investment, the industry has not yet developed a standardized response,” the report said. “At this early stage, investment managers view insurance as the primary means of financial protection against physical damage from climate events. However, insurance will not protect against a reduction in demand for assets in locations seen as vulnerable to climate risks.”
Threats from climate change including floods, hurricanes, wildfires and rising sea levels have already had an impact on US real estate markets. In 2017, insurers paid out a record-breaking $135 billion worldwide to cover damages caused by natural disasters and storms, the report notes.
The worry is that climate change can lead to increased insurance payments, maintenance and operational costs, as well as a decrease in property values. Over $130 billion worth of US real estate is located in metro areas that rank in the top 10 percent of risk to sea level rises, for example.
Institutional investors have adopted a few different strategies to handle this risk, the report found. For example, many investors carefully assess the physical risks when buying property. Some real estate investment managers are completing mapping exercises to understand the current and future risks of climate change to their properties, such as sea level rises, flooding, heavy rainfall, extreme heat, wildfires, and hurricanes. Risks unrelated to climate change, such as earthquakes and terrorism, are also factored into these models.
As one investment manager told researchers: “We are doing this to be proactive. We want to be able to understand what the upper bound of the value impact is so we can adjust for it with our investment strategy.”
Others are adding protection to their properties and exploring mitigation strategies, such as Retaining Seawall Construction projects, dikes, increased elevation and extra cooling systems to protect homes.
Insurance coverage is also being evaluated more. Some investors are proactively looking at their insurance to make sure they are protected. This involves looking at insurance partners to help anticipate rising premiums due to climate risks and the availability of coverage. They also told researchers they hoped that in the future, insurance providers would reward those who are proactive in investing in mitigation efforts to better protect their properties against climate risks.